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In “Wall Street’s Naked Swindle,” Matt Taibbi examines how a scheme to flood the market with counterfeit stocks helped kill Bears Stearns and Lehman Brothers — and the feds have yet to bust the culprits. The scheme that helped do in two of the five major investment banks in the U.S. is known as naked short-selling — the sale of shares you don’t have or won’t deliver. Normal short-selling, however, is legal and good for the market: it lets investors bet against companies that they believe will decrease in value.
To help explain his story, Taibbi heads to the white board and breaks down the differences between the two: click above to watch him explain short-selling (our buyer: Wilford Brimley, broker: Count Chocula, short-seller: Hervé Villechaize), and below for a discussion of its evil twin, naked short-selling. — Rolling Stone
For more on naked short-selling, see Caught On Tape: A Naked Swindle.
UPDATE: The full “Wall Street’s Naked Swindle” is available on the Web now.
— Rolling Stone
- Portions of Album Content Provided by All Music Guide © 2009 All Media Guide, LLC.
http://market-ticker.org/archives/1531-Short-Sales-The-Real-Issue.html
In reply to your article Matt….. worth a read.
Bear Stearns also happened to be the only major bank that refused to pony up when the Fed asked Wall Street to fund the rescue of LCTM…
LCTM–LTCM?
I too found that interesting and ironic that Bear was the only one that didn’t participate with the bailout of LTCM. So, aside of interworking on the St, was that event in and of itself the first of many to come? I know the author of this blog seems to believe that all it would take would be a “progressive” candidate to save the day; but putting that partisan bullshit aside; was LTCM the first siesmic alert? Fast forward to 2008 and we have another one. Only this time, the banks can’t pony up without the help of Uncle Sam extorting the masses. So, what’s next, and how much of a tremblor will it be and when shall we expect it?
Hedge fund,Long Term Capital Managment.
The short sell explanation should also include the downside of the transaction–if the stock goes up in value, the short seller loses. This may be obvious to you, but not the lay person.
J E Bradley.
There is no need to explain anything else cause any sane lay person understand – “short-selling” and other “legal” tools are what really fucked up the real economy.
Keep in mind it was those players who made the rules of their game. So they made this pure theft a legal matter.
I didn’t get why Matt said short selling was good for…anything actually.
uh, because when a stock is falling the short seller must buy back the stock in order to realize his gain. Hence, short sellers actually help preserve the market and put a floor under prices.
Really people if you have no understanding of the market go back to econ 101, you really shouldn’t be reading articles with big words.
Yeah, “the short sellers done it.”
sheesh.
Matt,
This is an EXCELLENT article, so well written, engaging and informative. I am a writer myself and am in awe of your great talent. In fact, I’m going to buy the hardcopy issue as a keepsake. Thank you!
THANK YOU for this analysis. Wonderfully written; this should be read by our “leaders” who can prosecute and push investigation.
Thank you for a very well written article showing the evidence of HOW a legalized crime was committed! If only we could find WHO these ‘criminals’ are! People who steal legally and make sure they cannot be sued by changing laws! In the pursuit of more wealth, do they even realize or care of the far reaching consequences of their actions? Obviously not.
It is time, we stopped letting people sell what they don’t own, and pass laws that will not allow anybody to over-leverage themselves. Short sellers and Buyers must have guarantees from prime brokers that those shares that they purport to sell are available to the particular trader. If there is a failed delivery, all involved parties should be punished, period. If such systems are not available, then stop the practice completely.
If something can become too big to fail, well, it is time we made everything small then. A democracy is not really a democracy if 300 people can affect 300 million people. If 50% of the wealth is with .5% of the people and 50% of the populace at or near poverty level.
Dear Matt,
You want to REALLY GET THE INSIDE SCOOP? These investment bankers are on the OUTSIDE of the real scandal. http://www.theantechamber.net/Vk2009/DocumentationValidation.htm Learn how the Bush family and all their CIA-affiliated economic ripoff artists decided to begin using the skills that they learned from the CIA to feather their own nests at the expense of the US. The link above will get you started. If you need help figuring out who the named “players” represent, get in touch with me or the website owner.
Fascinating story and unfortunately completely true and well documented.
Great article. However you have stopped one step short of the ultimate destination of the perpetrators.
The holiday destination story of the caribbean island with Roubles as a currency gives an idea. Russias economy was essentially cratered using the same methodology and a certain class became extremely wealthy as the country was economically raped. Some of whose exponents are now residents of another nation.
The same is now happening to the USA. The same class are the perpetrators of the financial rape of the USA. The same eventual destination will be apparent once the dust settles.
The more things change, the more they stay the same.
Neil Baird.
Sorry but where did you get this idea?
Russian economy is grounded for many reasons but not due to Russian “bankers” and Russian “socks market”.
Great article but the video is a bit confusing. Short selling is a very simple concept but a tough thing to explain to the average person.
What the great unwashed fail to realize, is that the elite of the financial community make no money from a stable stock market or economy… how can one make $ when stocks stay at the same prices..?
Therefore, the movers and shakers, make things move and shake, and in the process, put the small investors in precarious positions that they cannot possibly withstand, and then, extract the value from the small investors accounts and place it in their own. The system is no longer fair, and the playing field no longer level, because it has become acceptable…even desirable to feather your own nest with the life savings of others, regardless of cost, or morality, or legality. Like the fixed poker game, we’re the prey.
And what’s worse, the people we trust to monitor the bad guys are in on it.
Thomas: you are quite right in my view. However, what Taibbi is saying as does Patrick Byrne(i.e. that naked short selling brought down Bear Stearns and Lehman Bros.)is a deliberate mis-direction away from those who fixed the game.
Check out closely the Patrick Byrne sponsored video by Judd Bagley of Deep Capture and you will see the Fraud that they are presenting. The great majority of the naked fails to deliver and the three day prior “naked short sales” occurred after the collapse. In Bear Stearns the biggest Naked Shorts were made when the stock was between three and four on March 17, 2008. The large fails to deliver ( i.e. naked shorts established three days earlier) were still in fail position when Bear Stearns then went to 10. So after the very large naked short sales the Bear Stearns stock went to 10 from three.
The tape makes other deliberate deceptions when Bagley claims the details of the $1.7 million bet that he lifted from the Bloomberg article by Gary Matsumoto.
In Lehman, the largest naked short sales occurred after the collapse.
The great majority of the naked short sales were probably done by options market makers that were probably technically following the rules and had little to do with collapsing BSC and LEH. So the great majority of the naked short sellers can not be prosecuted or held liable.
So why does Taibbi, Byrne, and Bagley participate in this mis-direction. They are either informed abettors or are useful idiots. They don’t want the finger pointed at Dimon, Bernanke, Paulson, Cox, Goldman, Citigroup, Cramer, Citadel, SAC and on and on.
Good luck.
Radical, you seem to be the only one here with any sense of reality. I will say this once and I will repeat is as often as necessary: it is impossible for “short sellers” naked or covered to bring down a healthy company. Taibbi’s theory seems to be part and parcel of the nonsense that was perpetrated at the time of the bailout, when short selling was restricted for various types of companies. Short sellers in reality protect the market, because as a stock goes down they will buy it and cover their positions. The notion that short sellers are responsible for the downturn, the collapse, or whatever you want to call it is just utter nonsense.
It’s not that Bear was taken down – it should have been. It’s that the government officials connived with the other banks to do it in secret, and they let someone with inside knowledge walk away with about with $270 mil. For starters. Then they paid $29 Bil for the crap in Bear Sterns that nobody wanted and let JPM buy the rest for a song.
That’s why Bernanke and Geithner are scared to death of an audit of the Fed. The cesspool of investment banking on Wall St. would have been drained and contained long ago, by the free market, if they weren’t using the power and the money of the state to prop it up. They are not regulators they are enablers.
“What really happened to Bear and Lehman is that an economic drought temporarily left the hyenas without any more middle-class victims – and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country. And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked – and how completely even the government regulators who are supposed to protect us have given up trying to stop it.”
Given up trying to stop it? You’re kidding! The Fed and SEC only exist to ENABLE crimes like this, by keeping outsiders from their little club and by ensuring that the really big crimes committed by the insiders are covered up.
BTW, we are in the middle of another gigantic bear raid. Target – USA.
It’s the biggest bear raid since the sack of Rome.
Your story regarding Bear Sterns gets much more interesting if you follow up and find that the real winners (who bought the company with tax payer money) is the same guys who actually did it:
“Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.” Bloomberg.com
Taibbi is brilliant, his previous story on the credit default swap scandal (more than a little related to this one) is required reading for anyone who wants to understand the banking crisis.
Short selling is a toxic practice, and it should have been limited or eliminated, along with other methods of making money off a down market, years ago. Ultimately I don’t care about the market, and the idea that it’s central to the economy has been disproven by numerous ‘marketless upsides’ and ‘jobless recoveries.’ Up or down either way, the two parted company long ago, and the claim that they’re still tied together is hipster pseudo-business 101.
Businesses no longer reinvest their market share revenues, and they have no intention of doing so. The real economy–jobs, spending, personal debt-paydown–will have to wait for a new engine of productivity to emerge, like the tech sector in the 90’s or second-generation manufacturing in the 50’s and 60’s.
And save yer undergrad responses, Wall Street boys. Yer full of it.
BOKO Oct 2009
If you eliminate short selling the market falls even more severely, because there’s no one to buy the shares when they fall in price. Please go back to your readers digest; this subject is obviously too complex for you.
I realize the Naked Short Sale video was simplified, but without adding much complication I have to point out a material or at least a galling part of the scheme was omitted. The DTC actually gets paid when shares are loaned. One way for the DTC to increase profitability is to lend the same shares over and over and over again. Since the DTC is owned by the Wall Street crooks, the DTC profits presumably flow back to them. So when they defraud the market with naked short selling, they are in effect paying themselves to break the law and steal.
Way to go Rolling Stone.
I will have to reconsider where I get financial info in the future.Here I thought you were a music mag- why is no one else pushing this view?
Does Goldman own the world?
Can someone tell me how it is possible for naked short sales that occurred days after the collapse of Bear Stearns be a cause of the collapse?
Dear Matt – First, Thanks for a very well written article. the interesting part is that the banking world seems to have radio silence on your blog. I am surprised the same rumour mongers who you refer to in the article have not started a negative campaign to debunk your article and analysis.
In anycase I am so glad that the world of journalists still has someone who will pursue the things that should be making the headlines rather than sheepishly drink the cool aid distributed by the politicians
Ninety per cent of the alleged naked short sales occurred after the collapse. So how can someone claim that the short sales after the event caused the collapse of Bear Stearns.
Taibbi, Byrne and all the shills who prop them up are playing a game of deception. That’s why they will not respond to the simple question . How can future naked short sales cause the collapse of something that happened in the past? Sorry to pop your bubble.
just because Bear Sterns is dead- does not mean we don’t have to fix the naked shorting problem. who will the next victim be- you perhaps
just because Bear Sterns is dead- does not mean we don’t have to fix the naked shorting problem. who will the next victim be- you perhaps
We need to start demanding action and accountability- haven’t we waited long enough??
We gave Mary a chance and I for one think she has failed us…
from
by CCI @ 2009-01-16
At her confirmation hearing yesterday before the Senate Banking Committee, newly appointed SEC chairman Mary Shapiro pledged to follow through on a pro-investor agenda that will include a push to change the way credit-rating agencies are paid and slow the U.S. transition to international accounting standards.
Mary Shapiro, who was recently appointed by President-Elect Barack Obama to replace outgoing SEC Chairman Christopher Cox, came under fire in a recent Wall Street Journal article. The WSJ report analyzed Shapiro’s record as a regulator and chided Shaprio for having a “light touch”. Cited as evidence of her “light touch” was the declining amount of fines levied by Finra and the NASD over the three years of her leadership.
According to a report by Investment News of Shapiro’s confirmation hearing before the Senate Banking Committe, Shapiro’s most adamant vow was that she will “reinvigorate SEC enforcement efforts in the wake of the Bernard Madoff investment scandal and the agency’s failure to anticipate the collapse of Wall Street giants such as Lehman Brothers Holdings Inc. and The Bear Stearns Cos. Inc., both of New York.”
“I’ve never been afraid to go after people who I’ve thought violated the public trust,” said Ms. Schapiro.
“One of the first things I’ll do is take the handcuffs off the enforcement division.”
WHEN? HOW? TIME for a change-
sign me disgusted-
Wired
[...] month, Matt exposes the highly illegal, yet highly widespread practice of “naked short-selling”- selling a stock short and NOT delivering it to the buyer when required by exchange rules. [...]
[...] Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog. [...]
There has to be someone out their that has the courage to explain how when 90% of the naked short sales occurred after Bear Stears collapse, the collapse was caused by the naked short sellers.
Claiming that naked short sales collapsed Bear Stearns is like claiming that a person was murdered by a gun blast on Thursday and that the claim was the murderer pulled the trigger the following Monday.
Are you guys on acid?
If you shorted the shares after the collapse, how would you have made money? Is it because the bettors thought or knew Bear would go to 0 (from say, 3?)
What about Mary Shapiro’s relationship with the Madoff’s- according to the Times Online
December 18, 2008 “New SEC chief gave Bernard Madoff’s son a job” She previously appointed one of Bernard Madoff’s sons to a regulatory body that oversees American securities firms. What the heck is going on with this administration? How is we have so many questionable people with links like this in charge? I hope Matt is working to shed some light on this, especially since Bernie is claiming to be a close personal friend of Mary Shapiro. No wonder we dont have a new enforcement decisiono naked short selling…
[...] month, Matt exposes the highly illegal, yet highly widespread practice of “naked short-selling”- selling a stock short and NOT delivering it to the buyer when required by exchange rules. [...]
Could someone give me the tax implications of a short sale that is never covered? Example ~ A hedge fund sells one million shares of a stock short at $35 ~ naked ~ not borrowed. The stock goes to zero. The company becomes defunct. The hedge fund never covers ~~Is this a taxable event? The shareholder writes off the investment ~the hedge fund never pays a tax ??? One other side of this issue ~ As an example a company has a market cap of $500 Million ~~ Naked shorters sell a BILLION dollars of stock short. The company collapses ~ dissolves. The “bagholders-taxpayers” write off their losses which in some cases could be substantially above the $500 million market cap. The American Taxpayers are bagholders too!! Any comment?
In the words of Daniel Drew, the greatest stock swindler of this day: “He who sells what isn’t hisun, must buy it back or go to prison.”
Theres a meaty story in how the precious metals market are being naked shorted.. If they can keep the faith in all this paper by suppressing the price of hard assets they can keep the plates spinning that little bit longer.
If faith in paper fails, as would be more visible with 2k and 3k gold the house of cards starts looking mighty shaky.
Ted Butlers pieces on the silver market are obvious starter material.
The thing I don’t get is the “fails”. Why do the short-sellers even care about the price dropping, if they don’t ever have to deliver the shares to the buyer? Couldn’t they just short-sell a bunch of shares and walk away with that cash?
So somebody made a good bet…what’s the problem? Lots of smart people were predicting collapse. The timing of the bet is what’s tricky. Unless you’ve got some evidence of insider trading (and you can be sure they know who placed those options trades) there’s nothing criminal here.
What’s criminal was the stealing of our money AFTER the collapse.
Get it?
Some days ago I took off all my clothes on Wall St., so as best to show my psychadelic Timothy Geithner tattoo. Emblazoned across my chest, this amazing tattoo actually embodies everything great about naked short selling, despite the naysayers (you know who you are, elite-hating haber-dashers). Still, the beauty and power of this body-art failed to translate into concrete action, and the litle people still exist. Damn you all, little people. Only climate-change will finally cease your incessent words…DAMN YOU ALL!!!!!!!!
There ya go, Dude!!!!
I’m taking my fucking marbles and going home.
[...] Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog. [...]
[...] Rolling Stone’s Matt Taibbi presentation on Naked Shorting [...]
[...] Short-Selling Vs. Naked Short-Selling: An Explanation [...]