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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.
Gee. This problem of lending shares the stock ‘bank’ doesn’t have sounds EXACTLY like the problems with fractional reserve banking and all the other problems of the past.
Who would have thought the same problem could apply to banks(which can use worthless paper as legal tender) as do stock ‘banks’ (which hold worthless paper that can be traded for worthless paper enforced as legal tender).
Short-Selling Vs. Naked Short-Selling: An Explanation by Matt Taibbi…
In “Wall Street’s Naked Swindle” in Rolling Stone’s new issue, 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 hel…
This is what the people MUST MUST MUST rise up against and STOP. It should be ILLEGAL and is ILLEGAL to sell something you don’t have!!! These swindlers MUST be brought to justice and the people MUST demand it.
Outstanding article, Matt – AGAIN. I can’t help thinking of the end of the film “Fight Club” when reading your scathing analysis of the current greed-centric economic system. I do not condone terrorism, but something’s gotta give and if this isn’t fixed through appropriate channels, how long will it be until some head case(s?) just can’t take it anymore and begin physically assaulting these corrupt institutions? And how much of a Robin Hood syndrome would the American public tolerate? On that I think one could successfully short sell the very foundations of Wall Street.
I’ve thought of the fight club ending many times when considering how to take care of Wall Street. These greedy fucks will keep taking until we’re all broke and homeless. Time to take it to the street.
The final scene in Fight Club is my metaphor too (for how to heal the situation) — http://neoconsuck.blogspot.com/2008/09/500-points-closer-to-zero.html (youtube broke my video embed though). The only difference is I was mining it a year ago.
But I greatly admire Taibbi, for his scabrous punk-rock-lyrics writing style, and his HUGE audience.
Keep it coming Matt.
Piggy deserves it!
i agree. the only thing that’s going to stop these pus-filled swollen societal tumors is one or more of the following:
1) brute force (sniper, or extreme laws that are actually enforced)
2) POSSIBLY…extreme public humiliation and embarrassment, especially in front of family members (but don’t bet on it having any effect)
3) these gangrenous bungholes die off and are gradually replaced by people less morally crippled, more ethically disciplined
******************
If there is REAL action taken against these ethical blackholes, my bet is that it will be via a sniper or bomb or some such.
if i knew that some of these clowns was in my town, and knew where they were, i would gladly spend some nights in jail to fully disrupt their M.O. Like, if they were at a restaurant, I would eagerly completely disrupt their slopping at the trough. Like, drop my drawers, affix my bare butt on their table cloth and take a full-bodied shit, scrape up the feces and rub in it one of their faces. gettign arrested would make my day complete.
they really should watch their step. like an earlier poster wrote, some nut case is going to do them some serious harm and they will have no one to go whimpering to except themeselves.
Great video!
As usual Matt has done what most journalists are either unwilling or incapable of doing: identifying a problem (crime), researching the details of the problem (crime) then exposing the problem (crime)in language that anyone can understand. He is the Woodward/Bernstein of the new millennium!
The idea that a trader/broker can “borrow” stock from another trader/broker (who may or may not actually possess said stock in the first place) and sell it, vote for board members with it, or generally manipulate the stock and/or the company for which the stock is issued is insane! But, when it’s your ball and you get to make the rules, well, anything is fair, isn’t it? Afraid not.
The first thing we have to do even before changing the basic rules of the game is to separate our government from the corporations. As long as the direct connection exists between our elected representatives and this gigantic source of cash, ‘we the people’ stand not a chance. Right now I believe election reform may be more important than health reform. We have to get corporate America out of the pockets of the politicians or we’ll never fix the rest.
And BTW, I really HATE that term “corporate America!” Wasn’t it corporate America that sent all the jobs to Mexico, China, and India? Yeah, I thought so.
“We have to get corporate America out of the pockets of the politicians or we’ll never fix the rest.”
Excuse me, but isn’t it the opposite way around? Isn’t the problem that our government has increasingly (and, since the start of the Bush administration, openly and notoriously) been “by big business, for big business”?
I learned about naked short selling in ‘06 and have written my congressmen several times emploring him to look into it. The SEC is YEARS behind the curve on this, which shows you who is in control.
So where was this boy wonder when we needed him? NYC’s Danny Schechter has been reporting this crime for several YEARS! It’s great to have 20/20 hindsight but WHY DON”T YOU CALL FOR SOME ACTION since the same thing is about to happen again! What’s to stpp it?
Matt, this whole mess can be laid at the feet of the likes of Newt Gingerich, the Gramms (TX Senator and wife, Windy), et al who in 1994 launched a political movement to “get government outa business’ business”. The systematic de-regulating of business and banking that followed is what’s placed this country and, indeed, even “capitalism” itself in peril. The lesson to be learned from this is that the “market” doen NOT know best and free market philosophy was a dangerous path to follow. BUT…..now…..as a result, we’ll get truly stupid regulation and that will lead to the next cry to “get government outa business’ business”! And so goes the circus: “Fools to the left of me, jokers to the right, here I am stuck here in the middle with you”. dick
Thank you Matt and thank you Rolling Stone for publishing Mr. Taibbi’s very informative journalism. I have recommended Matt’s works as must read material for my family and friends. I have hope that enough people are waking up to the fact that our Government has been seized by a few very powerful executives in NYC and that these executives have committed generational theft through the TARP bailout and loose Fed policy.
Please follow the developments of the next big swindle “Cap and Trade.” I am all for taking care of our planet but I don’t want to see Blankfein and Dimon make a cent off of the deal.
This BS has to stop now!
I’ve been pleasantly surprised (and maddened) to see articles like this appear in print whether it’s RS or Conde Nast Portfolio. I’ve forwarded some of these things around along with others on The Federal Reserve and fractional reserve system (the master of counterfeiting). People have no idea how corrupt the system really is. There may be some attention from the MSM at CNN/FNC/CNBC but either it will be to shoot down the story or to pretend populist concern before moving on to the next big thing. Greg Palast wrote about the corruption of Cap-and-trade a few years ago.
Sensationalism and ignorance are a dangerous combination.
A free market allows capital to flow indicative to investor sentiment. BSC and LEH were the two most overleveraged, aggressive, and horribly mortgage laden balance sheets on the Street. The market is never wrong, it intepreted and let the free flow of capital control their fate.
When management fails, so does the corporation. When the corporate is publically owned and traded, the market will be the decider.
Agreed BSC and LEH dug their own grave. But as you know we no longer have free market capitalism, we have selective capitalism. AIG failed but was saved, why? Because they owed GS 13 billion bucks and Hanky Panky Paulson was once the man at GS. GS goes into a death spiral without the 13B. BAC, C, JPM all would be insolvent if it were not for the wizard behind the curtain at the Fed. At the same time 80 or more banks have been shut down in 2009 across the country. Why were the big boys bailed out and the others left to die??? That’s how corrupt our political system has become. You pay to play through hefty campaign donations, Guaranty bank, Colonial and the others had big problems with their balance sheets but they were no different than the “Too big to fail banks” like Shiti Bank and Skank of America. The smaller banks problem was that they didn’t contribute enough to BOTH PARTIES election coffers.
Next time Jack spare us with your free market capitalism BS and call it what it is an Oligarchy whose dominant character resides at 85 Broad St.
jack, with all due respect, get a clue.
When we speak of freedon in America–this is what we get. Freedom to rip people off. Obviously humanity needs regulations–but doesn’t that go against the American grain?
It’s insane. How does one reconcile the two? Is it POSSIBLE to do business in a clean way here–or anywhere?
What still amazes me is that neither our past and present government leaders nor Wall St. really get nor understand the extent and depth of the anger, that exists outside the DC beltway and the financial district of NY. One only has to read the preceding comments and other similar blogs to clearly understand that. The fear that I saw in Bush’s, Paulson’s, and others eyes in 9/08 appeared real to me, as the financial system they believed in was then in full chaos, from theirs and others belief that the financial markets are somehow self-regulating. However that fear and chaos have declined, since then, as the efforts to stabilize things and return to the status quo have gained traction and delusional belief in and by most media, governmental officials, Congress, Wall St., etc.
As human beings, we are imperfect; and any and all systems we develop are, therefore, in some manner and/or way flawed. The human tendency is to believe that we can, or can find a way to, control almost everything; and that has been and will continue to be one of humanity’s greatest self-deceptive flaws.
Wall St., the big banks, almost all hedge funds, etc., backed by many renowned economists with their sue-do scientific theories and models, the ever increasing number of non-practicing physicists with their quasi-quantum mechanics mathematical investment hedge models, to many straight-faced probability mathematicians and their unshakable belief that their ever evolving equations can be used in economics to cover all of the behavior and actions of over 6 billion humans, continuous exponential increases in computing power, etc., etc., have all pushed and/or have been used as part of the basis, for the self-delusional ideas, that they(”we”) were, and still are, somehow in control, of their ever more complex, rapidly evolving, and hidden “trust us” strategies and models, for the increasingly inter-related world wide financial/economic systems. The actual fact is that economics is not a true science, as it’s a human creation; and, therefore, is basically flawed. Trying to equate it to and utilize it like a true science is not just plain irrational, it’s totally delusional.
The weather, and the study of it, is a true science, as it’s a true natural system; but when is the last time the various yearly predictions of the total number of hurricanes/TS was right over the last 50 years, let alone believing you will actually need an umbrella or a heavy coat a week from next Monday, in 2 weeks or a month out? All of these smart weather scientists have similar computing power, models, etc., comparable to all of the Wall St. firms and big banks; but we all know it’s just a forecast, that may or may not happen, especially the further out in time the forecast goes. At least, these folks aren’t trying to sell you the Brooklyn Bridge.
The financial/economic system now has evolved into a series of bets on these types of short and long-term strategies, probability hedges, models, and the like, as that is where the most money can be made. We are once again in an era, where it’s like going to Vegas, where sooner or later snake eyes has to come up, as the limited set of odds are in the house’s favor over time. However, in the current economic/financial system, the actual winning and losing odds are in fact never fully knowable, as the variables are unlimited, and can and do rapidly increase over time. As a result, the so-called “bubbles” invariably have to develop, as they are driven by an very imperfect system, along with human emotion and basic instincts that all go along with it.
I believe, and apparently along with many others, that without meaningful change, understanding, and constant regulation/monitoring, of the economic/financial system and it’s players, we are doomed to, some say at likely ever increasingly rapid rates, these boom/bust “bubble” cycles. Much, of this underlying type of behavior, can be similarly seen in the cycle of the black rat in SE Asia, where every 48 yrs. the area’s vast bamboo forests flower and then die, after showering the floor of the jungle with uncountable numbers of seed pods. Several months ago, PBS broadcast a documentary on the last one, and that boom/bust was chilling to see in action.
Like the court jester in a Shakespearean play, Matt Taibbi has been the only one willing to tell us naked the truth about our financial institutions. Where is CBS, NBC, ABC, CNN, FOX, and the rest of the media? Why don’t they name names and indict these thieves? I guess the rest of the media is bought and paid for just like Congress.
By the way, whose money did brokerage houses steal? The stockholders!
Uh… not exactly right.
There’s nothing wrong with naked short selling, as long as actual shares are delivered within the three-day settlement period. The problem is failure to deliver the shares. When that happens, it’s called a “fail.”
It helps market liquidity if a broker is allowed to sell shares short without having borrowed them first (”naked”). But he MUST either borrow them or buy-in within a reasonable amount of time. In theory, if a broker cannot locate the shares to borrow within the standard three-day delivery window, he is supposed to “buy in.” In other words, he’s supposed to buy the shares on the open market.
But there is a loophole that allows brokers to play hot-potato with the “fails” and never borrow the shares or buy in. In effect it’s counterfeiting shares. There’s no excuse for the feds to allow it, except for the fact that there are so many counterfeit shares circulating now that calling them in would crash the market – more thieves that are “too big to fail.”
There’s a list of “fails” called the REG SHO list. After a certain number of days on the list, the shorts legally are required to buy in. But they flaut the law by buying from from a co-conspirator who sells the shares short, and then HE fails to deliver. Round and round they go. Stocks can stay on the REG SHO list with “buy-in imminent” for years. On top of that, real old fails were excluded from the regulation in a “grandfather” clause.
Wow, that’s the most rambling explanation of short selling I’ve ever heard. “Count Chocula” and “The Bushy Mustache Company”? Ha Ha! You’re so clever Matt!
The 10-second summary at the end would have sufficed.
The hedge funds are doing this stuff in many stocks. They even bankrupt biotech firms that are finding cancer cures etc. These people are the scum of the earth. These hedge funds hire paid bashers to come into stock chatrooms to bash stocks.
Go check out the stock Cell Therapeutics (CTIC). Go check out the Yahoo stock chatroom. Nothing but paid bashers and the stock has HUGE volume everyday. It’s a cancer drug researcher and it is being targeted by hedgefunds. The news has been good yet the stock is bashed heavily.
Just as Jim Cramer said on CNBC and admitted that hedge funds will “create a new truth about companies” and short the crap out of them. His online media company thestreet.com uses people like Adam Feuerstein to create a “new truth” about these companies while the naked short-selling is used. The Marketmakers are also involved and the SEC does absolutely NOTHING…BRIBES???
It’s not gonna change. CORPORATISM is destroying America. We need CAPITALISM in this country. Corporations are destroying this country.
So good to see this coverage from RS and Matt on the issue of naked shorting. This is the exposure that can help focus more attention to this ongoing crime. Many others have been instrumental in shedding light on this, most notably Dave Patch (investigatethesec.com), Bob O’Brian (thesanitycheck.com) and the investigative team at Deep Capture. Thank you all!
All these comments are all well and good. Until we as a country unite and say enough is enough this will continue.Get involved and vote,and spend or not spend your money with bringing down these fat cats in mind.money is all the powers that understand.
Sorry, dood, but your post indicates you are still in the permanently clueless stage. It’s all been gamed, they bad guys have trillions and trillions of dollars – and thatsa lot of power, dood!
Voting for one of two preselected candidates which have the same econ advisors (and they are the ones who call the shots) such as Phil Gramm (sailor McCain) and Robert Rubin (Obama), the two of four who brought us this meltdown, certainly is a wonderful exercise in futility.
Also, answering all those “progressive” pleas to send your donations to the fat cats in congress who are laughing all the way to the bank as they keep you occupied and silly, will certainly not accomplish anything.
We are way beyond the lock and load stage……
Cheers Matt once again.. shall we all just pray to our new Buddha Michael Moore or shall we get out and do something?
get your Corporatocracy tee shirts and walkyourdogma
Another great job Matt!!! Thanks for your hard work!!!!
I have read most all of the comments to this point and would like to ad my 2 cents.
Naked Short selling is always illegal except when done by an athuorized Marked Maker to fill in for temporary shares not available. The Sec doesn’t enforce strictly these laws because most of the ranking employees of the SEC
have goals of landing high paying postions on Wall Street after they have leave the SEC. If they can come down on the favoable side of situations that help Wall Street and make themselves known to the powerful, they can be rewarded with a nice high paying position at a big brokerage, hedge fund, law firm or research company.
Naked Shorting has damaged by varing degrees such companies as TASR, RFLX, DNDN, NFI, OSTK just to name a few.
Matt’s article freaked the shit out of me. Who regulates the regulators?!? Thanks for not only having the balls to write the article, but also to RS for publishing it. The cronies must be exposed. Glad RS is not publicly traded.(right?!)
How the F do you write an article describing how Goldman Sachs ruined the world, then write an article that says Bear Stearns and Lehman only crumbled into worthlessness because of some vicious trading scheme. Clearly the same things you are mad about Goldman doing were the same things Bear and Lehman were doing, only Bear and Lehman were either less skillful or less lucky–which is why they utterly ran out of capital.
This explanation should help:
From Bloomberg, an article: http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=aGmG_eOp5TjE states that the Bear Stearns collapse was precipitated by a option contract known as “put.” Trading options involves a contract where one party acquires a right and the other side, an obligation. (A call is with a right to buy, a put, right to sell). If the right is exercised, the other party has the obligation to come through. The party that holds the right, but no the obligation, pays a premium or fee for that right if the right is not exercised. Simple example: You are a real estate trader; you see a house you know you can resell at a price larger than what is asked, but are not sure. You tell the owner, I want to buy the right to buy this house within 30 days at the price you ask (or price negotiated if lower). The owner understands he can’t sell during that 30 day period so he will sell that right for $3000. If you think your profit on the potential sale will take place and will cover the fee for the right, you agree. In 30 days, you have the “option” to buy the house or not. If you don’t, the owner keeps the $3000, and can now put it back on the market. If you buy it, you do so at the agreed price. That is a ‘call option.” All this is regardless of who originates the idea for the option. Obviously in this case, you know something the owner does not, so you make the offer, so you are the buyer of the option.
In a put option, you are going to buy the right to sell, which you can exercise or not. Somebody has to sell you that right. If there is nobody to sell it to you, then, you can’t make the trade.
Now what happened with the Bear Stearns put options? The March 11 close price of the Bear Stearns stock was $62.97. “Somebody(s)” went to the market seeking to buy a right to sell the stock at $30 and $25. That right was to last for a period of just a few days. The buyers of the right would pay whatever premium was required to hold that right. Now you are a Bear Stearns stockholder or an astute speculator, and you say, wow! These guys are fools, where are they going to get shares to sell me for $30 and $25 in just a few days, when the stock is more than double that price? (Understand that if “the somebody(s)” exercised the option to sell, they had to get the stock and transfer it to the other parties) So you, bright speculator that you are, said to yourself, “If I participate in this put contract, I will get an easy premium fee with no risk!” In the face of it, anybody will jump at the opportunity of an easy premium, or buying a stock at a price at less than 50% the market price, if the option to sell is exercised. Either case it is easy money… no stock will drop in value to less than half in just a couple of days.
But that was exactly what happened. By March 14 the stock dropped to $30, and the Fed came in to force a sale to J.P. Morgan at $2 a share. “The somebody(s)” seeking to buy the right to sell, (and they found lots of takers) opted to exercise the right to sell at the strike price of $30 and $25, because they were now able to purchase the stock at around $2 a share. (How much exactly depends on how the priced moved over the period of time it would take them to acquire the volume of stock they were required to deliver.)
And that’s what made the Bear stearn!
“The new president, for whom we all had such high hopes, went and
hired Michael Froman, a Citigroup executive who accepted a $2.2 million
bonus AFTER he joined the White House, to serve on his economic
transition team – at the same time the government was giving Citigroup
a massive bailout. Then, after promising to curb the influence of lobbyists,
Obama hired a former Goldman Sachs lobbyist, Mark Patterson, as chief
of staff at the Treasury. He hired another Goldmanite, Gary Gensler, to
police the commodities markets. He handed over control of the Treasury
and Federal Reserve to Tim Geithner and Ben Bernanke, a pair of stooges
who spent their whole careers being bellhops for New York bankers. And
on the anniversary of the collapse of Lehman Brothers, when he finally
came to Wall Street to promote “serious financial reform”, his plan proved
to be so completely absent of balls that the share prices of the major
banks soared at the news.
“The nation’s largest financial players are able to write the rules for their
own businesses and brazenly steal billions under the noses of regulators,
and nothing is done about it. A thing so fundamental to civilized society
as the integrity of a stock, or a mortgage note, or even a U.S. Treasury
bond, can no longer be protected, not even in a crisis, and a crime as
vulgar and conspicuous as counterfeiting can take place on a systematic
level for years without being stopped, even after it begins to affect the
modern-day equivalents of the Rockefellers and the Carnegies. What 10
years ago was a cheap stock-fraud scheme for second-rate grifters in
Brooklyn has become a major profit center for Wall Street. Our burglar
class now rules the economy.
And no one is trying to stop them.”
– Matt Taibbi, October, 2009.
Mr. Mike, and you’ve barely even scratched the surface of those Obama appointments: Diana Farrell (McKinsey Global Institute, Goldman Sachs), Laura Tyson (Morgan Stanley, NAFTA super supporter), Richard Holbrooke (AIG, Perseus), Robert Hormats (Goldman Sachs, PetroChina biz), Herb Allison (Merrill Lynch, NY Fed), Gene Sperling (Goldman Sachs, CFR), etc., etc., etc.
Of course, the most anti-worker & anti-union lobbyist group for the ultra-rich, the Bretton Woods Committee (brettonwoods.org) also boasts some of the above as members:
Diana Farrell, Laura Tyson, Gene Sperling, Richard Holbrooke, Robert Hormats…..
Voting will do nothing. Do research on Diebold Voting Machines which were researched by students at Princeton University. Needless to say voting can be rigged and both candidates are “bought and paid for”.
We need to flush all government starting with the Federal Government on down. Get rid of every government employee and start over. Same with the courts etc. The corruption is to the core in every area. The FDA, SEC, FBI, CIA etc.etc.
The derivative meltdown that started with Freddie Mac and Fannie Mae was done INTENTIONALLY by using derivative “insurance” such as CDS combined with a policy of mortgages to anyone and everyone. It was designed (and the subsequent bailout) to eventually collapse the $US and US economy to bring the USA and Americans to their knees. Obama was no coincidence either. He has been brought in to usher in the new communist system. We have nationalized corporations and now there is mandatory nationalized healthcare coming into the picture. Spending on anything and everything.
Americans need to wake up! But unfortunately Americans (as the rest of the world population) are brainwashed.
There ya go, clean & simple. you are soo correct in “flushing the DC toilet” Thing, we have needed to do just that for 90+ years but tomorrow would be fine also.
Can’t seen to get anybody in Law Enforcement OR the Military to DO THEIR FUCKING JOBS !!!!! so I guess We The People will just have to clean this dirty house ourselves.
What do we tell the “Law” ??? Stay outa the way or Else ?
We got some nice camps FEMA built that could house all these inbread sociopathic buttbread fuckers, I’d love to stand guard… Rubber bullits anyone! Ha!
All matters “money” will remain irrevocably fucked up until the real culprits behind our country’s economic woes are identified in the public mind and the public then hounds them out of the middle of the nations business. The corruption rampant in and around Wall Street is really just an extension of the corrupt nature of the Culprit Supreme, namely the Federal Reserve. Naked short sellers who persistently fail to deliver what they ostensibly sell (thereby creating phantom or counterfeit shares) have learned well from Daddy Fed who since 1913 has persistently created phantom or counterfeit ‘dollars’ and has totally gotten away with it. “It’s the Fed, Stupid” is my suggestion for the title of Matt’s next article.
The Fed has proven a total failure under whose “management” the dollar has lost 97% of its value. IMO this ingeniously misnamed cartel of rapacious bankers is both corrupt and incompetent and unless checked will inflate away what little value our “money” still has.
All Central Banks with a penchant for fractional reserve flim-flm (which means all of them) have a couple things in common. One, they always fail; crushed under the weight of their own increasingly worthless and ultimately totally worthless paper, and two, by the time the system does collapse, the bankers who engineered the fraud have escaped with the real wealth of the nation leaving the populace with little more than a mountain of paper with fancy printing.
The Fed’s role has been to surreptitiously suck assets from the poor and middle class to hand over to the already obscenely wealthy private banking families who populate the not-so-federal Federal Reserve. Our “regulators”, together with our politicians (save maybe a handful like Paul and Grayson) have been totally captured by these parasites in pinstripes and unless our feckless “leaders” develop a spine and a conscience (not likely), our nations economic future looks grim indeed. This may be the stuff of revolution.
Matt Taibbi has the process wrong, so it isn’t surprised he’s come to the wrong conclusions.
Investor A has his shares at the custodian. This is correct if you don’t have paper certificates.
Now he goes wrong. Short seller borrows the shares. Correct that they get transfered to the short seller who sells. What’s missing and its a major point is that the short seller has to pay the custodian for the shares, and they have to pay more than the 10 dollars a share that are in the market. At the same time they have to agree to sell the shares back at a set price at a set point in the future. The difference between the buying and selling price makes a loan. The payment of more than 10 dollars a share insures the custodian.
Then at the end, if the price of the shares drops to 5 dollars, the short seller buys the shares at 5 dollars, delivers them back to the custodian, and gets its cash back based on the agreed price, which makes its profit.
The real world example of this is a house. You buy a house with borrowed money, the mortgage company wants a deposit and the first call on the assets. Two parties. With short selling its the same, except it is inverted.
Nick
Right, that’s “short selling”, not “naked short selling”. And when he’s talking about the naked variety he has the process exactly right.
The whole problem is that these short sellers are putting in a “put” when they haven’t even located shares to borrow or place a “call” on. They’re just putting shares all day long…which causes speculation that the stock is bad, only nobody does the math to find out that there’s more puts for stock than there are actual shares of stock and that someone is manipulating the price by short selling. People flee the stock, it drops in price, the firms debt is downgraded, and heeeeeeeeeeeere comes the run on the bank.
Read the article that’s being referred to before posting comments like this one.
Thanks Matt. Now, can someone please tell me who made the $1.7 million option that paid roughly $270 million? Doesn’t anyone here want to know what person, agent or entity put this play in motion?
It appears most posters can agree that crimes are happening. Will anyone point out the criminals by name, rank and serial number?
Likely suspects: Hank Paulson, Ben Bernanke, Stephen Friedman, Stephen Schwarzman, Peter Peterson,….(Geez, it’s such a long list)
Thank you Matt Taibbi for this important article and video!!
There is a fantastic movie out about naked short selling (the ONLY movie out about it, I think) called: “Stock Shock-The Short Selling of the American Dream.” Available on DVD only, of course. Amazon has it.
Matt Taibbi needs to be awarded a Pulitzer for binging to light the “Biggest economic crime of Human History ”
Sad and disgusting to see mainstream media totally ignore the story of the century i.e – how and why street imploded -
Far ominous for our country is if you don’t learn from history – it has a habit of repeating itself .
Also read the book ” Two Trillion Dollar Meltdown ” to really understand what the banks did .
Actually, reading Nomi Prins’ “It Takes a Pillage” would be much more enlightening,as it is a far more superior read, and the book you mentioned does of a bit of disinformation in it – no doubt meant to steer away some of the blame in the matter.
Unfortunately, there are still some in America who consider themselves to be “serious” consumer of the “news” when they watch the more subtly orchestrated propaganda from NPR and PBS News Hour, as opposed to the more obvious Foxtard propaganda.
Thanks, Matt, for writing an awesomely educational (and down right scary) article on naked short selling.
I’m wondering if the corporate elections that get “bought” with counterfeit shares explain why CEO pay has become grossly excessive in recent years. I’ve always wondered why shareholders have allowed their top guns to get paid so much….maybe it’s not the “true” shareholders that are voting for executive compensation packages.
You know the answer is very simple, but then I guess the captured regulators would not go for it.
Just mandate that every broker (stock custodian) report the aggregate long positions is all stocks at the same time all short postions are reported (in my mind this could be done daily with todays automation systems).
The it would be simple math : total long (no netting of shares) shares – report shorts (legitimate) shares, then compare that to the outstanding share and you have the naked or undelivered shorts. So it would be simple to see the magnitude of the problem and what stock had a concentration of naked shorts.
It just shows how corrupt the systems truely is – without that much effort the simple reporting of total long shares could put the rest the “mystery” of naked short selling and at the same time provide the regulator a guide on were to focus there investigations.
The SEC will save us … one Martha Stewart at a time.
[...] In his article, Matt Taibbi explains, in great detail, how naked short selling has been used to manipulate the markets into killing investment banks. Unless you’re already an expert on how the stock market works, start by watching this accompanying short explanation of short selling. [...]
Matt Taibbi’s truly brilliant and thoroughly researched article is a must read for any American who chooses to be self-aware. But, as I realize it must stand the test of legality and there are certain areas he shouldn’t legally tread – for the moment – please allow me to add several items which will only add to his article.
1) Jimmy Cayne, the CEO replaced by the clueless Alan Schwartz (not meant as criticism, only that Schwartz was “old school” and not truly one of the guilty), smiled at Schwartz when told he was on the way out at Bear. The reason he was smiling, because as some very reputable rumor has it, he had moved anywhere from $1 trillion to over $2 trillion in derivatives offshore, so when Bear’s downfall triggered credit events, Cayne’s piddling Bears’ stock value really didn’t matter as he became a ultra-rich dood!
2) When Goldman, JPMorgan and Deutsche did their run on Bear, and presumably the same group was probably responsible (along w/Morgan Stanley) on the Lehman takedown, an extraordinary number of credit default swaps (CDS) were written against Bear through AIG. Ergo, the bailout to AIG so those monies on the triggered CDSes could be paid to Goldman and JPM, etc., through AIG’s bailout funds.
3) The naked short-selling of Treasury bills mentioned towards the end of Mr. Taibbi’s article, finally explains why Goldman Sachs, JPMorgan, Morgan Stanley, et al., created ELX Futures (electronic exchange for futures trading aimed specifically at T-bills, etc.). Now I understand their investment in ELX…..
Truly great work, Matt. It’s truly reflects how far down our main-stream daily media has sunk when important investigative journalism must first appear in the Rolling Stone. This is NO slam against Rolling Stone. It’s just that such work should have appeared also in the New York Times and Wall Street Journal. As shown in the 1889 work at the http://GreatRedDragon.com site, this type of nonsense preceeded the Panic of 1907, which lead to the creation of the private Federal Reserve. As Charles Lindbergh Sr. predicted back in 1913:
“From now on, depressions will be scientifically created.”
The long list of appointees is simply payback for BO getting the presidency. What people are actually surprised that our most celebrated leader of the last four decades is as corrupt,if not more so, than possibly any president to date? Thanks to all you sycophants who believed avery lie from his lips, we will never get out of this debt, our children’s children will never get us out. But hey isn’t change what we really wanted. We did not get change except the new guard has a couple of different names. Look for the union label i bet those guys are pretty pissed off too. Put your money where your mouth is, get rid of BO before he gets rid of us.
Thankfully someone and this Media Outlet cares enough to publish the madness that’s occurring in what’s left of this great country. Congrats Matt and Rolling Stone, I just signed up for a subscription.
Keep the pressure on!
I don’t think anyone understands short selling. Ask yourself this question. Suppose the short seller buys the shares back at $8 for a profit, then he returns the stock he has borrowed. The stock goes back to $10. Where did the $2 profit come from? Not from the original owner, who held the stock the entire time, but from the broker. The broker is the third party in the transaction, and once the short seller opens the position, the broker will usually buy put options, which offsets the brokers risk.
The requirement to borrow the stock is in most cases superfluous, because the transaction is between the broker and the short seller. The broker who enters into the contract is willing to take the risk. Should the broker take on a short position greater than the existing float, or the combined short positions are greater than the float, it should be apparent to anyone.
However no one discusses phantom longs, or stocks bought on margin. By law, all shorts sales are done on margin, and all margin accounts must be marked to market on daily basis. Controlling the float is a strategy used by companies who want to levitate their stock price. By calling in stock, the owners of a company can squeeze the shorts, force them to cover and drive up the price, all at no risk to them. a large institution probably put on a short position because they planned to sell their shares of Bear, or they wanted to protect the value of the shares they were holding, which is called short against the box, the stock holder can be short and long simultaneously.
There is more than enough subterfuge to go around, but most of it is on the long side, because markets are supposed to go up, the system is rigged to make it easier to inflate stock prices, not drive them lower.
In a severe downturn money simply disappears. Credit contracts, and sellers sell to cover their margin calls. Short selling allows that some of that money is recovered by the party willing to take the short position, and provided the third party is still liquid when the short covers his position. We would be better served with a futures only type arrangement, in which each long position has a corresponding sell position but that doesn’t facilitate the phony wealth building machine we have.
Politics, the market and the brown smudges that drive them are now hip and accessible thanks to you Matt. I eagerly pour over your work and subscribe to Rolling Stone because of it.
Great writing, Matt. A true throwback to the early 70’s.
Simply put, short selling of all kinds is counter to the interests of anyone who owns a stock, since the individual looking to borrow shares is ALWAYS trying to drive down the price of that stock. Why not have a rule that allows an individual to check a box (at the time shares are purchased) that states: “These shares are not to be loaned out for any reason while I own them”…with severe penalties to the broker/dealer who elects to disregard these instructions?
Short selling is a necessary part of the market-however there should be strict rules regarding it.
Matt, another inside play for you to check out is the action on CME stock in March of 2008. An internal DOJ memo was leaked and it dropped 147 dollars in one day, overnight.
I used to be a “runner” on Wall $treet in 1959, a polite term for messenger boy. We proudly carried real leather pouches issued by our stockbroker-employer, and we delivered ACTUAL CERTIFICATES in the morning and picked up REAL CHECKS in the afternoon. Nobody had computers (except IBM on 57th street), and the NYSE used humans to keep track of who bought what from whom. The Registrar of the Corporation was responsible for putting YOUR NAME on the newly issued certificate of the shares you bought and mailing it to you.
Fifty years.
My how we have improved things.
By the way, “naked short selling” was always done before electronic registration. And nobody cared whether you owned the stock or borrowed the stock. Because, one way or the other, you were required to POST THE CASH EQUIVALENT of the stock, and you had to “mark-to-market” with more cash every day that your “bet” went the wrong way.
And the SEC was watching.
And therein lies the real key to the problem. They quit watching.
Or caring.
Another good point. But why did they stop watching? The bullys and wet-work criminals bought out and intimidated the responsible agents of the government, with the complicity of Congress. Where is Batman when you need him?
Matt Taibbi gets right down to it and spells it out perfectly.
I absolutely want to hammer my dick flat when I hear somebody going on about “that evil de-regulation and the free market.”
This isn’t deregulation. It’s organized crime in collusion with the government.
Well said. We are suckers to believe the American political process can fix this. We need military tribunals and firing squads.
Matt-
It would be fine if you focused on facts like this… with a conclusion such as “maybe regulators should enforce existing laws.” The problem is you consistently nestle valid points in prose that is 9/10ths rhetorically embellished bullshit and yellow journalism. It’s amazing you actually receive compensation for wooing the unknowing through hyperbole.
to me taibbi’s jouralism is all fact, no fluff. he engages in journalistically conveying objective and/or subjective observations about the matter.
he objectively reports about moral basket cases, and he objectively conveys normal subjective human reactions to moral basket cases.
taibbi weaves into his prose emotional responses to the ethical cesspools of goldman-sachs and the like.
one’s own subjective response can be considered at times to be objective actionable information, even in the area of being a physician, which is a bastion of objectivity. i read in the Merck Manual once (a doctors’ manual) about diagnosing a certain psychiatric disorder. if the doctor felt very turned off and found patient to interpersonally repulsive, this was condidered a predictable, objective sign of the psychiatric disorder. it’s like, the horrendous smell of shit is a sign that shit might be nearby. that’s subjective, yet it’s also objective.
taibbi is a master at weaving together objective facts and subjective reality.
********************
I’ll tell anyone who cares to pay attention that Taibbi is a global treasure.
Matt…
If you read this blog, I’d love to ask you:
Have you ever been to Nouriel Roubini’s Blog, the RGE Monitor? …and if yes, do you read the blogs there?
Just curious.
Thanks, Rich H / MA
Wow, reading Nouriel Roubini, huh? Roubini, of course, is thought highly of by the typical Ameritard who has begun recently paying attention, but ask yourself this, Ameritard, if Roubini is an active member of the Bretton Woods Committe (brettonwoods.org) which actively seeks to screw over the American worker, just check out everything they’ve been up to, including their letter to Pelosi and Reid on Feb. 11, 2009, which actively sought to kill the “Buy American” clause from that federal stimulus package, then just how much faith should you place in him and the other members of that lobbying group for the ultra-rich?
At one point in Matt’s article he writes:
“Here’s how naked short-selling works: Imagine you travel to a small foreign island on vacation. Instead of going to an exchange office in your hotel to turn your dollars into Island Rubles, the country instead gives you a small printing press and makes you a deal: Print as many Island Rubles as you like, then on the way out of the country you can settle your account. So you take your printing press, print out gigantic quantities of Rubles and start buying goods and services. Before long, the cash you’ve churned out floods the market, and the currency’s value plummets. Do this long enough and you’ll crack the currency entirely; the loaf of bread that cost the equivalent of one American dollar the day you arrived now costs less than a cent.
With prices completely depressed, you keep printing money and buy everything of value — homes, cars, priceless works of art. You then load it all into a cargo ship and head home. On the way out of the country, you have to settle your account with the currency office. But the Island Rubles you printed are now worthless, so it takes just a handful of U.S. dollars to settle your debt. Arriving home with your cargo ship, you sell all the island riches you bought at a discount and make a fortune.”
If you go to this article from Deep Capture http://www.deepcapture.com/the-simple-metaphorical-explanation/ and read it, Matt’s example, though summarized, is awfully similar to the one written at Deep Capture. Now, I do not know whether Matt gave credit to the author who wrote the article but I could not find any mention of the person within Matt’s article. If Matt did not give credit, then there is a case for plagiarism.
For those who don’t know, plagiarism is defined as the “unauthorized use or close imitation of the language and thoughts of another author and the representation of them as one’s own original work.” (Source: http://dictionary.reference.com/browse/plagiarism)
I hope this is taken seriously and my worries refuted. Matt authors great articles but this does not mean that he stands above honest journalistic integrity.
Regards,
Anon
Dear Anon.
Are you the shill I saw working the comments page of the IJ in Marin County, California?
On to another subject. Doesn’t Taibbi and Deep Capture personal realize that there are a few informed people out there who know that what they are promoting is pure garbage. None of these journalist are qualified to speak on the
subject of short selling , or naked short selling as any experienced person can tell.
Whether Progressive or Conservative, (I deliberaltely omit Democrat or Republican) we are all in the same boat. This average citizen is distracted by all the “issues” of the day, healthcare, jobs, inflation, abortion, and we don’t realize that the entire political and financial systems are totally rigged from the beginning. I believe there are a few honest folks in positions of influence and power but they are totally outnumbered and overwhelmed. I believe the socio-economic system (indeed the entire world system) is irretrieveably corrupted.
The American middle class has bee raped by Wall Street and Congress, and every day our productive capacity as a nation is beeing shipped overseas then sold back to us at “bargain” prices. No wonder China, Indonesia, and India are sucking up enormous amounts of cash and world resources. They are doing it on the backs of the American worker. The Capitalist/Communist strawman is a game used to distract the peasants of the world while the real power brokers suck us dry – politicians and Wall Streeters alike. It’s reminiscent of the billions of human batteries in the Matrix. Seems like a nightmare but it’s real.
Frontline did a speciallast night on Greenspan and it was obvious from the beginning they played him as an Ayn Rand Libertarian boogyman who started the whole crisis. Maybe so but identifying culprits in this evil enterprise is like smashing the fattest drone termites attacking your house and expecting all will be good. We are all being played for suckers by our “leaders” in finance and government. Left and Right be cursed. The best intentions and political philosophies are useless when administered by morally corrupt people. Maybe the anarchists are right, tear it down and start over… oh forget it.