Matt Taibbi’s recent article in the Rolling Stone about massive stock market abuse to push Bear Stearns & Lehman Brothers off the cliff for fun and profit is eye popping. The article focuses on the practice of naked short selling — selling a stock short without actually having the shares to cover or knowing where to find them. It’s apparently technically illegal, but with no enforcement, it’s done frequently. Without having to have control over actual shares, the naked short sell is similar to flooding an economy with counterfeit dollars, driving the share price down with your “counterfeit” shares, and making your short sale bet more likely to pay off.
Taibbi makes it clear that Bear & Lehman were ripe for the pushing because of their bubble investing, but the final push off the cliff looks a lot like fraud engineered by the other big investment firms and members of the Fed.
Along with the specifics of the naked short sale technique, Taiibi paints a picture of what amounts to a counterfeit economy.
[T]he great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs. Instead, Wall Street now serves, in the words of one former investment executive, as “Lucy to America’s Charlie Brown,” endlessly creating new products to lure the great herd of unwitting investors into whatever tawdry greed-bubble is being spun at the moment: Come kick the football again, only this time we’ll call it the Internet, real estate, oil futures. Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.
. . .
To the rest of the world, the brazenness of the theft — coupled with the conspicuousness of the government’s inaction — clearly demonstrates that the American capital markets are a crime in progress. To those of us who actually live here, however, the news is even worse. We’re in a place we haven’t been since the Depression: Our economy is so completely fucked, the rich are running out of things to steal.
The whole thing kind of makes you feel like a chump for working for a living. Still, worth a read.
I am a “free market” person as to economic philosophy but it sure is challenging to believe it is acceptable to allow “anything goes”. The system can only work where there are applied ethics and when that fails then hard enforcement of standards of conduct. The “too big to fail” also has a flip side of “too big to allow to do whatever”. The stock market and big financial institutions are two examples of so much financial and political strength that there has to be stiff and enforced regulations. Whether its investments made by individuals, retirement funds, etc. or whether it is the various uses of credit throughout the economy the absence of ethical and long term good business practices allows for the types of financial barons of the past that ran a system strictly for their benefit and to hell with the consequences for others. There will be “weeping, wailing, and knaching of teeth” but congress must past and agencies must enforce some changes in the system.
Sorry to be the OCD spelling police, but my tic is acting up. So, it is “gnashing” of teeth, Jack. ;)
I’ll defer to the experts I’ve listened to on this one…my thoughts will be represented succinctly — over-leveraged is not the same as counterfeit; they may have built a house of cards with their gambling, but short of outright fraud (which should be detected by the quasi-omnipotent SEC), the cards (contracts) have to have a base to build on.
Arnold Kling — Thoughts on Short-Selling
http://econlog.econlib.org/archives/2008/09/thoughts_on_sho.html
Robert P Murphy — A Man, A Plan, and a Short-Selling Ban
http://www.econlib.org/library/Columns/y2008/Murphyshortsell.html
EconTalk — William Cohan on the Life and Death of Bear Stearns
http://www.econtalk.org/archives/2009/09/cohan_on_the_li.html
EconTalk — Kling on Credit Default Swaps, Counterparty Risk, and the Political Economy of Financial Regulation
http://www.econtalk.org/archives/2008/11/kling_on_credit.html
Also, I found this via Google when I was looking for another, better discussion of the issue that I vaguely recalled back when the short-selling issue was more in the limelight. Can’t vouch for the source or anything…like I said, I just saw it on Google and clicked through.
http://www.businessinsider.com/john-carney-matt-taibbi-falls-for-naked-short-selling-hoax-2009-10
Found that other article I was looking for…
The Economics of Naked Short Selling
http://www.cato.org/pubs/regulation/regv31n1/v31n1-6.pdf
A source that I do know and trust on the Oct 5th post by Taibbi
Matt Taibbi Reports on Naked Short Selling, and Gets Caught with His Pants Down by Robert Wenzel
http://www.economicpolicyjournal.com/2009/10/matt-taibbi-reports-on-naked-short.html
Taiibi responded to the allegations that he fell for a hoax.
@Eric H: you need to separate two distinct issues:
(1) Taibbi’s Rolling Stone print article and,
(2) the trading video he subsequently blogged about
The Rolling Stone article is airtight. Every point he makes can be verified by you or me through analysis of publicly available data, and it paints a very dark picture of the circumstances surrounding Bear and Lehman’s destruction. Doug is right to feel like a “chump” after learning about what’s going on.
The trading video, which I have reason to believe is genuine, unfortunately cannot be verified independently, and so the dissemblers, whose livelihoods are threatened by what’s in the article, are attempting to discredit the article by conflating it with the video, which can be neither proved nor disproved. It’s a classic strawman scenario.
I’m not accusing Robert Wenzel of being one of the dissemblers, though he has been influenced by them. Instead, I point toward the notoriously short seller apologist goons at Clusterstock. Pro-short flackery has been their bread and butter for years.
The good news is, not too many have fallen for it. Indeed, last week Senator Kaufman of Delaware distributed the article to every member of the US Senate, together with a request that they co-sponsor his legislation intended to finally end illegal naked short selling.
It seems like you are citing the failure of regulation, Doug, when you say that it is illegal, but unenforced.
There has been a failure to regulate. From what little I know, it looks like a combined failure to legislate sufficiently and to execute the legislative authority that has been provided.
It’s an eye-popping read. Thanks for featuring it. I agree with the previous comment — unenforced legislation isn’t worth the paper it’s printed on. So, couldn’t a regulation go directly into the technology? Like, that little box where you type in three dots to make a million bucks — couldn’t it be required that the stock shares be registered as “delivered,” on both the broker’s and the trader’s accounts, before they are sold? If not, I wonder why not.
I admittedly did not really dig into this. I just wanted to post some counterpoints to the idea that naked short selling was inherently a bad thing, and in the process of looking for a resource I wanted to share, I came across those other posts regarding Taibbi and threw out the URLs. I didn’t even read the Wenzel post or really do any investigating; I just know that I’ve read a lot of this posts and comments elsewhere and I generally have some level of trust for him. I figured if I threw out those links (not the articles and EconTalk but the blog posts) without commenting the readers here were intelligent enough to dissect them if interested. (I think I was right)