9 ms·
Wall Street's Naked Swindle
- wallflower 17y agoSummary: 1) Hedge fund wants to short Bears Stearns 2) Hedge fund borrows 1M shares and sells them. Deposits its money with a Prime Broker. 3) Stock in Bears Stearns falls in price and hedge fund buys back the 1M shares it shorted (making a profit) Now, where this gets insane is the shares the hedge fund borrows don't actually exist (it sells stock it does not have, delivering IOUs to the stock buyers and by dumping those non-existent shares it depresses the stock price) > 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
- jacquesm 17y agoThere was a ban on short selling financials for a while to stop this kind of stuff. Maybe they rescinded it too soon. http://www.sec.gov/news/press/2008/2008-211.htm http://www.sec.gov/news/press/2008/2008-211.htm
- gills 17y agoGood job, you read the first page. The salient point of the article is calling out the obvious and rampant corruption that is strangling our economy; naked short-selling is an example to explain it.
- NathanKP 17y agoWow. This article is very wordy, but it does a tremendous job of explaining how the stock market is basically completely corrupt. Its a wonder that our American economic system hasn't collapsed already.
- brown9-2 17y agoI guess it depends on your definiton of "collapsed".
- gloob 17y agoIf you think "collapsed" is a legitimate description of the present state of the American economy, I tremble to contemplate the words you would use to describe, say, Zimbabwe's. Edit: That, alone, is a tad too much snark with a tad too little data for me to leave it unadorned in good conscience. Here's a couple points of interest: 1. In 2003, the Zimbabwean economy shrunk by 18 percent. 2. In 2008, the estimated inflation rate in Zimbabwe was 231 000 000 percent. 3. By late 2008, official statistics put that at 516 quintillion percent 4. The Zimbabwean Dollar officially ceased to exist on 1 July, 2009 (quoth Wikipedia; I'm not making this up). America's doing just dandy, all things considered. Edit again: On a non-economic front, it might be interesting to note that Zimbabwe's life expectancy is in the mid-30s for both sexes.
- wheels 17y agoZimbabwe's life expectancy for both sexes is closer to 45, which is similar to it's southern neighbor and regional economic stalwart, South Africa. It's that 15% of the population of both countries have HIV, not specifically economic troubles that the mortality rate is so high. https://www.cia.gov/library/publications/the-world-factbook/geos/zi.html https://www.cia.gov/library/publications/the-world-factbook/...
- gills 17y agoWe have collapsed. It's called denial.
- deleted 17y ago[deleted]
- benreesman 17y agothere have always been haves and have-nots, those are the facts of life. but these guys (read: gs) are laughing their asses off at us. and I'm pretty pissed off about it.
- jacquesm 17y agoThe problem is that our whole system is based around rewarding essentially detrimental behaviour. We'll be forever wondering what the landscape would have looked like if those banks had been allowed to collapse. I personally think that short term we'd have been much worse off, but longer term quite possibly much better.
- brown9-2 17y agoOne thing I don't get about naked short selling: if I bought shares from a short seller and it turns out these shares don't actually exist, what happens to the money I paid to the short seller? In other words, does the buyer of the phantom shares have no recourse?
- alex_h 17y agoIt appears that at least some of the time, the shares are delivered many weeks after the transaction date instead of the required 3 days. This would give the seller of the stock time to wait until the price had fallen before acquiring the stock and giving it to you to settle the transaction. However, I'm not sure how this would work when the number of promised shares far exceeds the actual number that exist. I would love to hear if anyone knows how this works.
- michaelbuckbee 17y agoShorts are really contracts to buy and sell shares at a future time, not actually shares themselves. So, at some future point money has to change hands, not actual shares. Think of it like a bet. If next Friday the share price is over a $100, I'll pay you the difference between whatever the price on the open market is and if it's less than $100 you pay me the difference.
- brown9-2 17y agoI think you are confusing short selling with options.
- yangyang 17y agoWell what he describes isn't how options work either, it's more like futures (assuming his $100 was the futures price for next Friday).
- barrkel 17y agoShares really do change hands: witness Porsche's market manipulation of hedge funds: http://www.thisismoney.co.uk/markets/article.html?in_article_id=481379&in_page_id=3 http://www.thisismoney.co.uk/markets/article.html?in_article...
- mattchew 17y ago"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 . . . an economic drought temporarily left the hyenas . . ." I can't take this sort of writing seriously in an article like this. It's fine for an internet rant that is supposed to make me laugh. In an article that is pretending to be an economic analysis, well, I quit reading. I did see something about naked short selling. Naked short selling sounds fraudulent to me, but I'd like to read a intelligent defense of it from supporters of the practice. Anyone know of one?
- michaelbuckbee 17y agoWithin the framework of current regulations, I'd consider naked short selling as a close cousin to something like insider trading. It's not so much fraudulent as it is both an indicator and piece of knowledge that the rest of the market doesn't have. In general it's disallowed because people just betting on the price of stocks instead of owning them (at least in some derivative way) is considered a bad idea.
- yangyang 17y agoIt's disallowed because it can cause failures to deliver if a borrow can't be located. Lots of fails can lead to systemic problems.
- anamax 17y agoInsider trading is actually a form of fraud against the entity that owns the information. For example, Google is allowed to trade on the fact that it's doing biz with Intel. Google's employees are not.
- joezydeco 17y agoBut let's say Google enters a deal with Intel that is going badly. Let's say it's 100% Intel's fault. Google shorts Intel stock just before announcing to the public that the deal is off and it's Intel's fault? I don't think that's exactly allowed.
- protomyth 17y agoIt is illegal to gamble on the stock price (check some historical articles about gambling halls that took such bets). I am having a very hard time seeing how any of the derivatives are not gambling.
- michaelbuckbee 17y agoYou're at the heart of the issue here. Naked Shorts (because they are NOT associated with an actual share someplace) are gambling.
- tyn 17y agoHedging is one use of derivatives that is not gambling.
- sielskr 17y agoThat dispassionate and nonpartisan authority on our financial system, Rolling Stone Magazine.
- mattmcknight 17y agoIt's preposterous to suggest that naked shorts killed Bear and Lehman, as this article does in some places, despite providing the real reasons in others. The naked shorts may have profited from it unfairly and driven the share price down (via the share inflation concept), but the banks were killed by not having the collateral for their insane leverage (and not getting protection from the government). Just because the stock price of a company drops, it doesn't mean it's going out business. This article confuses the sketchy method used to profit from the collapse with actually causing the collapse in many places, usually by suggesting that the shorts are motivated to cause the collapse, but with scant evidence of any connection. Seriously, Overstock.Com? They're still losing money. The shorts were right. For the other side of the shorting story, look at what happened everyone shorting VW in 2008 when Porsche upped their stake to 75%. It briefly became the highest value company in the world, as every short seller had their lunch eaten trying to find the few remaining shares to deliver.
- hristov 17y agoThe article actually mentions the other reasons for collapse of those banks. But the article makes it clear I think that naked shorts did cause the collapse as it happened, otherwise it would have happened much slower. Also naked shorts allowed many people to profit unfairly, by doing something that is illegal but it is not properly enforced. Regarding the VW story, were naked shorts even involved in that? I don't think VW trades in US exchanges and I am not sure whether naked shorts are a factor in Germany. NAked shorting should be differentiated from ordinary legal shorting. Legal shorting is not that problematic because there is a natural limit to it. Theoretically naked shorts can crash any company because they can flood the market with an enormous amount of shares.
- chrischen 17y agoIf there really are that many holes in the American economic system, then it's not unlikely that's where terrorists would strike next, since America is physically more robust than its other areas like the economy.
- jmtame 17y agoOverstock.com CEO: "This really isn't about my company," Byrne says. "I mean, I've made my money. My initial concern, of course, was with Overstock. But the more I learned about this, the more my real worry became 'Jesus, what are the implications for the system?' And given what happened to Bear and Lehman last year, I think we ended up seeing what some of those implications are."
- jongraehl 17y agoByrne tried to deny his company's real problems by blaming naked shorts.
- bluedanieru 17y ago"How about bonds? "Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts! In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered." That passage is a little alarming. A run on US government debt could be triggered by American financial firms themselves.
- jdbeast00 17y agoWhat should the layperson read to learn more about the inner-workings of financial systems? Any good books?
- tibbon 17y agoThis article actually does a shockingly good job. I'm not an economist, but I understood everything that was happening there. Speaking of economists, reading The Economist is a pretty good way to get your feet wet initially. It's a magazine, but its pretty in depth, but at the same time doesn't assume you're an expert on all parts of the system.
- alttab 17y agoMy girlfriend is a tax specialist for one of the most respected Mutual Funds in the country that doesn't do any wishy-washy derivative trading, she works directly with the CFO and the Comptroller. I read this entire article to her out loud and she was actually impressed with the accuracy of what is usually sensationalist writing from the Rolling Stone. As programmers who like to make black and white or otherwise binary decisions about things, I'd say we'd be the least qualified to make bogus or unfounded statements.
- ig1 17y agoI normally recommend The Complete Guide to Capital Markets for Quantitative Professionals by Alex Kuznetsov (despite the title you don't have to be a mathmo to read it, anyone with a technical mindset should be fine). I'd avoid relying upon articles like this one though, from my experience they're frequently wrong. I've been a developer on the leading equities analytics software, was lead developer on the worlds largest credit derivative trade settlement platform, and now work in currency trading. I don't have a huge in-depth knowledge in these areas, but I know enough that I can tell most of these articles are written by people who are completely clueless.
- jhancock 17y agoThanks for the book tip. Now, assuming this article is clueless. It is well written, but ok, lest say its factually inaccurate. Where is the article that is accessible and has enough facts right?
- jackfoxy 17y agoThere are too many powerful people who would have had near real-time knowledge of the March 11 meeting, the insight to connect the dots, and the means to cover their tracks. I'm guessing it was a consortium that made the bet on Bear, thus spreading around the protection. We'll never know.
- tlb 17y agoHe seems to argue both that the fall of Bear Stearns was inevitable, and that it's impossible that a smart outsider could simply have figured that out and bet against them, therefore the naked short must be due to insider trading. You can't have both.
- DTrejo 17y agoFrom what I understood, he said that insiders instigated the fall of Bear Stearns, and smart outsiders joined in to finish them off.
- DTrejo 17y agoThe 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 control of the Treasury and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent their whole careers being bellhops for New York bankers. And on the first 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.
- haseman 17y agoNot a bad article, but he attributed to some giant evil conspiracy by the banks something that was, in fact, simple economics. Banks weren't out to swindle people with all those 'new' investment funds, they were reacting to overwhelming demand from the managers of 80-something trillion dollars. That overwhelming demand was driven, in part, by the fed holding the discount window open for so long. If we remove the author's notion of 'evil' intent on the banks part, for which there is little to no evidence, and chalk it back to 'incompetence' instead, the author's article becomes a rehash basic economics and a lot of empty hyperbole. For a more dispassionate recap of the debacle, I'd recommend This American Life's article, the Global Pool of Money. http://www.npr.org/templates/story/story.php?storyId=90327686 http://www.npr.org/templates/story/story.php?storyId=9032768...