Wall Street: Crime of the Century

[quigleydoor]

Re: Wall Street: Crime of the Century

I'm just starting to figure out what this all means. Some questions. I listened to the first Financial Sense audio file posted at the top of this thread. It focuses on common stocks of thinly traded junior mining companies.

From the example in this piece, it seems that those who are the most vulnerable are shareholders in small companies who are getting conned by an investment bank into a new financing arrangement. Understanding this is a big blow to my stock-picking strategy, which has been to focus on long-term holdings of small companies which don't receive much attention from the MSM.

Now I think I understand that highly liquid, large-cap shares are less vulnerable to this type of manipulation.

What other security types are safe? Seems like anything which can be shorted is theoretically vulnerable. But which ones are actively exploited? Are there any security types in which the DTCC is not part of the transaction delivery and fulfillment chain?

Corporate bonds and preferred stock? Treasury bonds? Municipal bonds? If many people start to question the DTCC, then short/intermediate Treasuries might do well when the fecal matter begins to fly.

What happens if an ETF is exploited in this way? I don't know the internals of ETF transaction processing, but it must be pretty complex. I would even suppose that bugs in the ETF operational software system (i.e. the logic for selling the basket of stock shares when an investor sells (destroys) existing ETF shares) could cause inadvertent naked shorts.

What about open-end mutual funds? Can fund shares themselves be exploited this way? Are competent, honest mutual fund managers able to protect their shareholders from this scam?

[Rajiv]

Re: Wall Street: Crime of the Century

A number of separate issues arise from the failure to deliver -- First of course is the threat to the very survival of small companies. Second is the issue of ownership of stock that you think you have bought -- that I believe is a problem whether you have "bought" stock in small or large companies. These are risks to investors and to companies.

Then there are the systemic risks! These are also alluded to in Dr. Byrnes presentation. The toxin of the FTDs is accumulating in the system, and now poses a threat to bring the entire financial system down.

If a large proportion of stock buyers were to ask for physical delivery of the stock certificates, I believe that the system would collapse.

It is possible that this is the reason Bear Stearns could not have been allowed to go bankrupt -- but that its liabilities needed to be transferred seamlessly to another "Player" -- in this case JP Morgan.

Because in the bankruptcy proceedings everything would come to light, and figuratively speaking, the **** would hit the fan!

I believe that this kind of toxicity extends throughout the FIRE economy.

I am in no way implying that "Everybody" does this -- but enough players do this, and the problem has historically been swept under the carpet -- but the toxins have accumulated to such an extent that the survival of the system is at stake!

The Refco affair detailed in Dr. Byrnes presentation is extremely enlightening.

[Rajiv]

Re: Wall Street: Crime of the Century

On the Bear Stearns thing we have
Chris Cox, Bear Stearns, and Naked Short Selling 3 Apr 2008

SEC Chairman Christopher Cox appeared before a US Senate commitee to discuss the Bear Stearns implosion. Be sure to watch this video to the last second. To decode the Washington-speak, note that Senator Tester asked Chairman Cox about short selling, not naked short selling.

Interesting comments afterwards

in particular from donkypunch1

Had lunch with a powerful individual (the uncle of one of my best friends) who is big-time in Washington and apparently tight with Treasury Sec Paulson. I was asking him about how they are able to manage inflation with all the stuff I’m reading about that makes it sound like were “printing” money hand over fist, the fed’s taking on all these questionable securities and all the auctions being set up–his response was that Bear Stearns was taken down by naked short selling.

I literally choked, because other than Patrick and sympathizers, I have yet to find a solid source that definitively acknowledged the existence of the practice, let alone it being a problem. Him assuring me that nss does exist was pretty mind-blowing.

Also
Did a CNBC Reporter Help Destroy Bear Stearns?

Also relevant is Financial Black Holes

[bart]

Re: Wall Street: Crime of the Century

I'm so very glad to see this crud come more into public view, for only then does it have a chance to be truly stopped and the slime doing it to be brought to justice, even just a little.

Serious kudos to Puplava, Sinclair and others who are making it happen.

And for some perspective, a quote that EJ was running for a while:
"Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight."
- Daniel Drew, 19th century speculator

[Rajiv]

Re: Wall Street: Crime of the Century

See also Deep Capture: The Explanation

[Rajiv]

Re: Wall Street: Crime of the Century

information on stocks that have not been delivered, but is actually useless in that no serious numbers of how much is not delivered can be determined. It is a big scam, no telling how big, and no telling how it might someday play out.

From Sanity Check - How Big is the Failure to Deliver/Naked Shorting Problem? Yet More Information...

How big is the problem? I mean, we hear the now famous $6 billion delivery failure number tossed around from the DTCC, but how accurate is that, really? Is it a complete answer? Is there more information that is knowable?

The answer is, yes, more is knowable.

"Approximately US$1.8 trillion worth of trades remain outstanding and unsettled globally every business day, contributing significant credit and operational risk exposure to the trading participants."

That from the document at Touchbriefings.com. Huh. $1.8 trillion is a big number, even by Pentagon standards.

http://www.touchbriefings.com/pdf/1417/kumar.pdf

Or how about this? From the DTCC:

"For example DTCC estimates that 5% of secondary market trades fail to settle each day. With approximately $4.5 trillion of settlement value in 2004, failed transactions equal $ 225 billion daily."

http://papers.ssrn.com/sol3/papers.c...ract_id=849224

Alternatively, we can go to the UK Exchange Handbook, which contains some fascinating perspective on our wondrous settlement system.
http://www.exchange-handbook.co.uk/index.cfm?section=articles&action=detail&id=38756

If I read it correctly, it says that at least 5% of DTCC transactions fail to deliver. It also hints at delivery failures because of the CDS direct cross border link into the DTCC and between the prime brokerages.

"One of the problems in assessing how reliable, and hence safe, a market settlement system is concerns obtaining reliable data on such matters as failing transactions -- let alone ascertaining exactly where liabilities lie during the settlement and subsequent on-going custody of the assets. In the more advanced markets, such as those in the UK and the US, the local regulators have ensured that reliable transaction data is readily available in a very transparent manner. In these markets, when the depository advises that they have a fail rate of approximately 5% (in the case of DTCC) or approaching 1% in the case of CRESTCo in the UK, one can rely on such figures."

"This research is supported by the DTCC white paper, which reports that 6% of institutional transactions being settled on an average day are expected to fail, while the fail rate on the market-side is lower at 4.4%."

Huh. Very interesting. Again, sounds larger than that $6 billion per day, which many assume is a rolling total. I mean, 5% of everything they process fails? After netting and the stock borrow program have minimized the number that could fail? That is an amazingly large number, 5 times larger than what happens in Britain. Scary part there is that we are now talking after the replenishable pool from the stock borrow program is used, and presumably massive numbers are shunted ex-clearing, and not counting desked trades, and after CNS netting handles the vast majority, we still have 5%? Yikes. Makes me start to believe that the true number is many multiples of that 5% number. Anyone with hard data that can show that assumption isn't true is welcome to bring it on. Facts are facts.

So then, in our quest to understand it all, we turn to the actual white paper published by the DTCC on settlement issues, and we get more data. Much more.

http://www.dtcc.com/downloads/leader...settlement.pdf

"FAILS AND RECLAIMS
This shortfall in effecting STP is largely an efficiency issue. Fails and reclaims are another matter. They create risks for participants and for the system as a whole.

Because fails are quite common in today’s system, it falls far short of straight-through processing. Currently about 5% of trades fail or are “dropped” at the end of the day — about 20,000 from CNS and 15,000 from non-CNS deliveries for a total of about 35,000 of the typical day’s 700,000. This doesn’t include “fails to deliver” that aren’t even introduced into the system, which would make the fail rate higher (that's ex-clearing they are discussing, BTW - Bobo). Fails create significant risks for the deliverer and receiver. When a fail occurs, the deliverer is short of funds (although a firm can lend the securities it has and replenish them in normal market circumstances). Both the deliverer and the receiver have portfolios that are not what they expected. Although a fail does not create a credit, counterparty or principal risk, it does create a liquidity risk for the deliverer. And institutional trades that fail create position risk for both deliverer and receiver.12

Most fails occur because positions are not available; that is, the deliverer does not have free inventory. Stock lending can, of course, overcome this, as long as the lent stock is available quickly enough. When, as is usually the case, the lender receives sufficient cash collateral from the borrower, the credit risks associated with stock lending are small compared with the benefit of eliminating settlement fails."

Huh again. So, 5% fail PER DAY, not counting ex-clearing. Not a rolling number, but per day, unless I am reading this wrong. I don't think I am, but it is always possible, and I would welcome brighter minds than mine shedding light on this if I'm getting any part of it wrong.

So, this is a big, big problem, and it isn't happening because the dog ate the certificate. It's happening because the brokers just flat out don't have what they sold. As in, fraud. No got the doggee in the window I took the money for.

[Rajiv]

Re: Wall Street: Crime of the Century

Also to go along with the above is this -

Why The DTCC Is A Prime Mover In Securities Fraud and Naked Shorting

To hear them tell it, they are powerless to deal with NSS, acting more as a vessel through which stock flows. They ignore that they are an SRO, chartered with regulating the business conduct of their owner/members. They pretend that they don't become the intermediary, and thus the contra-party to the trade to both buyer and seller, and thus in full control of buying in failed trades (if they wanted). They pass self-serving rules that declare they can't force a failing member to buy in the fail, even though they are chartered with ensuring timely clearance and settlement. And for years they have been claiming that NSS is basically a non-issue, while their press geeks and counsel employ mind-numbing doubletalk.

Read the explanation of what the press release that follows describes. It is unbelievable, and yet typifies the DTCC's behavior. It is a huge part of the problem, and yet it continues to pretend to be an innocent bystander.
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A LESSON FOR HEAVILY NAKED SHORT SOLD CORPORATIONS\

A SYNOPSIS OF THE BELOW ARTICLE

1) Grifco International, Inc. owns 75 million shares of Coil Tubing Technology, Inc. and they wish to dividend out this asset to the owners of their 40 million shares outstanding.

2) Each share of Grifco owned will therefore receive 1.89 shares of Coil Tubing.

3) Grifco’s 40 million shares are partially held in “street name” at the DTCC and partially in registered format wherein the shareholders hold their own certificates, perhaps in a safety deposit box.

4) The DTCC holds in “book entry” format 68 million shares and thus a large % of these book entries are associated with failures to deliver. For instance, if 10 million shares of Grifco are held in a registered format by their purchasers in certificate form then 30 million would be held in “street name” at the DTCC and thus 38 million of the book entries held at the DTCC were in a failure to deliver status. The DTC division of the DTCC acts as the “legal custodian” of these 30 million shares (an estimate) and is well aware of the disparity between the 30 million shares in their custody and the 68 million “shares” held in an electronic book entry format on the books of their participants. They learned of this disparity during the dividend process.

5) Due to the enormous amount of deliver failures held at the DTCC (28 million shares plus the amount held in certificated form by registered shareholders) there obviously weren’t enough dividend shares of Coil to go around if all shareholders of Grifco were to receive 1.89 shares of Coil per Grifco share owned.

6) The securities laws clearly state that any short seller that is short any shares of an issuer on a dividend record date must match that dividend.

7) Instead of forcing their DTCC participants holding the short positions (failures to deliver) to deliver the missing dividend shares of Coil, the DTCC management told Grifco to contact the shareholders that didn’t receive their dividends to sign a waiver waiving their right to these dividends. Obviously very few would comply as they had legally earned these dividends.

8) DTCC then demanded that Coil Tubing, whose shares were being dividended out by Grifco but that otherwise had nothing to do with the dividend distribution process, to go out and buy additional free trading shares in the market or supply the missing amount out of their treasury despite the fact that it was clearly the responsibility of those short the stock of Grifco on the dividend record date to match the missing dividend shares.

9) Grifco obviously refused this DTCC order as it would have been very damaging to their shareholders because of the dilution, as well as very expensive.

10) DTCC management then issued a statement on 7/10/08 that unless it received the necessary shares within 21 days that they were going to proactively reduce the size of the dividend distribution from 1.89 shares of Coil per Grifco share owned to 1.29 shares per Grifco share owned. They did this despite the fact that it was clearly the responsibility of those DTCC participants that were short the stock to match the dividend.

11) Coil Tubing refused to play ball with this DTCC mandate and filed suit against the DTC and Grifco itself claiming that Grifco should have been aware of this massive discrepancy. In reality Grifco management has no idea of the levels of delivery failures in their shares held at the DTCC or outside of the DTCC in an “ex-clearing” format.

12) The judge issued a temporary restraining order forbidding the DTCC from adjusting the Grifco shareholder’s accounts from 1.89 dividend shares per Grifco share owned to 1.29 shares of Coil per Grifco share owned.

QUESTIONS THAT ARISE

1) How dare the DTCC attempt to transfer this debt from their DTCC participating owners/participants (those with the short positions) onto the shoulders of either Coil Tubing, or Grifco and their shareholders?

2) How dare the DTCC allow their participants to run up a massive level of delivery failures equaling 28 million shares plus the amount held in registered format, in a corporation with 40 million shares?

3) How dare the DTCC try to get Grifco investors/shareholders to sign a waiver denying them of the dividend their purchases earned?

4) How dare the DTCC management force the shareholders and management teams of both firms to shoulder the financial and time burden of this litigation, just to receive what was owed them?

5) How dare the “legal custodian” of these shares (i.e. the DTC division of the DTCC) treat the “beneficial owner” of these shares, to whom they owe a fiduciary duty of care, in this reprehensible manner?

6) How dare the “legal/nominal owner” of these shares, CEDE and Co. the nominee of the DTCC, treat the “beneficial owners” of these shares (to whom they owe a fiduciary duty of care as the surrogate “legal owner” for which they were appointed only as a means to streamline ownership transfer without cumbersome deed-like instruments) in this fashion?

7) How dare a “qualified control location” capable of granting compliance with the critically important “Customer Protection Rule” (Rule 15c3-3 of the ’34 Act) treat the “beneficial owners” of these shares in need of this protection in such a manner? The “Customer Protection Rule” mandates that the purchasing broker/dealer “promptly obtain and maintain the physical possession or control of fully paid for and excess margin securities” on behalf of their client, the investor, or keep them housed at a location, like the DTCC, that will obtain the physical possession or control of them on their behalf. This clearly was violated by the DTC.

8) How dare the DTCC acting in the capacity of a “Self-Regulatory Organization” (SRO) defined as “An entity, such as the NASD, responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members” refuse to regulate the “business conduct” of its abusive participants that refused to deliver the shares of Grifco that they sold, as well as the dividend shares of Coil Tubing that they clearly owe?

9) How dare the DTCC with the Section 17A (’34 Act) mandate to “Promptly and accurately clear and settle all securities transactions” refuse to settle these transactions after these archaic delivery failures were brought to their attention?

Once the enormity of this delivery failure situation was brought to the attention of DTCC management, the correct course of action was obviously to firstly force the perpetrators of this massive fraud to buy-in the shares of Grifco that they'd previously sold, but refused after inordinate amounts of time, to deliver. Secondly, those short the stock on the dividend record date would obviously be on the hook for the dividend shares.

This is the type of corruption in the naked short selling arena that U.S. investors are up against in the DTCC-administered clearance and settlement system in use in the U.S.

THIS IS BUT ONE OF DOZENS OF REASONS WHY YOU NEVER HOLD SHARES IN DEVELOPMENT STAGE CORPORATIONS IN “STREET NAME” AT YOUR BROKER/DEALER, ESPECIALLY IF THEY ARE ABOUT TO DISTRIBUTE DIVIDENDS. YOU SHOULDN’T HAVE TO GO TO THE EXPENSE AND HASSLE OF FILING SUIT IN ORDER TO RECEIVE A DIVIDEND CLEARLY OWED TO YOU.

[bart]

Re: Wall Street: Crime of the Century

Thanks Rajiv, a truly excellent recap.

[Rajiv]

Re: Wall Street: Crime of the Century

I am truly astounded that anybody who has read and understood this stuff - still believes in the sanctity of markets -- and continues to participate in that market!

[Jim Nickerson]

Re: Wall Street: Crime of the Century

I am truly astounded that anybody who has read this stuff - still believes in the sanctity of markets -- and continues to participate in that market!

Rajiv, you need to stop putting up all this stuff. People may read it, and if they understand some of it, then it will make them uncomfortable with the so-called American dream and illusion of American superiority in so many things. It isn't nice to make Americans doubt their own system in anything.:rolleyes:

I doubt many here seriously look upon the American markets as having anything to do with "sanctity."

I continue to trade, so as long as I get back to holding cash by selling positions, I think I circumvent being the one left holding the empty bag of what one believes to be an owned security. As a matter of fact, I have yet to read of an individual taking a loss because of a position represented on a broker's ledger as being in one's account when in fact the shares have not been delivered.

The puzzling thing to me is that no one seems to know how large the problem really is, and what will happen if something makes it mandatory that all the FTD's be wiped out, corrected, or their existence done away with. As I have surmised before, I don't think any responsible individual or agency has the cojones to seriously try to remedy the problem.

[bart]

Re: Wall Street: Crime of the Century

I am truly astounded that anybody who has read and understood this stuff - still believes in the sanctity of markets -- and continues to participate in that market!

Very much agreed, especially about market sanctity. Over the years as I keep researching and learning, the raw and huge amount of behind the scenes "special" stuff going on... well, astounding isn't anywhere near a strong enough word.

The "continuing to participate" knowingly and without taking the actions of various scum into account still surprises me... but I also look back a number of years and see how naive I was and also see how tough it was and is to both deal with and devise counter measures... and it makes it easier to understand in others.


And of course, this applies too as well as various data from Jesse Livermore's (available for free download from my site on the quotes page - they're public domain to the best of my knowledge) and other books:
"Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight."
- Daniel Drew, 19th century speculator


That's probably my key lesson - if one doesn't see at least some of this crud and take it into account, one isn't even playing with anything close to a full deck and is almost guaranteed a sub standard return.

That's a very strong statement and I may get some flack or disagreements... but I have the actual facts, much like you do. And I have the receding hairline to prove I've done my homework too...;)

[Rajiv]

Re: Wall Street: Crime of the Century

I learnt my lesson in 2001-2002 -- I had an extremely good timing model -- that I stress tested doing totally computerized shadow trading for six months -- but it stopped working about a week after I started trading with it! And this was before 9/11 -- luckily I was out of all positions on 9/11 -- otherwise I would have been killed!

[bart]

Re: Wall Street: Crime of the Century

I learnt my lesson in 2001-2002 -- I had an extremely good timing model -- that I stress tested doing totally computerized shadow trading for six months -- but it stopped working about a week after I started trading with it! And this was before 9/11 -- luckily I was out of all positions on 9/11 -- otherwise I would have been killed!

No question that timing and trading is tough, or that I take some whopper losses now & then.

I don't actually have a fixed model or use computers for other than data analysis and charts, but rather try and approach a trade within the current context of all the data of which I'm aware.

I've never been able to work out a reliable computer based model, and not for lack of trying. The best I've been able to do with all the various signals (like VXO vs. VIX or MACD or whatever) is to try and load the probabilities on my side.

[Rajiv]

Re: Wall Street: Crime of the Century

My point was slightly different -- six months of stress testing -- no subjective shadow trades -- and the model works like charm -- one week of trading - it works -- then whammo it stops working! Why?

[bart]

Re: Wall Street: Crime of the Century

My point was slightly different -- six months of stress testing -- no subjective shadow trades -- and the model works like charm -- one week of trading - it works -- then whammo it stops working! Why?

I wish I knew... just the perverse nature of life I guess?


My own prediction charts, like this one on gold, (which had been working fairly well since 2005 on major signals) just plain quit working well around Dec 2007.

I still don't know why, although ECB gold sales are part of the reason.