| | Register
Who is Bob O'Brien?
Sanity Check Archive
Click Here to see Bob's Old Sanity Check articles.
About our Blogs

Blogs found on this website represent the opinion of the author. For more information please visit our terms of use.
Funny Bunny
Looking for something a little lighter?
Catch Bob's more irreverent and amusing pieces in his Funny Bunny Blog.

The Harsh Truth From The Most Unlikely of Sources - Thestreet.com

Location: Blogs Bob O'Brien's Sanity Check Blog    
Posted by:   bobo 4/24/2006 11:00 PM

Is it wrong when a money manager writes the defining piece, elegant in its simplicity, that clearly and simply articulates the problem occurring in the stock market today?

Is it something for the entire NY press corps to be ashamed of, that a avocational journalist nails it, when they seemingly are incapable of doing so?

Arne Alsin again nails it. No preamble or explanation is required. Read it. Don't be a cheapskate if you don't have a subscription. Pay for it. It's worth it.

Really.

I won't reprint much for fair use. But I will give you this:

"The Stock Market Is Patently Unfair
By Arne Alsin
RealMoney.com Contributor

4/25/2006 8:02 AM EDT
URL: http://www.thestreet.com/p/rmoney/marketcommentary/10281223.html

In a fair market, the property of investors is secure and protected, the playing field is level, and rules are uniformly enforced.

Unfortunately for investors, that does not describe the current condition of the stock market. The current stock market is patently unfair.

The core issues are not complex. They are actually quite simple. Investors in stocks should consider these current realities:

  1. A share may or may not be a share.
  2. A vote may or may not be a vote.
  3. A trade may or may not be a trade.

Shares, votes, and trades --- these involve basic, fundamental market functions that should not be at issue. But they are at issue. And a fix is needed. Here are three core principles around which stock market reform should be focused:

Investors Deserve to Know What They Own

It should be a given that brokers fully disclose exactly what sort of asset an investor owns. It's not a given because there is a sizeable roadblock: Full disclosure does not serve the financial interests of brokers.

While it's true that it's your property and you deserve to know what is in your account, don't expect the brokers to be forthcoming anytime soon. If brokers had to disclose to investors when shares are removed from their margin accounts and lent to short sellers, it might put a crimp in their massively profitable stock-lending businesses."

There is more. much, much more.

You should read it.

It should be widely disseminated.

Because it is the truth.

Arne? If you are reading? Bravo. About frigging time. This isn't rocket science. So why is the entire NY financial press machine avoiding the issue that you were able to summarize in, what, 1500 words?

We are proud of you. And they should hang their heads in shame. This is an ugly aspect of the American dream gone wrong. And those who corrupted it deserve to be punished, rather than buying gulfstreams and owning the country.

Send Arne your thoughts.

Send Realmoney your thoughts.
Copyright ©2006 Bob O'Brien
Permalink  |  Trackback
Comments (15)
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By Tammy on 4/25/2006 5:55 AM
http://www.chicagotribune.com/business/chi-0604250188apr25,1,6752206.story?coll=chi-business-hed&ctrack=1&cset=true

SEC failing to fix own problems

Bloomberg News
Published April 25, 2006

WASHINGTON -- The Securities and Exchange Commission, which enforces standards for financial reporting by public companies, continues to fall short in its own internal accounting procedures, according to a government report released Monday.

An audit of the SEC's 2005 financial report found the agency failed to fix problems with computer security, fine collection and preparation of financial statements, the Government Accountability Office said.

Those problems qualified as "material weaknesses," or flaws that could affect the accuracy of financial statements, the GAO said. It identified the glitches in an audit a year ago.

The GAO, the investigative arm of Congress, concluded that the SEC had addressed 13 of its 34 recommendations as of January. SEC Chairman Christopher Cox said the agency has taken additional steps since then.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By Alan Greenpants on 4/25/2006 5:59 AM
The Stock Market Is Patently Unfair
By Arne Alsin
RealMoney.com Contributor

4/25/2006 8:02 AM EDT
URL: http://www.thestreet.com/p/rmoney/marketcommentary/10281223.html

In a fair market, the property of investors is secure and protected, the playing field is level, and rules are uniformly enforced.

Unfortunately for investors, that does not describe the current condition of the stock market. The current stock market is patently unfair.

The core issues are not complex. They are actually quite simple. Investors in stocks should consider these current realities:
A share may or may not be a share.
A vote may or may not be a vote.
A trade may or may not be a trade.

Shares, votes, and trades --- these involve basic, fundamental market functions that should not be at issue. But they are at issue. And a fix is needed. Here are three core principles around which stock market reform should be focused:
Investors Deserve to Know What They Own
It should be a given that brokers fully disclose exactly what sort of asset an investor owns. It's not a given because there is a sizeable roadblock: Full disclosure does not serve the financial interests of brokers.

While it's true that it's your property and you deserve to know what is in your account, don't expect the brokers to be forthcoming anytime soon. If brokers had to disclose to investors when shares are removed from their margin accounts and lent to short sellers, it might put a crimp in their massively profitable stock-lending businesses.

Brokers often generate annual yields of 10%-15% or more when they lend out your property, and rates of 25% or more are not unusual for hard-to-borrow stocks. If there were full disclosure, investors might demand a share of those lending profits.

Taxes are one obvious reason to mandate full disclosure. I own the stock of Commerce Bank (CBH:NYSE) (CBH) in a margin account. Instead of getting the benefit of the 15% tax rate on dividends, last year I paid ordinary tax rates (which are more than double) on a sizable portion of my Commerce dividend (called "in lieu" income on the 1099 form).

Why is the special 15% dividend tax rate unavailable to me?

It's because I don't really have Commerce shares in my account --- despite what it says on my brokerage account statement. My broker lent my Commerce shares to a short seller who sold my shares to someone else. The borrower of my stock paid me an amount equal to the dividend, so I don't lose the dividend income. But since I don't actually have shares in my account, it's not a real dividend and the lower tax rate is not available.

Because of the lack of disclosure, taxpayers with dividend-paying stocks in their margin accounts have to wait until after the tax year is over to see if they have a "surprise" waiting for them on their form 1099.
One Share = One Vote
The Internal Revenue Service doesn't play games. When a company pays a dividend on a share of stock, only one shareholder gets the benefit of the 15% special tax rate. Even if it's lent out to multiple short sellers who sell to multiple buyers, only one shareholder gets the special tax rate. So brokers carefully track shares of stock for tax purposes.

When it comes to voting, however, brokers do a lousy job of tracking shares.

They literally trample on the right of shareholders to vote their stock. When your shares are lent to a short seller, you are supposed to lose your voting right --- it is supposed to follow the shares.



Amazingly, your broker has the gumption to send you voting proxy materials even when your shares have been lent. In what amounts to a full-blown charade, your broker allows you to vote shares that you think you have, but really don't have.

The net result of this nonsense is predictable enough: Overvoting is a rampant problem. A trade organization (made up of stock transfer agents) recently reviewed shareholder votes for over 300 companies and found evidence of overvoting in every single case.

Some brokers have procedures in place to summarily reduce the vote totals that they report so that they don't report excess votes. Rather than report 150,000 votes when the brokerage has only 100,000 shares, for example, the broker simply trims the vote. So, as a shareholder, your vote may actually be worth only ½ or ¾ of a vote, or whatever fraction that the broker deems fair and equitable.

The voting issue is a mess that needs to be cleaned up. The right to vote should be tied to share ownership, with enforcement of a "one share, one vote" rule. If the brokers can figure out who gets the special 15% dividend tax rate, then they can figure out who has the right to vote.
Trades Mean Something
In my column last week, Why Does Failure to Deliver Go Unpunished? , I described purchasing several blocks of shares of Overstock (OSTK:Nasdaq) , shares that were not delivered within the required three-day settlement period, known as T+3. For four separate purchases, cash was taken from my mutual fund's account on the stipulated settlement date (T+3) and held in a separate account by a custodian bank. We waited as long as three weeks to get delivery of our property.

Since that column, I've heard similar stories from many other investors and money managers, including one from a major bank that has been waiting for delivery of Overstock shares for two months.

The manager at this bank says that the broker is going to cancel the trade. This should not happen.

In a fair market, with trading rules that are enforced, it would not happen. With over 300 stocks suffering from significant delivery delays, it's clear that there is a systemic problem in the market. The T+3 rule is frequently violated and the violators go unpunished.
Legislators Need to Get Involved
If a market can be abused, it will be abused. Hundreds of companies have failure-to-deliver problems. Shareholder voting is a farce. Trading rules are being ignored. Investors can't say with certainty what is in their accounts.

To hand off the market's problems to the Securities and Exchange Commission to solve behind closed doors is a less-than-optimal solution. In the interest of maintaining investor confidence, these issues are better served and solved in an open, transparent forum like Congress.

All that is needed is a member of Congress with enough courage and foresight to tackle these problems, before they develop into a crisis.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By hemingway811 on 4/25/2006 6:18 AM
Christopher Cox is appearing before the Senate Banking Committee this morning to discuss "A Review of Current Securities Issues."

http://dealbook.blogs.nytimes.com/?p=2267

Watch it live (requires RealPlayer).

http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=206
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By Ranger on 4/25/2006 6:33 AM
It is about time somebody else stated the facts! The small people cannot do much to get change because it is so difficult to get a large group to all act together for the thier own interest. This is not a problem for the illegal aliens! Another topic, sorry. I have written before the problem is with the Market Makers and brokers because they make money (BIG MONEY) by breaking the rules and there are no penalties for breaking the rules. The sad truth is once this problem gets main stream attention then the ones gettting shafted (you and me and all the folks putting money into mutual funds, 401K's, savings plans) will revolt. A huge RUN ON THE MARKETS will cost the Market Makers and brokers more money then would have made by following the rules. One can look at ENRON and figure out how folks view being a victim of crime. Whatever happens in the criminal court is after the fact the the money is gone. What is going to happen when the population of this country decides to take thier money back and buy CD's agains. I believe folks are not stupid and a 3% return on a CD is always better then having a criminal steal your money while you watch ins disbelief. Think about that one!
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By David on 4/25/2006 7:14 AM
I am certain that Alsin and his accountants know more than I do, but can anyone confirm whether this assertion is actually true?

>>Taxes are one obvious reason to mandate full disclosure. I own the stock of Commerce Bank ... in a margin account. Instead of getting the benefit of the 15% tax rate on dividends, last year I paid ordinary tax rates (which are more than double) on a sizable portion of my Commerce dividend (called "in lieu" income on the 1099 form).
>>Why is the special 15% dividend tax rate unavailable to me?

See for example (and again I am genuinely ignorant in this area) page 2 of this, points 3 and 4:

http://www.sia.com/TaxIssues/pdf/NewIRSguidancepayments.pdf

also this:

http://personal.fidelity.com/planning/tax/content/annualcredit.shtml

I don't know if these remedial actions went into effect, and presumably Alsin does, but some more-informed discussion would go a long way here.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By hawlw3 on 4/25/2006 7:56 AM
How do I subscribe, so that I can read such great articles?
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By n-tres-ted on 4/25/2006 8:27 AM
Saw Chairman Cox testifying in response to the same questions from Sen. Bennett of Utah. Same useless (and seemingly embarassed and circumspect) comments by Cox. Sent Bennett the Alsin link provided by Bobo above, which certainly was not mentioned at the hearing.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By rtway1 on 4/25/2006 8:28 AM
I just e-mailed this gentleman to express my thanks and I hope that he would consider getting involved in some kind of gov,t. reform. This is the type of human being that normal people would gravitate to, a rare commodity nowadays. I hope that larcenous phony Shelby reads this.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By Jasper on 4/25/2006 8:28 AM
Bobo

I get it. If they do articles on this topic and subscription fees go up, then maybe they will cover the issue more. Sorry, I'm not buying. One or Two honest articles out of thousands. What a waste. We have to buy coverage of a news story. Isn't that what got us into this mess to begin with?

We keep going down this road in this country and the shit will never ease up. Jeepers.

Jasper
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By majordanger on 4/25/2006 9:26 AM
I wrote an email last to Mr. Aslin and he replied and thanked me for the note. He says he has been concerned about the short attack on NFI for sometime.
At least he replied. None of my distinquished Senators or Congressman have botthered to do that .

Keep pushing Bobo.. This needs to go up one or two more teirs of infobabble.
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By golfwalt on 4/25/2006 10:13 AM
Just sent this email to Alsin:

Mr. Alsin: As with your recent piece on Overstock.com, today you've once again shown you are not afraid to acknowledge the elephant in the room.

So many have been piling on OSTK since Rocker Partners began their campaign to bring it down, it was a breath of fresh air to read your concise analysis of OSTK's prospects. Then, I was impressed and reassured by your independent thinking and willingness to simply stick to the facts in spite of all the vitriol and fear in the press regarding that company and its management.

So with your story today about your personal experiences with “failures to deliver”, or FTD, you explain clearly what more and more people are seeing as one of the largest systemic threats to the equity markets that exists now. Just as importantly, you accurately state the urgency of the problem and say it must be addressed quickly since global confidence in the U.S. markets is at stake.

Funny thing (or not so funny), the FTD issue is not a recent development. Of course, while they are certainly aware of the issues, it’s easy to see that the interests of the SROs’, brokers-dealers’, and markets’ are clearly at odds with investors’. What’s puzzling to me though is that the SEC is keenly aware of these issues as well and simply doess not address them. It may be because they are so close to Wall Street, but whatever the reason, enforcement seems to be beyond the SEC.

But please keep up the good work. You won’t be alone for long.

Golfwalt
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By mhelburn on 4/25/2006 10:23 AM
PILs were created to collect the max tax on something that would have preferential treatment if the broker did not lend out your shares. This is reasonable since one is receiving interest instead of qualified dividends and tax-exempt interest. In such cases, there should be a tax-make-up payment to the client.

Problem: 1. It may throw the income into a higher category.
2. The broker does not include the tax make up on the 1099 and makes the client responsible for reporting it as income.
3. Removes the ability to offset investment interest against income that is reported as "Other Income".

All income from lending shares, whether the client receives benefit of the lending or not is reported as "Misc Income". This ends up on 1099 as "Other Income" and investment interest can't be offset against it.

from 1099-Misc

"Box 8. Substitute Payments in lieu of Dividends or Interest

Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. Report on the "Other Income" line of Form 1040."

Brokers are reporting PILs that they lend on their behalf as if it were being lent on your behalf. If they put them on line 21, you can't deduct investment interest from them. They are converted to non-preferential treatment for taxes, but deny the offset. This is not done on the client's behalf. For qualified dividends and tax-exempt interest, there should be a tax make-up that makes one whole, but it still denies the offset.








Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By mhelburn on 4/25/2006 12:25 PM
Just spoke to Michael Hara of the Office of Chief Counsel of the IRS. He told me that the Jobs Relief Act was intended only to catch the difference between 15% dividends PIL and tax-exempt interest PIL. He suggested filing an amended return with an explanation of items designated by the broker on line 21. After speaking to him I called the client services at my broker and he was much more receptive to my input and said that he would bring it up.
Better Yet Sent it to Cox! By InTheKnow on 4/25/2006 3:55 PM
Eveyrone send the Alsin piece to COX!
Re: The Harsh Truth From The Most Unlikely of Sources - Thestreet.com By bryedge on 4/26/2006 5:23 AM
"All that is needed is a member of Congress with enough courage and foresight to tackle these problems, before they develop into a crisis."

Well, if this is the fix, we are certainly screwed.

Your name:
Title:
Comment:
Please limit your comments to 500 characters. For longer comments, use our forums.
Subscribe via Email
Get This Blog via Email:


Powered by Squeet.com
Sanity Check Archive
Resources
Copyright © 2006 The Sanity Check   |  Privacy Statement  |  Terms Of Use