Arne Alsin wrote another noteworthy article today for Realmoney, Thestreet.com's subscription online newsletter.
The article describes structural deficiencies in the market, and the abusive and larcenous activity of participants run amok, their larceny unchecked by regulators, or their own failed self-regulation.
In it, he describes his own experience as a fund manager, trying to get delivery of his OSTK shares. He describes the experience of other fund managers. And he describes the inevitable loss of faith being experienced by the most knowledgeable of institutional investors - a bad sign, as they understand the system, and the reality of any structural problems.
You can view the article here. Some key excerpts:
"Overstock offers such a lousy risk/reward proposition for shorts, there can be but one reason that a 25% yield is obtainable for lendable shares. It's because certain market players are grossly overextended. With twice as many shares short as are lendable, there are a lot of naked short positions in place that are desperate to find shares to borrow.
The Threat to Investor Confidence
When brokers allow twice as many Overstock shares to be sold short as are lendable, it is evidence of a structural problem. Undergirding the market is an implicit triangle of trust between brokers, companies and investors. For the market to function properly, investors must have confidence in the system. They must be confident that their property is protected, that rules are uniformly enforced and that rule violators are punished.
Stocks are accounted for as a so-called "fungible mass" in a book-entry system, in the same way as currency. It requires confidence for the system to work. Depositors don't demand actual currency for their cash assets because they have confidence in the book-entry system of banks.
As one money manager explained to me, after struggling for weeks to get delivery of Overstock shares (see my column about my similar experience), he lost faith in the system. He didn't trust that his brokers would not lend out his shares. So he demanded actual certificates, which took another several weeks, and they are now in a bank vault.
When shareholders resort to demanding actual certificates for their shares, as has occurred en masse at Overstock, it is akin to a depositor going to his bank and demanding actual currency -- a so-called "run on the bank."
Correct. It is exactly that - a run on the bank, as investors realize that, unlike the Federal Reserve, the privately owned affiliation of brokers that would act as the de facto stock bank are NOT authorized to print stock at will - as the Fed is with currency. Only the issuing companies are allowed to print stock, and the breach in the public trust that wholesale abuse of this trust constitutes is precisely the threat to investor confidence that this site has been warning about for the last year and a half.
When those you trust prove to be untrustworthy, that is disastrous for a system predicated on trust.
And yet, even as this unfolds, and increasing evidence becomes available that Wall Street is a law unto itself, and that no rule is too sacrosanct to violate - even now, the abuse continues unchecked.
I suppose one could view that as a breakdown of the rule of law in the market, or it could be attributed to a sense of invulnerability by the players, or perhaps a sad commentary on the ineptitude of a token regulator asleep at the wheel.
I personally think that it is a group of rich, privileged white guys whose private sentiment is that they rule the country via control of the financial system, and thus are not subject to any rules - that is a naive contrivance to keep the sheep in line. Hey, if you are one of the owners of the Federal Reserve banks, and one of the big names on Wall Street, and you own big chunks of the media companies - who is kidding who? You are the largest contributor to both political parties, and anytime you are caught with your hand in the cookie jar (or hijacking the cookie truck) you get fined less than one cent for every dollar you stole...
Who can blame absolute power for corrupting absolutely?
It always has.
Why would now be any different?
I think the reason most of the investing public ignores this issue is also twofold - they are told by the mouthpieces of this powerful cartel of players, via the media, that all is well and that there is no crisis, and they also view the sort of corruption that takes place on Wall Street as rich guy #1 screwing rich guy #2.
In other words, the public fails to see how it is their problem, and likely has the sense of apathy that has been an earmark of the last few decades.
The problem is that the cracks and fissures are becoming visible, and while our regulator mouths facile aphorisms, a growing segment is becoming aware that this is not an interstitial issue, but rather a fault running the length and breath of the system. I personally view this with mounting alarm, given the lack of action by our watchdogs, and the sense of invulnerability that the industry has displayed.
I celebrate honest commentators like Arne Alsin, and you should too. The truth will out in time, and knowledge is indeed power.
Bucking the trend is difficult, and the complete media cover-up of this issue has been astounding. Guys like Arne are willing to tell the truth, when careers are made by ignoring it. That is noteworthy, and a harsh indictment of the rest of the machine. Our stock bank is broken, the prisoners are running the jail, and our journalists are more interested in "crushing" their opposition and obstructing justice than in reporting the biggest story of our generation.
And that is likely the tame version...