Today, Carol Remond (who else?!) issued a not-particularly-surprising article pronouncing Reg SHO a success.
This is the same Carol who missed 99.999% of the testimony at the NASAA conference on naked short selling (linked at the Library) decrying Reg SHO as an inadequate failure, and instead miraculously only heard the official SEC and NASD talking-head position statement assuring us that all was well – which completely ignored the mountain of evidence discussed that demonstrated that it was clearly out of whack. Tut tut, see no evil, hear no evil Carol is back, with more verbatim regurgitation of the regulators' official story.
Here she is, trumpeting the rule that pardons all FTDs that occur prior to a company landing on the Reg SHO list, and which establishes exactly ZERO penalties for violations of the rules, as a success. Now, hold your laughter for a minute, and follow along - this probably wasn't intended as an insult to our intelligence, but rather an ill-written comedy piece - at which it is more effective than Reg SHO is at its stated purpose.
Let’s do a quick blow by blow dissection of Carol's latest flight of fancy, and read between the lines to see if we can glean even a kernel of truth.
Here are some choice nuggets, and my translations thereof into non-BS-speak:
“Market regulators said in a series of interviews with Dow Jones Newswires that a sharp decrease of the number of companies on the so-called threshold lists shows the early positive impact of Reg SHO. The regulators also said that ongoing examinations of clearing firms showed that Wall Street firms have abided by the new rule.
"Thus far, there appears to be a good level of compliance," a senior staffer at the Securities and Exchange Commission said. According to the SEC, 99% of all trades in dollar terms settle on time.”
Ha ha ha ha ha ha. As one wag said in an email: “Who? The head of the bullshit department? What's his name?”
I am more charitable than that. I would simply observe that as far back as the creation of the SEC, Wall Street's worst crooks have been arguing that they are behaving themselves – Dick Whitney, the head of the NYSE from the mid-20’s to the mid 30’s insisted that was the case – right up until he was convicted of stealing money from a fund intended for widows and orphans, and sent to Sing Sing prison for 5 to 10. So there is no shortage of historical precedent for Wall Street and their buddies at the SEC to be assuring us that all is well – they kind of said the same thing during the analyst scandal, the specialist scandal, the mutual fund frontrunning scandal, REFCO – hell, during the S&L scandal, the regulators, and even Congressmen and members of the Reagan cabinet insisted that everything was fine, right up until the taxpayers had to eat a many-hundred-billion dollar bill.
I would like to draw attention to the 99% figure that the SEC uses, in dollar terms, that settle on time. Hold that thought as you read this next revelation:
“On average more than $2 trillion worth of trades settle daily through the National Securities Clearing Corp. and Depository Trust Co., two subsidiaries of the Depository Trust and Clearing Corp., the entity that operates a global electronic clearing system.”
Wow. That is a lot of dollars worth of trades. $2 trillion. What is 1% of $2 trillion? Remember, 99% settle - the $2 trillion – so 1% don’t:
$20 billion. Per day. Of trades that don’t settle on time.
That is how the math works out.
Now, the truth is that the total dollars of STOCKS that settle every day is closer to $120 billion per day, which means that the real math number is more like $1.2 billion, but why should Carol be expected to know anything about her subject matter? Besides, do we actually KNOW that her number of $2 trillion isn't the fuzzy math number that the SEC is using? I don't. I can guess, but I don't KNOW, because the actual data is secret. But let's use the more conservative number for the rest of this, and if you want to think $20 billion, knock yourself out.
So $1.2 billion per day of trades don’t settle, or rather, investors pay $1.2 billion every day for shares that don’t get delivered.
Let’s say it even more simply: The American public hands Wall Street $1.2 billion every day for product. Wall Street pockets that money, and then doesn’t deliver the product.
Now, can anyone else think of an American business that defrauds investors out of $1.2 billion per day, and doesn’t deliver what was paid for? No? That’s because there aren’t any. Imagine if 1% of all car sales, the dealers took the money and then didn’t deliver cars to the customer. Or imagine if Dell didn’t deliver 1% of the computers they sold every day, but kept the money. Or imagine if 1% of all bank deposits disappeared every day, you know, just vaporized, and nobody could find the cash – would that be a problem? How about if 1% of the insulin in distribution was actually colored water? Or 1% of the heart medicine was sugar pills?
What if 1% of all tires sold every day failed? Or 1% of all brakes sold failed? Or what if 1% of all households that paid for heat during a blizzard failed to get it? Or 1% of all cruise ship passengers failed to get lifeboats when their boat sank in the Atlantic during winter? What if 1% of ambulances per day failed to get their patients to the hospital, and instead dropped them off at the dump? What if 1% of the blood donated every day slipped through and had HIV, or was the wrong type? Or if 1% of the blood just didn’t show up – you know, failed to be delivered?
That’s the math. And that is what is being trumpeted as a success. I kid you not.
Does anyone have a problem with this?
There is more. Much, much more:
“Some companies have argued that the existence of threshold lists and the fact that some securities stay on them for extended periods of time indicate that the clearing and settlement system on Wall Street is broken.
A few securities, including Krispy Kreme (KKD) and Martha Stewart Living (MSO), have been on threshold lists since Reg SHO's inception on Jan. 10, 2005.
But regulators said that extended stays on threshold lists are not in themselves indicative of any lack of compliance with Reg SHO. They point to a number of factors affecting the number of long-term or aged fails, including so-called grandfathered fails, a number of exemptions granted to stock and option market makers that provide liquidity to the market as well as delays in the delivery of certain types of securities like restricted 144 stock.
"Just because stocks appear on the threshold list doesn't mean that broker dealers aren't following the rules. It means that they are exercising exemptions under the rules," said Steve Luparello, executive vice president of Market Regulation at NASD.”
Right. Uh huh. Extended stays on the list of companies whose shares have not been delivered to the buyers are not a sign of non-compliance with Reg SHO, “in themselves…” Right. And having many gigabytes of kiddie porn on your hard disk, along with many hours of films of children being abused, are not indicative of being a pedophile, “in themselves.” Spoken like Pete Townsend’s defense lawyer.
There are plenty of other possible explanations – the dog could have eaten $1.2 billion worth of certificates per day, or they could have been misplaced, or slipped the seller’s mind – I know I was busy today, and I can guarantee I never got around to delivering $1.2 billion of stock – so I understand how that can happen. Or it could all be a big misunderstanding - $1.2 billion per day of misunderstanding. There are many POSSIBLE explanations – the universe could be splitting into parallel universes with each sub-atomic event, an infinite number of times per second, and the deliveries could be getting made in all those other universes – that is also possible.
Of course, the most likely explanation is that the SEC keeps everything secret from investors and companies because the data shows that there is gross fraud occurring at every level, $1.2 billion per day’s worth (or maybe $20 billion...), and if they show us the data all those other “possibilities” evaporate, and they require those possibilities to exist so that the public doesn’t have a lynching party outside of SEC headquarters. That’s my theory. And every FOIA request we get denied with conflicting stories from the SEC make that theory more plausible – to whit, the contradictory statements that they are closely monitoring the efficacy of Reg SHO, while simultaneously saying that they don’t have any of the data with which to closely monitor it.
To posit that they are keeping the data secret for any other reason besides self-preservation, in the face of gross larceny, is difficult to reconcile with $1.2 billion per day of non-delivered shares.
Of course, we aren’t in a vacuum and there are other signs we can use to eliminate the “of themselves” qualifier, like Dr. Byrne not being able to get hundreds and hundreds of thousands of shares he bought in the open market for months. And the average Reg SHO company losing close to 50% of its value while on the list. But of course, Carol and the regulators ignore those events – they have no statement about any of that, as if by pretending to be unaware of it, it serves their rhetorical purpose.
How convenient. The CEO of OSTK can’t get his shares for months, the stock has been on the list for every day except a few weeks for over a year (there goes the grandfathered share argument), but Reg SHO is a "success".
Huh.
But to continue:
"Grandfathered fails may be a significant factor in extended fails," said the senior SEC staffer, adding that the Commission is "analyzing the data to determine whether SHO should be revised in any way."
Data provided by the SEC shows that Reg SHO is having the intended effect of clearing up fails to deliver. Through the end of November 2005, the average daily aggregate fails to deliver for all stocks on threshold lists decreased by almost 40%. Meanwhile, the average daily number of threshold securities declined by 36% and the average daily fails of threshold securities dropped by 41%.”
Why not just insert, “may NOT” where it says, “may?” Do we really need to hear a bunch of unidentified SEC choagies (why are THEY keeping their identities secret?), speculate as to things that MAY be causing extended fails? How about reading Dr. Boni’s report, linked in the Library, that says that extended fails are being used as a strategic, manipulative trading strategy? No MAY there. After studying it at length, she knew what was going on – why is there suddenly ambiguity? Is it, or isn’t it? Why do we need “may” when simultaneously, the SEC is telling us it has to keep the data secret, and that we have to trust them? How about the SEC MAY be lying to us, deliberately, because Wall Street is paying the right folks to do so? Given the Abramoff scandal, we KNOW that members of Congress are taking money to vote against our interests and lying about it, so why would the SEC be above what Congress and the press seems to be OK with?
Notice that at no point does the SEC or Carol state the obvious – that we wouldn’t need terms like MAY if we had the DATA. The only ones benefiting from keeping the data secret are the manipulators, and to believe that we need the SEC to be analyzing the data that they simultaneously claim they don’t have, defies believability. It insults our intelligence, and is a slap in the face to the American investor, treating us like dimwitted children who will be satisfied by being shown a shiny object, while being assured that we can’t be trusted with the truth.
But let’s consider the last part of the sentence – that the average daily aggregate fails decreased year over year, by the end of November. In 2004, the last two days of November the NYSE/NASDAQ FTD’s were 217 million and 200 million. On the AMEX/OTCBB, they were 487 and 497 million. So add those together and average them and we come up with around 700 MILLION shares average at the end of November, 2004, for which money had been paid, but no shares delivered. A “near” (why near? – why not give us a number – I may feel that 30% is “nearly” 40%, but that wouldn’t be accurate to most, now would it – more weasel words in the explanation here should set off alarm bells) 40% decrease would put that around 400 million shares in 2005 – NOT COUNTING EX-CLEARING FTDs, which are likely at least 4 to 5 times that many, using the DTCC’s own statements.
So here’s a question: How many companies’ shares dropped off in 2005 because they were de-listed or went bankrupt? You know, like CMKX, with who knows how many naked short shares? Or Delta Airlines? Or AAII? Try this out – couldn’t all of the “progress” be nothing more than de-listing a few of the right companies, and BK’ing a few more? Wouldn’t that account for all of it? That seems to me like it MAY explain the whole thing - an overall reduction of between 36-40% in their metrics, by nothing more than a wave of the BK/delisting wand!!!
Wouldn’t it be nice to know if that MAY be the pure-and-utter-horseshit-sort-of-nonsense that MAY be being passed off to reporters like Carol, who don’t seem to question any utterance from the SEC or hedge funds, no matter how preposterous?
We would know if that EXTREMELY LIKELY explanation was true or not if we were allowed to see the data, but we aren’t. You know, just ‘cause. Could it be because we would see through this sort of subterfuge in a New York second, and would storm the barricades? Nah.
Try this bit of fun:
“Under Reg SHO, brokers who fail to deliver a security for 13 consecutive settlement days have to execute mandatory buy-in to clean the fails. If the broker cannot buy-in the security, it and its clients will be restricted from further selling short the security without a "pre-borrow agreement."
Not really, Carol. They are supposed to, if it doesn’t cause them unreasonable hardship – and there is no real definition of what unreasonable means, just as there is no definition in the NSCC’s Stock Borrow Program of what “temporary” means. And isn’t there a restriction already in place for brokers executing a short sale, where they have to have a “pre-borrow” agreement? So they violate that, and then they REALLY have to have a “pre-borrow” agreement? Or what? Then they REALLY, REALLY, REALLY have to have a “pre-borrow” agreement? Who’s kidding who? This is pure bureaucratic tripe of the worst sort – I think of it as $1.2 billion a day worth of tripe.
“In addition to the grandfathering provision which exempted outstanding fails before Jan. 10, 2005, market makers that provide liquidity to the market are exempt from the locate requirement under Reg SHO. Meanwhile, option market makers who have positions in a security before it got on a threshold list are exempt from closing out fails resulting from short selling positions that market maker made to edge the existing position.
"Our analysis shows that a number of the positions that continue to exist (on threshold lists) for periods of time are hedge or arbitrage activities exempt from the provisions," NASD's Luparello said.”
So, market makers can sell naked to their hearts’ content, and they don’t have to deliver until a security gets on the list. And even then, let’s say that they continue to sell naked, helping out their hedge fund clients – you know, a big house like UBS or Lehman or Bear or Goldman just sells and sells, day after day. What is the penalty for doing that? Well, they will REALLY have to have locates once they are caught. And if they continue? You guessed it – they will REALLY REALLY have to have locates. Or even better, they could always just say it was for Rickert Partners account A, which is then barred from executing more short sales in that security until they deliver (but not from selling long shares and failing to deliver those), but Rickert Partners account B can then sell for all it is worth, until it is barred, and the C can sell, into infinity.
And the reference to arbitrage is funny, given that the Berlin exchange scam is nothing more than a vehicle to allow international arbitrage on a sham basis – those arbitrage games are exempt from the scrutiny subjected to US transactions.
My summary of Carol’s piece can best be translated into a few easy words: The SEC and Wall Street want investors to believe that they aren’t being robbed, and she is always more than happy to print whatever story they come up with.
Pretty simple.
Any questions?