Conversations With A Friend Over The Delivery Failure Crisis & Ensuing Implications

We were chatting, the two of us, covering a lot of ground, discussing the actual size of the delivery failure crisis, the grand design of how it got that way, what it might cost to fix it, whether it was even fixable, why the NY press has a moratorium on discussing things like the bombshell numbers showing $60+ billion in FTDs and FTRs for just Q2, 2006 in just the NYSE numbers...

And one of the most puzzling things for my friend was why this could progress to the level it has, with every check and balance failing investors. Essentially, a system in crisis, where the nation's middle class stands to lose much of their buying power and worth, and yet our guardians acting as though nothing is wrong, even as they contort to avoid the rhino behind the couch.

I'm a cynic, so my take is that it has been a deliberate co-opting, taking place over the last 3 decades or so, the young sociopath turks of the 80s, now in their 40s and 50s, running the machine and assisting from high places, emboldened by their success over the last 20 years or so, convinced that crime pays magnificently, and that only a rube or a hick would consider observing rules and laws.

The 20-something year old scumbag cheat has become the top guy at the broker or fund or in public office/at our regulator, and the #1 lesson he/she took away from it all is that as long as he/she, the new royalty, wins, everyone else can lose - and that there is no actual penalty for getting caught, as you get an underling to fall on his sword, while you go on paying the toll to have another bright tomorrow.

My friend felt that was a big part of it, but that another piece was that the system is a kluge, and that kluges tend to introduce inefficiencies, and the miscreants will always test the inefficiencies for maximum effect. What we are seeing is simply an oversupply of creative miscreants, with most of our Roosevelt-era safeguards gone the way of the buggy whip.

The model he/she used to describe it is a whole system of cable TV cheats, all of whom have tapped into the real cable line, to bootleg the signal. Problem is that there are now virtually no paying subscribers - everyone cheats in the system.

It was a fascinating discussion, the kind that reminds me how nice it is to be around very, very smart people whose intellects fire at light speed.

The depressing part of the discussion was the fear that it will be virtually impossible to get the average person interested until AFTER they have lost a big chunk, if not all, of their money. Human nature is that we don't tend to care until we personally have taken a hit from the thieves - then suddenly it becomes important to stop the thievery. Not in all cases, but in most.

Never bet against human nature.

Here are a few other random snippets:

It was observed that the delivery failures skyrocketed right as Reg SHO went into effect - obviously the industry taking one more large bite of the apple in order to benefit from the oh-so-helpful grandfathering passed by our conscientious regulators. It was also interesting to note that of the 20 years of history on that spreadsheet, how the problem mushroomed over the last few years.

We talked about the contortions that the NY press has been demonstrating in avoiding this issue as one of the primary drivers away from the US markets and indeed the dollar. It's as though if the WSJ and Barron's and the NY Times refuse to acknowledge a large theft of money from the system, year after year, creating a massive contingent liability for every strata of the industry, that everyone else will just figure there is no problem. It is a contemptuous view of the rest of the world, and one which is clearly in error.

I opined that the system was marvelous at lying to people and telling them comforting things, rather than the truth. Just as Casinos feature billboards of the Korean bus boy who just won a million but speaks all of 4 words of English, the financial system spins the lure of easy money and secure retirements - but you have to be in the game to win. Earnest, white-haired father figures assure us that our system's participants are as stable and ethical as Intel designing and manufacturing their next semiconductor, or skilled engineers building a bridge. Nobody would dare admit that there are maybe 300 guys in back offices on Wall Street intently stealing as much as they can get away with, calculating that as long as the gravy train lasts it is worth the risk. That doesn't get new money into the system, or engender trust.

My friend pointed out that even the winners are getting screwed - their winnings would have been bigger except for the miscreants. Fair point. Everyone loses except for the system, even if you are one of the rare winners.

I articulated that my personality is such that I would rather know what is true and real, versus what is comfortable. Call it a personality disorder - an intent reverence for the rational and logical. It is comfortable to believe that your nation is the best and the most honest on the planet, that bad things rarely happen here, and that if they do they are isolated events. It is comfortable that the watchdog will nab the evildoers, punishing them with a vengeance. It is comforting to believe that one can lead a rich retirement by putting one's cash into the market, into well researched companies in understood sectors, and that the regulators will stop miscreants from outright stealing your money.

All of those notions are comforting, even if provably untrue. Unfortunately, the majority would rather have comfortable beliefs versus understanding reality as it actually is. Reality is oftentimes disturbing and depressing. Reality bites. I don't blame them a bit - I wish I wasn't burdened with my "affliction."

But the problem I have with comfortable thoughts versus reality is in their ability to predict accurately. I predicted a number of things would happen when I first corresponded with Patrick, based upon my observation of how the miscreants targeting Overstock had historically played their hand. Sure enough, all happened. Now, some might say I am a conspiracy theorist, and that well may be, but when the theory accurately predicts future events it is useful. When the comforting belief that the SEC will put a stop to overt stock manipulation is tried on for size, it fails to accurately predict what will occur - thus, the comforting conceit fails to be an accurate predictive instrument, and must be discarded as useless.

I tend to favor logic over happy thoughts, and as of this moment, the notion that we have any regulation of Wall Street by anyone at all is only a happy thought - and an easily debunkable one at that.

We talked about the actual size of the money that has been pulled out of the system, and about mechanisms that could be designed to accurately gauge it.

One suggestion was to take the selling price of every SHO stock, and then chart the price when the fails built, and then compare it to the current price, and that would give one an idea of the scale of the crisis in terms of real dollars at time of failure since departed the system. In OSTK, it might be an average of $50 or so. In NFI, it is likely $40 or so. For many, like TASR, or KKD, or many of the others, it might be $50 and they are now $7. For many OTCBB stocks that were once $20, and now trade at 50 cents or less, the current mark to market is likely 20-50 times lower than the actual average price at which the majority of fails were executed. We sort of agreed that it was likely 10 times greater, at least, than current mark to market, and quite possibly 15 or 20 times greater. Numbers like half a trillion a year were not discarded as implausible.

The important thing to recognize in this is that money is now gone. It went out of the system, bye bye, and was pulled out to buy mansions, and Gulfstreams, and Picassos, and hockey rinks and the like. It is not available to be returned, any more than the money confiscated by criminals in the S&L crisis is available for disgorgement. It is out, distributed to a small number of crooks, taken from a broad base of cheated investors. Classic redistribution of wealth - a few get most of the cash, through illegal and unethical behavior, and it is too late to stop it.

Horses bolt, barn doors will be shut long after the gesture is meaningless. Way it is. Always has been.

Having studied history, this is no different than in other eras. In the 1910s and 20s, huge, empire-level fortunes were built from running stock pools. The Kennedy fortune was built by Joe running pools. Most of the venerated names on Wall Street, and indeed in Corporate America, won big as the country lost its shirt. Just as a few built dynasties during the industrial revolution, and during the union-busting era, etc. The story of a few powerful groups consolidating massive wealth generated by the masses is not rare or unique - it is almost mundane. That is how things are done, and have been for centuries. The market we currently have is merely one of the venues for redistribution. It is by no means the only one.

But the one constant is that the money is NEVER given back by those who stole it. NEVER. Instead, they traditionally buy the best government they can afford, the most convincing police/regulators, and 99.999% of the money stays gone once it is redistributed. Same as it was in the S&L crisis, same as it was in the 1920s, same as it was every other time.

Now, that is depressing. But it is also true, and I favor reality over comfort.

The big lie this time around is that the markets are regulated, and that it can't happen again, exactly as it has happened in the past. Readers of this blog know that is fanciful at best. It is happening as we speak, in very obvious ways.

Note that not one paper or journalist has picked up the story that a spreadsheet from the SIA shows the level of the problem to be at least, AT LEAST, ten times worse than anyone has dared admit.

We discussed why that is, how it could happen in a country that trumpets its marvelous freedom of speech and of the press. I pointed out that the NY financial press was largely owned by or beholden to Wall Street, just as the government was populated by Wall Street alumni. Why would anyone expect that bought-and-paid-for structure to break the biggest indictment of the financial system's disastrous course in our lifetime - the greatest theft of wealth in our nation's history? Who's kidding who?

Is it really that difficult to imagine that just as most of the ruling guys on Wall Street today were educated in the same schools, eat at the same restaurants, know the same people, send their kids to the same schools, that most of the financial journalists and editors share common pasts, know the same people, play poker with the same guys? It doesn't take a cast of thousands - maybe two dozen. That would handily control the major NY pubs, and the message that one doesn't cover this sort of story except to ridicule can be propagated from on high. Never mind that Wall Street outright owns big chunks of the pubs and media machine - all it really requires is human nature to act as it has since we started walking on our hind legs.

As with the S&Ls, most of the employees of the culpable institutions are likely innocent of wrongdoing, both at the media outlets, as with the brokers. It really only takes a few at each organization, and a few chosen insiders willing to lie and protect their ill-gotten but lucrative gains.

It isn't comforting to believe that we are being fed a scripted reality that favors the redistribution of our wealth, and lies to us and covers-up any evidence that there is a crisis occurring as we speak. I get that. Sort of ruins one's day.

$60+ billion documented FTDs and FTRs, and the press is silent. That should tell you everything you need to know. Whitewash. Cover-up. Words used when important facts surface and are kept from the public, to benefit a select few. Washington Post? Not a peep. Even that icon of journalistic bravery silent - the paper that broke Watergate, unable or unwilling to read a spreadsheet and discuss its implications. Very, very sad. The lowest moment in our journalistic history. And that requires some real effort.

As to our regulators, want to bet that the SEC meeting next week doesn't discuss this massive theft of wealth by the system's royalty? Just flat out pretends it isn't available for one and all to review? That the SEC and the Senate Banking Committee and the Judiciary all just ignore the new, hard evidence of a national emergency in our financial markets?

Why would a regulator pretend that the clear, unimpeachable evidence of a massive crisis just doesn't exist? Why is that? Why would those chartered with our protection work so hard not to see the bullet-riddled corpse right on the steps of their edifice? Why would a number so big now as to demand an immediate special prosecutor instead get met with the sort of silence a suspected-pedophile uncle receives at Christmas dinner?

Because they believe that we are stupid, malleable, lazy, uninformed sheep too apathetic to care that a few are stealing the retirement savings of the many.

That is a good bet. Has always been a good bet. For centuries, if you controlled the money, the banks, you controlled the country.

We discussed the history of civilization, where since the birth of agrarian societies wealth has been redistributed from those who labored to produce it to those who stored and counted it. It is a classic de-coupling of the fruits of those who produce value, and those who accumulate it while creating an industry to better allocate and count it. Again, that is nothing new.

Even the concept of money is not particularly new - the fractional reserve system that the brokers are attempting to create out of an auction market where THEY DON'T OWN THE ASSETS is nothing more than how banks first came into being. Rather than carry two tons of gold on horseback via dangerous roads, one could carry a paper note good for two tons of gold on deposit at the destination. Simple concept.

The difference is that in a stock market, the investors own the assets, not the brokers. The brokers merely facilitate the exchange of cash for assets.

At least that is how the 1933 and 1934 Acts spell it out. Today, by owning the clearing and settling mechanism, the brokers and bankers have managed to create a fractional reserve system for stock - stock they don't own and for which they have no right to fractionalize. They have created, through artifice, a trap system wherein they can behave as though they own the stock, and can issue the equivalent of the paper notes that were backed by gold deposits...only there are no stocks owned by the brokers to back them. And with the abolition of paper certificates as proof of ownership, there is no mechanism for the tired merchant arriving on horseback to verify that his gold is in the vault.

The only thing that backs these electric IOUs are the promises of the brokers, and your faith in their ability to make good on their promise. That ability is largely illusory.

Most people don't realize that they don't own stock anymore, they own a security entitlement that entitles them to a share of stock, presumably that is on deposit at the DTC. That the stock they paid their real money is held, "In Street Name" by Cede & Co as the registered owner. In other words, the industry has come up with a way to get you to pay for something they then use as their own asset, exactly as though they had bought and paid for it, and they merely transfer a contractual right to the share's rights to you, as the beneficial owner. But if the share doesn't exist, or too few do to match all the beneficial owners, then what did you pay for? A lie. An unregistered security.

Most people don't realize that many stocks have considerably more entitlements than stock in circulation. That's why 100% of the recent corporate voting sampling discussed in Bloomberg had overvoting. Because there are more entitlements than assets.

And that is the fractional part that is illegal. UCC8 specifically mandates that security entitlements must have underlying stock, on a one for one basis, for each entitlement. My previous blog discusses how the current scheme actually creates unregistered securities, essentially a new class based on the broker's promise to execute at some unknown time in the future - not the security the company issued. That was discussed, and we shook our heads at how an entire nation could be so easily suckered by a few shifty scumbags.

$60+ billion just from the NYSE participants reporting to the SIA. Not counting the NASDAQ, or the OTCBB, or the pink sheets, or any of the massive international clearing entities. And then consider that $60+ billion is after pre-netting at the broker level, but before CNS netting. So pre-netting has likely hidden another $50 billion, just as CNS netting hides around 96% - the now infamous $6 billion DTCC/SEC number is post-CNS netting, which is how $63 billion becomes $6 billion after CNS. It is not unlikely that the pre pre-netting number is actually $100+ billion for these NYSE reporting entities, and that the total including the NASDAQ and others is well over $250 billion - at today's mark to market. Multiply that by 10 or more if you want an idea of how much the actual sale price was of the securities that the industry REFUSES to deliver to those that paid those trillions in real dollars.

But the $60 billion number, with conservative real sale price multiplier of 10 is bad enough. To put that theft of real, hard-earned dollars into perspective, consider the $600 billion number that today's $60+ billion of mark to market value likely represents in terms of original sale price. What is the total annual operating budget of the SEC? The DOJ? The entire Eastern Seaboard? North Korea, Portugal, Spain, etc.?

Here's a hint: The miscreants have stolen more than 10% of the world's annual GNP via the US market system so far over just the last 5 or so years. That's what the conservative extrapolation of the numbers tells us.

Where does everyone honestly believe the trillions in hedge fund dollars actually comes from? Where are the trillions in narco-commerce and black market dollars circulated through? How do governments fund their black ops, and support regimes for which public support is waning or non-existent? You think they are doing it passing hundreds at Target? Please. They require "liquidity" to do so. All of it. They require a secondary banking system that uses the market as its transfer mechanism.

This is actually so simple to see once you understand the outline.

But I digress.

There were no easy solutions that came out of the discussion. A few were tossed around, and I think we agreed on several having the capability of stopping the current looting, for a time.

But I guess the overarching theme was the importance of knowing and understanding reality as it actually is, rather than seeking refuge in popular delusions and the madness of crowds.

And delusions masked as comforting thoughts is what Wall Street peddles, as surely as a crack salesman peddles momentary relief from the vagaries of this mortal coil, but at a disastrous price.

Hard to tell which will be more destructive to our society in the end - Wall Street or dope peddlers.

And that is the saddest thing I can say about it.

But it was a good discussion.