S.E.C., NOT TREASURY, MUST ACT
Chairman Christopher Cox of the Securities & Exchange Commission is already a month late on his July promise to Congress that the agency would propose new regulations “next week” to protect all stocks from naked short selling. The infamous emergency order issued July 15 which protected Fannie Mae, Freddie Mac and 17 banks from naked short selling expired August 12. Fannie and Freddie shares doubled within a week after the SEC EO became effective in July, despite SEC’s assurances those two stocks were not being attacked by naked shorters. Then FNM and FRE hit new lows within a week of August 12 when again SEC left them to the tender mercies of illegal, manipulative, fraudulent naked short selling.
All U. S. financial market continue to reel under the same relentless onslaught by large money pools (investment banks, hedge funds, brokers and others) which sell shares short and fail to deliver them, except with electronic entries into brokerage accounts. The SEC seems paralyzed by Wall Street’s influence over the agency, Treasury and Congress. Last heard from in mid-August through a leak to the press, SEC was “working feverishly” to propose new regulations covering naked shorting in September.
By Wayne Jett
(c) September 4, 2008
Treasury as Retail-Investor-of-Last-Resort
Now Bill Gross, manager of fixed income assets at PIMCO, urges Treasury secretary Henry Paulson to save the markets by buying private assets with federal funds. Implicitly, this would attempt to break the naked short sellers’ bear attack by buying their phantom shares with tax money. The best solution would be effective enforcement of securities laws prohibiting fraudulent trading practices.
Gross of PIMCO points to the fact that shares issued for new capital raised by financial institutions from PIMCO and others “are all underwater.” He sees this as persuasive evidence that the Federal Reserve must now step up as retail-investor-of-last-resort in the ultimate bailout of institutional investors. Surely he knows that the securities PIMCO bought are being pounded by naked short selling. Why does Gross not step up and demand the SEC do its job: immediately stop naked short selling and require the perpetrators to buy back the phantom shares they have created artificially? That would get his share prices up much more effectively.
London FSA’s Timid Solution
Earlier this year, the Financial Services Authority in London detected the same manipulative tactics attacking British financial shares as their issuers prepared to raise new capital with rights offerings to shareholders. Naked short sellers were driving down share prices below the offering price before rights could be exercised, thus preventing financial firms from raising new capital. FSA issued its own emergency order prohibiting naked short selling, provoking tremendous tumult from the manipulators, but curing the financing problem at least for the interim. Sadly, the FSA’s protective order timidly exposed the new shares issued to naked short selling again as soon as the rights offerings were completed. This assured those share prices would soon join those bought by PIMCO “all underwater.”
Even the U. S. Treasury and the Federal Reserve System combined cannot overcome selling pressures created by relentless, unbridled creation and selling of phantom shares without limits. Attempting to do so would simply empty federal resources into accounts of pecuniary interests which capitalize on the lawlessness of U. S. financial markets. The federal government cannot prevail by buying more shares than naked short sellers can create, anymore than the Treasury can beat counterfeiters by printing more currency than counterfeiters print. Naked short selling must be stopped by enforcing the laws that prohibit it and by punishing the activity as the monstrous crime that it is.
Palin Brings New Energy for Reform
The unhappy circumstance that share prices in U. S. markets are dropping day after day should not be blamed on Senator John McCain’s selection of Alaska Governor Sarah Palin as his vice-presidential running mate. Much to the contrary, Palin’s selection has been electro-magnetic in energizing the Republican base, women’s appreciation of the ticket, and McCain’s fundraising. So far as financial markets are concerned, Palin’s presence on the ticket means Wall Street did not dictate the choice and that McCain may not be its captive either. No place deserves attention of real reformers so much as Wall Street and the financial markets.
The Prism of Fannie and Freddie
Retail investors and even institutions are being driven to the sidelines because U. S. financial markets are more lawless in 2008 than at any time since the 1930’s. Big players of Wall Street are pulling all the stops in a frenzy of bear attacks because the SEC has tacitly green-lighted their tactics. The SEC emergency order of July 15 protected FNM, FRE and 17 banks, but implied that all other securities are fair game for naked short sellers. This was a poisonous message to send in a market already deep in crisis.
When FRE was under attack and sliding on July 11, reported volume was 397 million shares. July 14 volume was 263 million and July 15 was 222 million. When the SEC emergency order became known, volume dropped immediately to 137 million shares July 16, and under 100 million shares when the order became fully operational the following week. The share price rose from $5.26 on July 15 to $10.80 on July 23 when daily volume was 73 million shares. As markets learned the SEC’s emergency protection would not be made permanent, volume stayed low but the share price declined to $5.37 on August 12 (on 33 million shares), after which the emergency order expired. By August 19, the share price was down to $4.19 on 113 million shares trading.
FNM followed almost identical timing and trading patterns: volume of 409 million shares on July 11, a low share price of $7.07 on July 15, a high of $15 on July 23 on volume of 98 million, volume as low as 24 million on August 1, but dropping in price from $13.60 August 5 on 33 million shares to $4.40 on August 20 when 207 million shares traded. Manipulation of share prices can hardly be more blatantly obvious. These are two of the most significant financial institutions in the U. S. markets, and their shares are being subjected to jungle law, except for the one brief, shining moment that was SEC’s emergency order.
Life Outside Camelot
Fannie and Freddie’s experiences in SEC Camelot provide a prism through which may be seen the illicit forces attacking almost all other securities in U. S. public markets. By the stark contrasts in trading conditions under the emergency order relative to before and after, an ugly reality may be seen for FNM and FRE that naked short selling creates as much as 90% of trading volume and easily cuts the share price by 50%.
Retail and institutional investors must act to protect their interests by insisting the SEC, the White House and Congress bring true integrity to securities trading. Correcting the problems will cause hard times for perpetrators, as well it should, but that is the necessary order of things if society is to succeed. ~