classical economics
for analysis,  forecasting
and policy design

SEC and Goldman Sachs
SEC AND GOLDMAN SACHS
Dance the Naked Short Charade
By Wayne Jett © October 1, 2009
    Wednesday completed a day-and-a-half of panel discussions advertised by the SEC as its serious effort to learn more about fraudulent trading tactics known as naked short selling and possible rebirth of the Uptick Rule. No surprises. The first day was filled with immaculate Wall Street bankers, hedge fund managers and regulators filling the air with jargoned suggestions for further SEC assistance to the business of exploiting American investors.
    Goldman Sachs’ exec in charge of securities lending assured the SEC commissioners that current regulations have already rendered naked short selling (intentional failure-to-deliver shares sold short) de minimus. If this gives a sense of déjà vu “all over again,” as Yogi Berra might say, you are right.
Another Round for the House
    Under the same deft hand which orchestrated this roundtable and supervises SEC staff responsible for trading and markets, James (Jamie to his friends) Brigagliano, the SEC in 2004 insisted naked short selling was so negligibly small as to be a non-issue. The agency magnanimously adopted Reg SHO anyway, including the “Madoff clause” expressly authorizing options market makers to naked short, and then insisted its regulation eliminated the naked short selling non-issue entirely.
    Imagine the bureaucratic shock then, in March, 2008, when naked short selling combined with options and credit default swaps to destroy Bear Stearns and its shareholders (with a notable assist from Secretary of Treasury, fka CEO of Goldman Sachs). By coincidence, March 31, 2008, was the date SIFMA last published its consolidated balance sheet of member firms showing $258 billion as the marked-down market value of shares which were owed on that date in failed delivery transactions.
Exploring Yesteryear
    While walking memory lane, remember March 14, 2007. That’s when the SEC heaved mightily and announced a $2 million fine against Goldman Sachs for “an illegal trading scheme carried out by customers through their accounts at the firm.” (Emphasis added.)  Get this straight: Goldman Sachs was fined although an innocent bystander (per the SEC) – its customers were crooks who were allowed to do their own trades.
    What did the crooks trading through Goldman Sachs do? They sold shares short but marked the sales “long.” They continued this practice from no later than March, 2000, for more than two years, which would mean until, say, October, 2002.
Good Ol’ 2000-2002
    Does that period March, 2000, to October, 2002, ring a bell? Why, my gracious, it happens to coincide with a precipitous decline in U. S. financial markets. The Dow index of 30 industrials fell from above 10,000 below 7,500 in that period, the S&P 500 fell from about 1,500 below 800, and NASDAQ fell from 4,572 to 1,330. What an amazing coincidence!
    The SEC explained that, when the crooked customers failed to deliver shares sold “long” on time, Goldman Sachs dutifully borrowed shares and delivered them on behalf of its customers. But the SEC did not say when the shares were delivered, or how many of the “long” sales were covered later by Goldman’s customers purchasing shares.
    With all this trouble, worry and cost falling upon innocent Goldman Sachs, one would think its customers should have been more considerate. They could have borrowed the shares from GS in the first instance and avoided the problem entirely. No reason not to do so, except the cost of borrowing share, so they were careless and inconsiderate.
The Useless Uptick Rule
    Oh, but wait … that old, antiquated Uptick Rule remained in effect in 2000-2002. If Goldman’s customers had marked all those sales as “short” rather than “long,” then the sales would have had to comply with the Uptick Rule. Goldman’s customers couldn’t have driven down prices as unrelenting “long” sales at ever lower prices. Their bear assaults on share prices would’ve had to slow down and wait for upticks between sales. Another amazing coincidence!
    If you can believe it, yet another amazing coincidence occurred in December, 2006. Just three months before announcing the $2 million fine of Goldman Sachs – settling violations that must have involved many billions – the SEC proposed to repeal the Uptick Rule. In that instance, the agency actually acted promptly and repealed the 70-year-old rule pronto, effective July 3, 2007.
    Of course, Goldman Sachs probably didn’t care whether the Uptick Rule was repealed or not, because by reputation their executives come to the office every day only to do the right and honorable thing, to build upon the firm’s integrity and to make the world a better place. Indeed, if the SEC had acted sooner to dispose of that antiquated, noisome Uptick Rule, the crooked customers of Goldman Sachs would not have been forced to rain down embarrassment upon Goldman’s innocent shoulders.
    Surely all this explains why panelists and commissioners attending this week’s SEC roundtable on naked securities lending, naked short selling, and possible reinstatement of the Uptick Rule showed unusual deference to the views of Mr. Leslie S. Nelson of Goldman Sachs, the man who informed Panel Four and the commissioners that naked short selling is de minimus. Perhaps it explains, too, why the amazing coincidences noted in this report went unmentioned at the SEC roundtable. ~