By Wayne Jett
© September 22, 2008
Before He Strikes Again
Don’t believe the media blitz telling you the two-day market rally of September 18-19 was inspired by hopes for Treasury Secretary Henry Paulson’s bailout/recovery plan. The sharpest two-day rally since 1987 occurred before Paulson designed or presented his harmful, spendthrift plan to Congress.
On Thursday, Senate majority leader Harry Reid spoke with Paulson and Fed chairman Ben Bernanke, and then said “no one knows what to do.” Paulson and Bernanke met with congressional leaders that evening, and Senator Charles Schumer of New York said what he heard from them was “frightening.” Nothing from that meeting, mid-way through the market rally, was re-assuring to investors in any respect.
Every Paulson action this year has unsettled the markets. Why would the prospect of another Paulson plan with unknown provisions costing “hundreds of billions” ignite a thousand-point gain in the Dow industrials in two days?
It didn’t. In fact, Paulson has been the most feared and disruptive force in U. S. financial markets since March, when on a Sunday he imposed a $2 share price on common shareholders of investment bank Bear Stearns. Bear had closed two day earlier at $32 under fierce attack by naked short selling. Paulson’s action delivered enormous profits to those short sellers of Bear stock and placed a bulls-eye target on every financial firm for stock manipulators to hit.
After Bear’s fatality, banks and financial institutions of every stripe were attacked by naked short selling with unbridled ferocity. Mortgage bank IndyMac had strong liquidity and faithful depositors, but naked shorting knocked its share price to low single digits. This time, Senator Schumer assisted and rewarded their fraudulent trading by starting a public run on the bank by depositors.
Fannie and Freddie
Fannie Mae and Freddie Mac, the two largest mortgage investors in the U. S., were attacked by naked short sellers – parties who purport to sell shares, take the money from buyers, but deliver nothing. On July 11, such fraudulent trading pushed the volume of Fannie and Freddie to 397 million and 409 million shares, 40% or more of their total shares issued. But how could that be? All their shares were owned by large investors, almost all of whom were holding and buying - not selling!
The SEC rose from slumber July 15 and issued an emergency order barring naked short selling of Fannie and Freddie. Their share prices doubled. Then the emergency order expired August 12, the shares hit new lows. But Lehman Brothers issued an analytical report attesting the viability of both firms, and their share prices rose again. Paulson would not be deterred, however. He pressed the bank regulator to seize control of Fannie and Freddie, again on a weekend, and immediately imposed terms of “agreement” that destroyed the share prices of both companies.
Naked short sellers were winners to the max yet again, courtesy of Paulson’s demand for warrants on 79.9% of each firm just for entering into the agreement – no other consideration paid. Based on those warrants, Paulson’s Treasury prospectively owns 80% of both firms even if none of $85 billion is actually needed or advanced to bolster liquidity. Ill-gotten gains of naked short sellers after Paulson’s actions on Fannie and Freddie have been estimated at $500 billion.
Broader War on Financials
Having displayed his government power to destroy private equity so clearly with Fannie and Freddie, Paulson stepped back to let naked short sellers have their way with Lehman Bros., Merrill Lynch, Washington Mutual, Wachovia Bank, and AIG, among others. They did, and Lehman fell into bankruptcy, Merrill fell into a purchase by Bank of America, and AIG fell into a second-thought credit line deal with Bernanke and Paulson (also with complimentary warrants that destroyed AIG’s share price before a dollar of new liquidity was advanced.
Even General Electric and Ford became targets. Worse, Morgan Stanley and Goldman Sachs were attacked by naked short sellers on September 18. Their share prices were driven down sharply even as the SEC’s actions to “plug loopholes” in regulation of short selling sparked the sharp market rally in other financials that same day. CEOs of Morgan and Goldman immediately screamed in protest to SEC’s chairman Cox, and to Senators Schumer, Christopher Dodd and Hilary Clinton, among others, demanding protection from illegal trading manipulation of their shares.
Law Reclaims Dodge City
Lo and behold, SEC acted, issuing a ban on all short selling of 799 financial stocks effective Friday morning and launching an investigative probe to determine who was abusing the king-pin investment banks of Wall Street!
For at least eight years past, the SEC ignored all such entreaties by publicly traded companies for protection against naked short selling attacks. Indeed, SEC’s record contains instances of probes launched into companies that complained of such trading practices, rather than probing suspected manipulators.
Markets Know the Score
Make no mistake. The market rally of September 18-19 was ignited by hope for effective action by SEC to enforce laws prohibiting fraudulent, manipulative trading tactics in U. S. financial markets – not by trust in whatever Treasury’s Paulson might propose. Had SEC acted one year ago as it acted September 17 and 18, almost surely Bear Stearns, IndyMac, Fannie, Freddie, Merrill, Lehman, AIG and others would be prospering entities today trading at or above their share price highs of 2007.
Instead, SEC did nothing while naked short sellers and Paulson pulled apart these financial giants as starved men pull apart cooked chickens. Paulson proposed Friday night that Congress give him by statute a $700 billion slush fund with unfettered authority to buy and sell “mortgage-related assets” from any U. S. financial company. By Monday morning, the proposal was expanded to cover all “distressed assets” of any nature. By that stroke, Paulson would be armed to relieve Goldman Sachs, Morgan Stanley and other prime brokers of their mammoth risks categorized as “failure-to-receive” shares naked shorted, which they term an “asset” in the nature of accounts receivable.
Do and Do Not
Most financial companies do not need or want to sell their mortgage-related assets. All they need are two things: (1) relief from a highly ill-advised accounting rule effective only last year; and (2) effective SEC protection from fraudulent, manipulative short selling of their shares. FASB 157 required financial statements to be adjusted to unrealized changes in perceived value of such assets, based on no better guide than an artificial index easily manipulated by speculators.
Treasury secretary Paulson should be denied the additional power and money he seeks. If he gets them, almost certainly he will use both to the advantage of pecuniary interests which have gained so much already through naked short selling. Paulson has a track record to that effect. If he is given his way again, U. S. financial markets will not like it. ~