WALL STREET EMBARRASSMENT
By Wayne Jett
© July 21, 2008
Today Fannie Mae (FNM) and Freddie Mac (FRE), the two government- sponsored enterprises which buy trillions of dollars of U. S. housing mortgages, began to enjoy a new federal subsidy granted only to 19 favored companies. Hedge funds and investment banks are no longer permitted to counterfeit and sell FNM or FRE shares, thanks to a new rule announced July 15 by the Securities & Exchange Commission pursuant to “emergency” powers.
The 17 other favored firms whose shares will be protected from counterfeiting are Wall Street’s major stockbrokers. These are the very same brokerages which have served hedge funds and other institutions so well by assisting counterfeiting and “naked short sales” of shares of many other target companies.
At the same time Fannie, Freddie and the brokers enjoy protection as endangered species, open season continues for all other shares traded in U. S. markets. Even Jim Cramer, CNBC’s evil genius of “Mad Money,” who previously opined hedge fund managers should spread false rumors to make their short sales profitable, couldn’t take the SEC hypocrisy. Cramer wrote on thestreet.com that naked short sales have, at all times, been illegal: “You can't do naked shorting. You are supposed to be bought in. But the SEC has stopped enforcing the rule. No one bothers to even look anymore. The SEC looks the other way, and then the brokers look the other way.”
In acting to protect Fannie, Freddie and the brokers instead of the entire market from naked shorting, Cramer wrote, the SEC’s action was “embarrassing. … As embarrassing as everything else that has happened with the financials in the last 18 months. And very depressing.”
Cramer sees the SEC’s action as embarrassing and very depressing because, as a former hedge fund manager, he wishes to maintain a semblance of honor and integrity. Thus, he is embarrassed and depressed by Wall Street’s obvious domination of the SEC and the double standard that protects Wall Street firms from illegal trading practices continuing against other public companies.
View from the Target
Executives and shareholders of other public companies are neither embarrassed nor depressed by the SEC’s handling of naked short selling. They are outraged and incensed by it. The American Bankers Association has asked the SEC to give all its members the same protection enjoyed by Fannie, Freddie and the Wall Street banks.
Some companies and shareholders have complained vehemently for years that their share prices are depressed, even obliterated, by aggressive, unbridled counterfeiting unchecked by SEC law enforcement. As of June 30, 2007, a consolidated balance sheet prepared by the Securities Industry and Financial Management Association showed the marked-to-market value of undelivered (counterfeited) shares to be $192 billion. Yet SEC did nothing effective until similar attacks on shares of Fannie and Freddie threatened to embarrass Washington politicians partly responsible for quality of mortgages held by the two GSEs.
Shares of Fannie and Freddie plummeted on July 11 under such high volume that suspicion of counterfeiting was unavoidable. After the naked short assault continued again July 14, SEC’s announced new rule brought respite the next day. Relief in the markets was immediate. Bank of America (BAC) rose from $18.52 on July 15 to $27.40 on July 18, or 48% in three days. BAC was one of the 19 firms favored by SEC. Equally importantly, relief came to share prices of other financials under heavy attack, including Washington Mutual (up 83%), Wachovia Bank (up 48%) and others.
Consider this for a moment. The SEC granted limited relief from stock counterfeiting, and share prices responded with a very significant rally. Is it not patently clear that illegal trading practices in U. S. markets are manipulating share prices and stripping large amounts of illicit profits from law-abiding investors?
Even as it acted weeks after British regulators gave limited protection to London financials, SEC was equivocal. SEC granted illegal naked short-sellers a week of grace before making effective the new requirement to borrow shares before selling them. Worse, SEC on July 18 said it would continue to permit options market makers to sell shares without first borrowing them, so long as the shares sold are delivered to the buyer on the third day after the trade (T+3).
However, options market makers have notoriously sold shares short without delivery to buyers for indeterminate periods without SEC enforcement of a buy-in. Unless SEC actually enforces T+3 delivery of shares by OMMs, that monopoly privilege to naked short will destroy the special protection intended for the GSEs and brokers. Hedge funds will continue to create their counterfeit shares indirectly by buying “put” options. Fannie, Freddie and the brokers are subject to assault through “put” options, as occurred with Bear Stearns.
Not every financial market regulator is so captured by influence of pecuniary interests as is the SEC. Canada, for example, acts with considerably greater resolve to protect ordinary investors who invest in shares of companies they favor. Contrast that with SEC grants of privileges to parties which sell shares they do not own in companies they disfavor.
The Investment Industry Regulatory Organization of Canada says plainly: “naked short sales are not permitted in Canada.” IIROC rules provide it is a manipulative and deceptive practice to enter an order without reasonable expectation of settling (delivering shares) in any trade that results from the order. Brokers are required to enforce procedures to assure delivery of shares by the seller no later than the standard settlement date.
“IIROC monitors trading and settlement to detect violations of, investigate and enforce the above rules,” according to its compliance officer, for all shares publicly traded in Canada. If this can be done in Canada, then surely the same is true for U. S. markets which, after all, have been touted for decades as the most transparent and fair in the world.
On July 21, 2008, it is factually certain that U. S. financial markets are neither transparent nor fair. They are not even more transparent or fairer than other financial markets in the world. The shares of 19 companies – most of them brokers and investment banks which directly engage in or facilitate naked short selling of shares of other firms – enjoy special federal regulatory protection of their own shares from counterfeiting.
The SEC is assisting scandalous crimes of massively historic proportions by allowing sale of counterfeit shares of all companies except the “favored 19.” That status quo is entirely unacceptable and must be remedied at once. ~