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Wednesday, November 30, 2005
The NASAA Conference - My Take
I listened with interest to the proceedings today, moderated by Ralph Lambiaste, which sought to discuss and probe the naked short selling problem in the markets. Here's my take:
First, bravo to Ralph for introducing a sense of humor to the event, and for asking the tough questions. Here are my takeaways:
1) All the regulators all say that they are aggressively investigating, pursuing, monitoring and regulating, and that they are enforcing the rules. Richard Shapiro summed this up best: "Where is the enforcement?" He noted that we hear all the rhetoric from these guys, but the important data is kept secret, and there is no evidence that any of them are doing anything. One of the other panelists noted "there is no such thing as an innocent fail" - and I agree. There isn't. And all of these guys know it.
2) My take on this was echoed by all of the academics: We need to know what the fails are in order to trust the system. We need transparency, and the reason that the DTCC provides to us for not providing transparency is that they have passed a rule against it. The fails to deliver problem is of unknown size, and the consensus was that investors deserve to know how large it is, by company, and in the aggregate for the market.
3) Voting rights are destroyed by FTDs, and the process by which shareholders have lost their "one share, one vote" rights is a disgrace.
4) The agreement was that the reason that the DTCC and the SEC don't tell anyone what the size of the FTD problem is is because there would be a collapse in faith in the markets.
5) The SEC's position was that they welcomed comments about SHO, and would carefully consider any during their next review. Presumably they would carefully review those comments in the same way that they did in 2004, and then disregard them, as they did the first time around. This was talking head bureaucratese of the first order, IMO, and nobody was fooled.
6) A legitimately shorted share, borrowed and then delivered to the new buyer, can then be relent to another short seller by the new buyer's broker - there is no limit. Contrary to all the rhetoric from my many critics, that take was verified as correct.
7) The SEC's Brigagliano said that the grandfathered fails were roughly 4% of the total market - in terms of number of companies where grandfathering was done. Nobody asked the obvious question - what was the total dollars that represented, for which no deliveries had been made, or ever would. If 4% of the many trillions per year, we have a colossal, centi-billion dollar problem.
8) The panel seems to get it. They were clear that the lack of transparency was the largest problem, and that secrecy benefited nobody but the manipulators. The SEC made hollow-sounding assurances of regulatory enforcement, which were handily dealt with by Shapiro's cutting statements, and Lambiase's simple, "I was under the impression that there had only been 3 over the last 10 years." No rebuttal was articulated.
9) The same, tired, "grandfathering doesn't provide amnesty from enforcement actions" dross we have heard for a year now from the SEC - nobody said it did, Jimbo. What we've been saying is that it does give a vacation from having to cover those fraudulently transacted, non-delivered trades, and allows the short sellers to keep the profits from driving companies into the dirt - that was grudgingly conceded by the regulators. After much dancing around, they admitted as much. That's why you don't see the DTCC or the SEC doing these in open forums - it's hard to argue against the obvious truth when it is presented by knowledgeable folks who you can't snow.
10) Ralph was flabbergasted over the voting rights abuse - his statement was, "we've fought wars to protect the right to vote". Correct. We have. But we can't get Wall Street to stop abusing the American public. Ironic, no?
11) There was much discussion over the tax implications of leaving short positions open in perpetuity, which ignores that if the shorting occurred from offshore accounts any profits are tax exempt - offshore investors don't pay capital gains tax.
12) Equivalently, there was discussion about the foreign exchange listings - in which the regulators dutifully addressed their own straw man contention that naked short selling was being conducted there, and happily ignored that nobody was making that claim - it's an arbitrage game, stupid.
13.) Some discussion about ex-clearing shenanigans was discussed, but unfortunately the one big one - wherein brokers not only lend each other shares, but enter IOUs on their back office ledgers instead of demanding delivery, or buying in the fail - wasn't. That is no surprise.
Here are my takeaways: Everything you've read here and on NCANS is solidly based in fact - it was all confirmed by the panel. The system doesn't punish those who use naked short selling as a manipulative practice, an endless supply of legitimate shorts can be created by the system via re-loaning stock from margin accounts, naked shorts are a huge problem concentrated in a small number of stocks, there is no plausible reason that the FTD info shouldn't be public, the SEC and NASD and NYSE, for all their bluster, have no real impact on the problem (there was, as always, much discussion of "studying the matter further" and being "receptive to input", with the best line going to the guy who pointed out that they are taking a "Giulliani approach of ticketing small infractions"), there are no meaningful penalties for FTD'ing like crazy, there are huge inequities in the reporting system which favor short sellers and market manipulators, and everyone of any substance in the business knows this. All of it. And is doing nothing.
Surprised that the NASAA panel confirmed virtually every statement made here, that has been dismissed as silliness by the quisling media and the hedge fund apologists?
You shouldn't be.
I agree with Patrick Byrne, who said that when we look back at this we are going to say, "all the evidence was there, all along, and a few guys spelled it out in impossible to misunderstand language, and the regulators, and the government, stood by and did nothing, feigning innocence and ignorance."
The SEC guy predictably tried to underscore what a small problem this is, purposefully ignoring the observation that the FTDs were concentrated in a very small number of companies. Just pretended he didn't hear it. Also sort of blah blah blah'd over the direct question Ralph framed over how companies could exist on the Reg SHO list for a year if any of the rules were being enforced - he committed to being willing to study it more, which is SEC-speak for do nothing.
Ralph Lambiase deserves tremendous credit for being willing to tackle this. I have no doubt that he will be personally attacked sooner rather than later, and the panel's statements distorted, mocked, or ignored. That's how this system protects itself.
The positive is that now the problem has been validated by as august a body of academics and specialists as one could desire - it isn't all in my head, and yes, you should be worried.
The solutions for what should be done were best framed by Professor Finnerty: Tell us the size of the problem, and force settlement in a reasonable time. This isn't rocket science.
Settle the trades. And don't lie to us.
Bravo panel, and bravo Ralph Lambiase, my new favorite for regulator/lawmaker of the decade. In the 80's it was a tie between Giullani and Ed Gray, in the 90's Giullani had it locked, and for the millennium, we have Ralph Lambiase - Spitzer is all show, no substance, and pretends to be ignorant of what was shown today to be a pervasive fraudulent practice embraced by Wall Street. For my money, Lambiase had it cold.
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