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"Interesting what Susanne points out in this article... (in Bold)"!

Naked shorting’s crux: BD failure to deliver

June 25, 2007
Regarding “SEC seen shy on naked shorting” (April 23), [Dan] Jamieson does a good job of explaining “naked short selling” and the intention of Regulation SHO.

However, he neglects to describe how this problem was created.

In fact, if investors don’t understand this root cause, they will continue to chase red herrings like “the grandfather clause” and to blame amorphous entities such as “hedge funds” until the damage is so far beyond the ability of the broker-dealer community to make restitution that it will take an act of Congress to repair.

I am a former manager of depository trust and clearing corporations in San Francisco and New York. I was also senior adviser on a capital markets project to create trade clearing and settlement in Russia.

The most important element of the “naked shorting” problem is that broker-dealers are allowed to fail to deliver shares at settlement.

An economist at the Securities and Exchange Commission went so far as to write a paper describing how settlement failures can be used as “investment strategies.” But this notion should be obviously absurd to every investor.

If an individual investor buys or sells shares, the retail broker won’t tolerate any failure of delivery, either of shares or of money. So why, then, are the broker-dealers allowed to fail delivery of shares for weeks, months and in some cases even years?

The answer is simple: because they are the owners of the central clearing and settlement organization in the United States, the one company that provides settlement services for virtually every trade in every security — Depository Trust and Clearing Corp. in New York. Although DTCC was given the authority by Congress (when clearing agencies were created) to “facilitate the prompt and accurate settlement of securities transactions,” it says that it can’t fulfill that purpose and the SEC collaborates with it in this charade.

Mr. Jamieson fails to mention only that this double talk is at the root of the problem.

When a broker-dealer knows that it won’t be required to deliver shares at settlement, not only does it have no need to borrow shares, it doesn’t even need to declare a sale as short.

This, as Texas attorney John O’Quinn said recently in an interview with Bloomberg television, “is just stealing; that’s all it is.”

While I am glad to see that you are carrying some news on this subject, I am disappointed that you are misleading your readers into believing that one regulation is going to make it all better. The quote from [attorney Peter] Chepacavage, “Another catastrophic event like 9/11 could induce naked shorters to take advantage of a panicked market,” is simply wrong.

According to the Federal Reserve Bank of New York, we don’t have to wait for an event at that level to see a trillion dollars in settlement failures on any given day.

It happened post-9/11 and again in 2003 and in 2005.

Regardless of any amendments made to SEC Regulation SHO, until something is done to strictly enforce settlement, this problem will persist. Ignoring the source of the problem is no way to find a solution.

Worse yet, it holds the danger of lulling investors into inaction.

Like a frog in a pot of water on the stove, they won’t know they are still in trouble until it is too late.

Susanne Trimbath

Chief executive

STP Advisory Services LLC

Santa Monica, Calif.

Editor’s note: The writer is co-author of “Beyond Junk Bonds: Expanding High Yield Markets” (Oxford 2003), a review of the post-Drexel Burnham Lambert world of non-investment-grade-bond markets.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070625/FREE/70621011/1006/INIssueAlert01

John Good