More from bob obrien's Sanity Check:
Friday, April 22, 2005
The 82% Solution - Updated
Update: There's now a powerpoint presentation of my best take of how the stock borrow/FTD process works now up at NCANS. It is an approximation for your amusement and tittilation. Hope everyone enjoys it.
I called the DTCC today. Also emailed them. My question was simple – what happens to the 82% of the fail to delivers that the stock borrow program doesn’t satisfy?
I figured that isn’t asking the DTCC for the secret to constructing a dirty bomb, so they could at least explain that simple part of it. I mean, is there some special rule that prevents them from explaining a basic part of the clearing system? Is it top secret, eyes only?
Apparently so. No return calls, no return emails, and everyone in legal was in meetings. Funny, that. A lot of meeting over at the DTCC. Larry Thompson? Meeting. His staff. A meet-fest.
The reason I ask is because I can’t construct a model of how those fails are handled that doesn’t involve a systemic disregard for the rules that is clearly illegal. By the entire clearing system and brokerage apparatus. But that can’t be. That’s crazy talk. There’s no way that an entire industry has systematically conspired to defraud investors.
But there’s no other explanation that I can figure out. I even have a guy working on a flow chart of a fail that is handled by the borrow program, and one that isn’t. There’s no way to make it work unless the end buyer is being defrauded – is being told that they have shares in their account when there’s nothing there but some sort of a marker or IOU – and that’s fraud and counterfeiting. The classic definition – where you represent an instrument that is not genuine as being legitimate.
I’m hoping that the DTCC will be able to help me comprehend this. There has to be an easy answer. It can’t be that 5 large brokerage houses got together and just agreed to treat IOU’s as being the genuine article for their retail clients. That would mean that the entire system is predicated on a fraud. Because the next logical step is to assume that the IOU’s are traded as though they were legit shares. Which would violate a host of consumer protection laws, and subject the accounting firms that audit the brokers to huge, huge liability.
There’s no way that is the case.
Note to DTCC: I’ll be in all day tomorrow.
And my new Yahoo ID is bobobrien_1 - just in case anyone cares...
And here's the link to the power point presentation he's talking about: http://www.ncans.net/files/Fail%20To%20Deliver%20Flow%20Chart.pdf