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Replies to post #245321 on Fannie Mae-No Politics (FNMA)
C. The Regulators’ Response to the GSEs’ Crisis Situation
U.S. Treasury Secretary Henry Paulson, whose immediate prior employment was as the
Senior Partner and CEO of Goldman Sachs, arranged for the GSEs to be placed under
government conservatorship over the weekend of September 7, 2008.
Paulson‘s prior employment gives him special expertise in trading and in market
information used to detect fraud. At the apex of the trading in Fannie Mae is Goldman Sachs,
the specialist or central trader on the New York Stock Exchange (?NYSE?) where Fannie Mae is
listed for trading.7
Goldman has the records readily available that are necessary to detect fraud
in the trading of the GSEs and a responsibility to report fraud if detected.
It is obvious that the U.S. regulators are aware that there has been substantial fraud in the
U.S. marketplace because they have the same records that are discussed below. Citations to
these records are included in this document for the benefit of investigative reporters, academic
researchers and regulators who have not connected the dots between stock ownership and
trading. It is hard to understand why the regulators did not bring to light the massive fraud in the
trading of the GSEs before their stock prices collapsed, forcing the government to take the GSEs
into conservatorship. Where were the regulators? President Bush stated in an off record
comment that was taped on July 22, 2008:
?It is uncertain. There is no question about it. Wall Street got drunk. That‘s part
of the reason I asked you to turn off your T.V. cameras. It got drunk and now it‘s
got a hangover. The question is how long will it sober up and not try to do all
these fancy financial instruments.?8
H. Legitimate Short Sales Appear to be Curtailed During the SEC Emergency Order
All reports from the securities lending industry indicated that demand for legitimate borrowing of shares declined dramatically during this period. An industry data processor of 15 billion transactions per day, S3 Technologies, reported that short selling in Fannie Mae and Freddie Mac dropped 90% when the emergency order was implemented.16
Short interest was reported on July 15, 2008 and July 31, 2008. The combined reported short interest for the GSEs during this emergency order period increased by only 5.5 million shares, supporting the fact that legitimate short selling was curtailed under the order. However, in this 12 day trading period the GSEs traded over 3.5 billion shares or over two times the total number of shares issued for trading by the GSEs. Many of these shares sold do not appear to be shares owned by the sellers and were not sold short in accordance with the securities laws, i.e. they were counterfeit shares sold as if the GSEs issued the shares.
The market makers are the most likely sellers of the counterfeit shares during this time because other market participants were not allowed to short sell without pre-borrowing shares for settlement and in this 12 day period examined, this amount only accumulated to 5.5 million increased shorted shares. The majority of the 3.5 billion shares sold, that were not sold by legitimate investors who owned the shares, must logically be a supply of shares counterfeited by the market makers.
15 Division of Market Regulation: Responses to Frequently Asked Questions Concerning Regulation SHO, Question 5.3: Does the close-out requirement apply to delivery failures that do not occur at a registered clearing agency? Answer: We interpret the close-out requirement to apply only to fail to deliver positions at a registered clearing agency. Our interpretation is based on our understanding that transactions conducted outside the Continuous Net Settlement System (?CNS?) operated by the National Securities Clearing Corporation (?NSCC?) are rare. If this historical pattern changes and a significant level of fails are not included in CNS, we will reconsider this position.
http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm 16 SEC Emergency Order Leads to Dramatic Drop in Short-Selling of Fannie Mae and Freddie Mac Securities, Market Wire, July 23, 2008.
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I. Market Participants Actively Trading Fannie Mae and Freddie Mac
The primary market makers in these two GSEs are Goldman Sachs (Fannie Mae) and LaBranche & Co. (Freddie Mac).17 These are the specialists on the NYSE where the GSEs are listed, thus all trades executed on the NYSE in the GSEs must flow through these market makers.
The largest trading electronic exchange network appears to be Direct Edge, who is owned by Goldman Sachs, Knight Capital Group and Citadel Derivatives Group. Knight and Citadel are also registered market makers on the NASDAQ trading the GSEs.
The following table shows the registered market makers on the NASDAQ Stock Market in the GSEs. These are most, if not all, of the registered market makers trading the stock of the GSEs.
17 NYSE.com Specialist listing: http://www.nyse.com/about/listed/lcddata.html?ticker=FRE
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Table 5 – Registered Market Participants in Fannie Mae and Freddie Mac on the NASDAQ18
Firm Name
Regularly Trading Freddie Mac
Regularly Trading Fannie Mae
Clearing Firm
Bernard L. Madoff Investment Securities LLC
Yes
Yes
Bernard L. Madoff Investment Securities LLC
Cantor Fitzgerald & Co.
Yes
Yes
Cantor Fitzgerald & Co.
Citadel Derivatives Group LLC
Yes
Yes
Citadel Derivatives Group LLC
Cowen and Company, LLC
Yes
Yes
National Financial Services Corporation [FIDELITY INVESTMENTS]
Domestic Securities, Inc.
Yes
Yes
Penson Financial Services, Inc.
E*Trade Capital Markets, LLC
Yes
Yes
E*Trade Capital Markets, LLC
Finance 500, Inc.
No
Yes
Penson Financial Services, Inc.
Fox-Pitt, Kelton Incorporated
No
Yes
Pershing, L.L.C.
Hudson Securities, Inc.
Yes
Yes
Goldman Sachs Execution & Clearing, L.P.
J.P. Turner & Company, L.L.C.
No
Yes
National Financial Services Corporation [FIDELITY INVESTMENTS]
Keefe, Bruyette & Woods, Inc.
Yes
Yes
Pershing, L.L.C.
Morgan Stanley & Co., Incorporated
Yes
Yes
Morgan Stanley & Co., Incorporated
Murphy & Durieu
Yes
Yes
Ridge Clearing and Outsourcing Solutions, Inc.
Octeg, LLC
Yes
Yes
Octeg, LLC
Pershing LLC
Yes
Yes
Pershing LLC
Robert W. Baird & Co. Incorporated
Yes
Yes
Robert W. Baird & Co. Incorporated
Spartan Securities Group, Ltd.
Yes
Yes
Penson Financial Services, Inc.
StockCross Global
Yes
Yes
Penson Financial Services, Inc.
Susquehanna Capital Group
Yes
Yes
Merrill Lynch Professional Clearing Corp.
The Vertical Trading Group, LLC
Yes
Yes
Jefferies & Co., Inc.
Timber Hill LLC
Yes
Yes
Timber Hill LLC
Trimark Securities, Inc.19
Yes
Yes
Merrill Lynch, Pierce, Fenner & Smith Inc.
UBS Securities LLC
Yes
Yes
UBS Securities LLC
William Blair & Company L.L.C.
Yes
Yes
William Blair & Company L.L.C.
J. Pattern and Practice by the Same Market Participants
Other stocks that appear to be under stress, as discussed in the news media that may need government assistance or may go bankrupt because they cannot raise capital with their depressed stock prices are: Washington Mutual Inc., Lehman Brothers Holdings, Inc., American International Group Inc., National City Corporation, Wachovia Corporation and Ford Motor Company. These stocks also appear to be counterfeited. Of these eight NYSE listed companies, seven of these companies have the same specialists (NYSE market makers) as the GSEs,
18 Source: NASDAQTrader.com
19 A division of Knight Trading Group.
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Goldman Sachs‘ Spear, Leeds & Kellogg division or LaBranche & Co. where all trades on the NYSE must flow through. Table 6 shows these eight companies and their specialists.
Table 6 – The NYSE Specialists for These Under Stress Securities
Security Name
Specialist
Fannie Mae
Spear, Leeds & Kellogg Specialists LLC
Freddie Mac
LaBranche & Co
Washington Mutual
Spear, Leeds & Kellogg Specialists LLC
Lehman Brothers
Spear, Leeds & Kellogg Specialists LLC
American International Group Inc
Spear, Leeds & Kellogg Specialists LLC
National City Corporation
Banc of America Specialist
Wachovia Corporation
LaBranche & Co
Ford Motor Company
LaBranche & Co
These publicly traded companies share another common bond; they are traded mostly by the same market makers as the GSEs from the NASDAQ Stock Market. Table 7 lists the market participants registered on the NASDAQ Stock Market trading the GSEs, Washington Mutual Inc., Lehman Brothers Holdings, Inc., American International Group Inc., National City Corporation, Wachovia Corporation and Ford Motor Company.
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Table 7 – Active Market Participants in these Companies Registered on the NASDAQ
Firm Name
Clearing Firm
Number of These 8 Stocks the Firm is Currently Trading
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff Investment Securities LLC
6
Biltmore International Corporation
Jefferies & Co., Inc.
5
Citadel Derivatives Group LLC
Citadel Derivatives Group LLC
8
Cowen and Company, LLC
National Financial Services Corporation
8
Domestic Securities, Inc.
Penson Financial Services, Inc.
8
E*Trade Capital Markets LLC
E*Trade Capital Markets, LLC
8
Hill Thompson Magid and Co., Inc.
Hill Thompson Magid and Co., Inc.
5
Hudson Securities, Inc.
Goldman Sachs Execution & Clearing, L.P.
8
Keefe, Bruyette & Woods, Inc.
Pershing, L.L.C.
7
Morgan Stanley & Co., Incorporated
Morgan Stanley & Co., Incorporated
8
Murphy & Durieu
Ridge Clearing and Outsourcing Solutions, Inc.
4
Octeg, LLC
Octeg, LLC
8
Pershing LLC
Pershing LLC
8
Puma Capital, LLC
Ridge Clearing and Outsourcing Solutions, Inc.
5
Robert W. Baird & Co. Incorporated
Robert W. Baird & Co. Incorporated
7
Seton Securities Group, Inc.
Jefferies & Co., Inc.
4
StockCross Global
Penson Financial Services, Inc.
4
Susquehanna Capital Group
Merrill Lynch Professional Clearing Corp.
8
The Vertical Trading Group, LLC
Jefferies & Co., Inc.
7
Timber Hill LLC
Timber Hill LLC
8
Trimark Securities, Inc.
Merrill Lynch, Pierce, Fenner & Smith Inc.
8
UBS Securities LLC
UBS Securities LLC
8
William Blair & Company L.L.C.
William Blair & Company L.L.C.
8
It is obvious that some of these market makers trading the GSEs are dealing in counterfeit stock. The NYSE, FINRA, SEC and Treasury know this, but instead of enforcing the laws against this activity, they took a conservatorship of the GSEs, which they knew or should have known would benefit the counterfeiters at the cost of the U.S. taxpayers.
The Wall Street financial reporters who have analyzed the Fannie Mae and Freddie Mac debacle have so far concluded that their demise was a result of the public‘s failure to pay their mortgages. They are blaming the public without considering the massive fraud that was occurring and continues to occur. This fraud resulted in a vast amount of money that was stolen from the marketplace that destroyed the ability of these GSEs to raise their own capital. The GSEs are unable to raise money, as they had in the past, by selling their stock to investors.
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Absent the market makers fraud, it is probable that the GSEs would have survived without taxpayer intervention.
Advisor to the U.S. Government and Market Maker
Paulson was reported to be advised by Morgan Stanley to have the U.S. government take the GSEs into conservatorship status. When the market manipulation of the GSEs began in the fourth quarter of 2007, Morgan Stanley & Co. sold 94% of their 34 million shares of the GSEs. These positions were sold to other investment, mutual and pension funds. Morgan Stanley is a market maker in the GSEs and may not have been a neutral party for Paulson to bring in as an advisor.
K. Summary of Key Points
? The number of legal shares issued by the GSEs was not sufficient to account for such large trading volumes.
? From October 2007, all shares issued for trading by the GSEs, 1.6 billion shares, were reported to be owned by just the reporting institutional investors.
? Ownership other than the reporting institutions obviously exists.
? The GSEs have traded over 16 billion shares since October 2007.
? The shares illegally supplied through counterfeiting in Fannie Mae and Freddie Mac caused over a 90 billion dollar decrease in their value.
? On June 30, 2008, when all shares available to trade were owned by reporting institutions and less than one month before the SEC‘s emergency order went into effect, the NSCC reported that the fails to deliver of real shares of Fannie Mae and Freddie Mac was zero.
? The zero reported fails to deliver at the NSCC are in direct opposition to the facts that show delivery failures should be significant. Basically, all of the shares are in known ownership, therefore, legal settlement of these large trade volumes from October 2007 to date with real GSE‘s shares, was and is not, mathematically logical.
? The ill-gotten, gains from counterfeiting the GSEs‘ shares appears to exceed 1/2 trillion dollars.
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? Less than thirty market participants show up as professional market makers in these stocks.
? U.S. citizens‘ pension funds, state employee retirement accounts and other important investors in the U.S. markets have been financially harmed in these GSE investments; while the stock counterfeiters continue to profit.
? Absent the manipulation of their stocks, the GSEs could have raised significant capital. This is evidenced by the fact that mutual funds, pension funds and other large investment funds continued to purchase shares of the GSEs.
? The counterfeiters of the GSEs stock continued their relentless manipulation of the stock prices during the SEC emergency order.
? These are violations of the anti-fraud provisions of the U.S. securities laws and may violate the U.S. laws against counterfeiting. Where were the regulators?
? The NYSE, FINRA, SEC and Treasury should know there are illegal counterfeit shares trading in the GSEs because they have all of the information readily available to prove it.
? Instead of enforcing the laws against the illegal activity, the regulators took over conservatorship of the GSEs, which benefited the counterfeiters at the expense of the U.S. taxpayers and their future generations.
09/14/14 5:34 PM
AI
