Replies to post #118525 on CMKM Diamonds Inc (fka CMKX)

[BigGubs]

If I see another NSS theory i'm going to puke!!! NAKED SHORT THIS

[bluediamonds]

Too Big to Fail?

Posted by: rbitulsa
In reply to: None Date:9/21/2004 12:53:53 PM
Post #of 22059

Something to chew on...

If there is a very large naked short position in CMKX, then could either or both of the deals seen recently between NITE/Citigroup and Schwab/UBS be related to the covering of this position? If so, might the DTC/SEC, and Roger Glenn be involved in a bailout of those caught with substantial naked positions?

For your perusal and reference, in 1999, The Cato Institute published a briefing paper titled "Too Big to Fail? LTCM and the Fed Reserve". To summarize, a hedge fund, Long Term Capital Management (LTCM), found itself in a pickle. During a period in 1998, it's hedge fund value had dropped from $120 billion to $80 billion, and the company's capital dropped from 2.7 billion to $600 million. This "leverage ratio" of 133 to 1 was a death nail by any standards, and the Fed feared "disastrous effects on the financial markets". With the Fed Reserve's direction, the following took place: "14 prominent banks and brokerage houses - including UBS, Goldman Sachs, and Merrill Lynch, agreed to invest $3.65 billion of equity capital in LTCM in exchange for 90 percent of the firm's equity."

If CMKX does indeed now "have the goods" to force a covering, it's not too hard (for me) to review LTCM's predicament, and replace some of the names, to see a link to what might be going on behind the scenes at CMKX. 1) Replace LTCM with a host of market makers and hedge funds, where through the accumulation of large naked short positions in CMKX, have found their "leverage ratio's" at distasterous levels (they don't have enough equity to cover). 2) Not necessarily the Fed Res., but at least the SEC/DTC (complicit, by the way), has every motivation and responsibility to ensure a smooth transition out of this mess. 3) UBS, Citigroup, and likely others [you might call them cannibals (see post 7407 on RB's GBLL board)], are waiting in the wings, taking large chunks of equity from those market makers and hedge funds caught in the squeeze. 4) In place of infusing capital back into the troubled companies (per LTCM), UBS, Citi, et al instead cover their massive short positions. The shorties get to stay in business, but just barely. Citi, UBS, et al, benefit by taking over the substantial base assets of the funds divulged by shorty, likely acquired at a nice discount. Plus, they may benefit on the back-end by either accumulating positions directly in CMKX (prior to or during the covering) or by providing funding directly or indirectly to CMKX after the fact, through some sort of investment conglomerate, direct equity agreement, or straight cash funding. And CMKX benefits through the elimination of a corrupt share structure, and a correction to it's proper valuation.

To compare LTCM's predicament and bailout against all of the unknowns surrounding CMKX's share structure is a stretch, I know. Never-the-less, it can be seen from the LTCM example that such an occurance in the market is possible, and that there is precedent for the government and other large financial institutions assisting the bail out of a failing hedge fund, in order to preserve the stability of the markets.

When most people here "CMKX might have the largest naked short position against it in the history of the markets", their gut reaction is "that's a very bad thing for the company, right?" If a large naked short position does exist, and the company does "have the goods" required to force a covering, then I would argue that the short position is, in the least, simply an obstatle in the way of the company persuing it's business plan. But you cannot understand a naked short position properly if you don't see that a huge naked short position is a potentially massive cash vacuum, with very large potential profits waiting to be sucked up by those who position themselves properly against it.

Just food for thought and all my opinion while we wait for the real CMKX story to unfold. It's also interesting to note that UBS is a client of E&A...

http://www.investorshub.com/boards/read_msg.asp?message_id=4090111

[janice shell]

hmmmm....not much of a recommendation.

BTW, a couple of the JAGH shareholders I spoke with on the CC, started buying OMOG in the .015 level and are still buying now.

[violent]

how long could something like this take?