SEC Extends Order Limiting Naked Short Selling Through August 12

Notice Harvey Pitt side with John Tabacco? The SOB was head of the SEC and did nothing, and now, he's going to cash in. I guess we're lucky to have his voice, but I'm pretty sick of these guys cashing in on my sorry ass.

A long time ago, Patrick told me of a visit he had from some guys in shiny suits. It sort of took him by surprise. The Italians control stock loan, I'm told. They told him they knew he was on to something, and they wanted to help. I didn't realize it at the time, but it was probably John.

All of the sudden, John is on the side of the shorts. I don't blame him. He's a capitalist, and bags of money just walked into his arms. Events have unfolded perfectly for him. Always happened that way. As they say in the South, '.......Sun don't shine on the same dog's ass every day."

Now this is interesting. in 2006, Cramer was threatening us with lawsuits. The emails were vicious. Now, look at this.

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=9280498&src=finance&ch=633473

 

Possible solution/comment regarding option mm exemption and naked shorting.



http://www.sec.gov/comments/s7-19-07/s71907-1306.pdf

 

LOL... Looks like the scumbag at least knows when he's been beaten.
____________________

“First they ignore you, then they laugh at you, then they fight you, then you win.”

~Mahatma Gandhi

"All truth goes through three stages. First it is ridiculed. Then it is violently opposed. Finally it is accepted as self evident."

~Schoepenhouer

 

LOL... Looks like the scumbag at least knows when he's been beaten.
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I'm not so sure. Would you play poker with him? Tomorrow he may sing a different tune. The guy is a certified manic. He should have his own personality VIX index. He's lonesome and need the nss crowd till the next bull tech market. Wtf, naked shorting is news du jour and he is on television, he is not so stupid to argue the point.

One other point he made I thought was important. The academics will collect data from July 15th, he made the point that the shorts were covering prior to the 15th, this will distort a conclusion.

 

Clip presently unavailable...wtf

 

This has happened to us more than once. That is why the guys at Deep capture save everything to disk. Let me go look, and I'll see if I can find it. He basically says many banks will go out, and FDIC will be on the hook.

 

“Memo to the FDIC: Watch your back. The SEC just flipped its allegiance to the bad guys, the guys who want to break not just certain banks, but your bank! That's right, with the scrapping of the emergency rule that eliminated naked shorting, where you don't have to find the stock, and with the end of the vigilance against bear raiding, the SEC may have just caused a run at the FDIC.”



http://www.bloggingstocks.com/2008/...stocks-sec-paints-a-target-on-downey-and-its/



Cramer on BloggingStocks: SEC paints a target on Downey and its ilk



Posted Aug 13th 2008 9:24AM by Jim Cramer



Filed under: Industry, Market matters, Merrill Lynch (MER), Federal Natl Mtge (FNM), Goldman Sachs Group (GS), Amer Intl Group (AIG), Lehman Br Holdings (LEH), Cramer on BloggingStocks

TheStreet.com's Jim Cramer says struggling banks can be shorted to oblivion now that the rules won't be enforced.



Memo to the FDIC: Watch your back. The SEC just flipped its allegiance to the bad guys, the guys who want to break not just certain banks, but your bank! That's right, with the scrapping of the emergency rule that eliminated naked shorting, where you don't have to find the stock, and with the end of the vigilance against bear raiding, the SEC may have just caused a run at the FDIC.



I had hoped that the SEC would see that these financials have been manipulated to unreasonable levels, making the confidence in all institutions so low that nobody wanted to give them money. The rule change -- which when you think of it, wasn't much of a rule change as much as an enforcement of the way things are supposed to be, where you actually have to find the stock you sold short first so you don't fail to deliver -- worked!



It gave the system some breathing room. I think the rule change might have saved Merrill Lynch (NYSE: MER) (Cramer's Take) from being shorted into oblivion so it couldn't have done its deal. Lehman (NYSE: LEH) (Cramer's Take) didn't do a deal, those bad boys be back on the griddle now for unknown European exposure. AIG (NYSE: AIG) (Cramer's Take) wasn't protected in the first place and I believe will need to raise $10 billion to $15 billion in the teens to cover its European exposure. Now there's little hope at all for Fannie (NYSE: FNM) (Cramer's Take) or Freddie (NYSE: FRE) (Cramer's Take), as their stocks will be blitzed into oblivion and Hank Paulson will have to start the planning of cash infusions as opposed to what he said last Sunday -- why did he say that, for heaven's sake? Maybe he's too close to John "We don't need capital" Thain from their Goldman (NYSE: GS) (Cramer's Take) days.



But forget all that, let's talk about reality, let's talk about what could happen now, now that it is clear that not only is the SEC not extending these rules to other financials, as I had hoped, but is letting them expire.



Let's talk Downey Financial (NYSE: DSL) (Cramer's Take). Everyone knows this savings and loan is on life support. The headlines are just awful, the losses staggering, the deposits are running the wrong way, and it looks like another IndyMac is in the works.



Now, consider that more than 60% of the float of this bank is short, so it is virtually inconceivable you can get a borrow, so you shouldn't be able to short it, but naked shorting's allowed now, so you don't have to worry about a buy-in. Second, no upticks, so what's the point of waiting here?



You can only guess what the hedge funds will do now, right? The stock was down 25% yesterday. Why not just mash the stock to zero, the way IndyMac's was? I think that will happen today and tomorrow and Friday. By that point, the depositors will freak out -- I don't think they hedge funds will hire actors to stand in line, but there sure are enough of them unemployed in L.A. that it wouldn't be too hard to get 'em to hang out at 5 a.m. Just provide them coffee. (I wonder if the union would get angry?)



Anyway, with naked shorting and no upticking, the prospect of pinning Downey at 20 cents or 30 cents seems pretty likely to me.



Then the bank has to be seized. When it does, the FDIC's pressure hoard of insurance capital disappears quickly: Remember, it doesn't have any IndyMac takers yet because there is no mortgage resolution trust to dump bad loans to.



And voila, three days after the rules go away we have a bank panic all over again.



That's what I think will happen now. It just seems so obvious to me -- how can it not seem obvious to the SEC or the FDIC? Is it because, like the Ben Bernanke Fed, there are only academics and laissez-faire theoreticians running the joint with a handful of pols mixed in? Do you think they even know how the operation against Downey is going to work? Do they even know about this stuff?



I don't even think so or they would have extended the rule and broadened it.



I have seen the power of the rules in their ability to save even the worst of institutions that could be saved.



When the rubber hit the road in 1990 and I was shorting all of those failing bank stocks, the one thing that kept nagging at me was whether I could get a "borrow" on some of the worst ones, because everyone else was shorting them, too. In Confessions of a Street Addict, I documented how I got crushed on a Rutherford Savings Bank short I had when my broker could not find any more stock to lend me so I could stay short. I got bought in at a ludicrous price -- the broker just came in and bought the stock back well above the market -- and my quarter was almost lost.



That would never happen now, ever. Because the SEC doesn't care. Why? I don't know. My friend Mario Gabelli told me yesterday that he thought it was just because the academics sold them a book of goods that this stuff didn't matter. He could be very right. I think they are just over their heads.



I thought they may have figured all of this out after the July 15 bottom, but it turns out they really didn't understand that a return to the rules the way they were for 70 years was a good idea, as opposed to the laissez-faire garbage they believe in now.



Downey could have been Rutherford. It could have had a chance.



But not with this market. Not with this SEC.



Look out for this. It's Saturday's headline.



Be ready for it.



Oh, and I forgot something else: There are four or five Downeys out there right now that we all know about.



They will probably all meet the same fate in the same time frame now that the geniuses at the SEC have said all is well and good and the problems have gone away.



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RELATED LINKS:

Cramer: Shorts Are Not, Should Not Be Equal

Ask TheStreet: Naked Shorts

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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Goldman Sachs.

 

Searching for the naked truth
Aug 17th 2008
From Economist.com

The real problem with abusive short-selling


FOR much of this financial crisis, America’s Securities and Exchange Commission (SEC) has cut a pathetic figure, relegated to the sidelines as a hyperactive Federal Reserve tried a variety of creative measures to keep the system afloat. When the market watchdog finally did get in on the act, it was highly controversial: a temporary order restricting short-selling the shares of 19 financial firms deemed systemically important, including Fannie Mae and Freddie Mac, the two troubled mortgage agencies.

The ban on “naked” short-selling—the sale of shares one has not yet borrowed—was announced on July 15th and allowed to lapse on August 12th. Its stated aim was to aid “price discovery”, but many suspected it was a share-support operation. This week saw feverish analysis of what, exactly, it had achieved, and what role, if any, abusive short-selling and other forms of manipulation may have played in exacerbating banks’ woes.

As regards the ban’s efficacy, arguments can be mustered on both sides, and no clear verdict has emerged. The value of the companies on the list rose sharply while it was in place, but the entire market was rallying. Short-sellers do not seem to have been deterred: for the nine American stocks on the list, short positions fell only slightly. And bid-ask spreads on the 19 stocks widened, suggesting the ban damaged market efficiency.

Some wonder why these firms were offered special protection in the first place, given that short-selling accounted for 12% of their outstanding shares in the months leading up to the ban, slightly less than the proportion for all financial firms.

The SEC has promised a post-mortem. But its mind seems made up. It is working on proposals to extend the naked-shorting ban to all shares. This could be in the rulebook within two months. There is talk of other changes, too, such as bringing back the “uptick” rule, which required traders to wait for a firm’s share price to rise before selling it short. This was designed to stop the relentless hammering of beaten-up stocks but was repealed in 2007 after studies suggested the decimalisation of market prices had rendered the rule ineffective. Another possibility is to introduce some sort of “circuit breaker”, which would put a brake on shorting if prices fell beyond a certain level. Some officials favour forcing traders to disclose large short positions.

Two questions hang over these efforts. First, does the SEC really need new rules to curb naked shorting? Under Regulation SHO, introduced in 2005, it has powers to tackle abusers, but it has used them timidly. The Government Accountability Office is probing the rule’s implementation.

One problem is the nebulousness of some wording. For instance, when locating stock to borrow, short-sellers need only have “reasonable grounds” to believe it can get hold of the shares. It is quite common for several hedge funds to execute a trade, each assuming it has access to, say, the 1m shares in Citigroup that Morgan Stanley has announced it has available to lend that day. This can lead to persistent “fails-to-deliver” (FTDs), which occur when the short-seller is unable to produce shares at settlement. These become “phantom” shares that can trade in the market as if they were real.

The second question is whether naked shorting really is such a problem for large financial firms. Of the 19 protected stocks, only Deutsche Bank was on the SEC’s “threshold” list for companies with a big FTD problem in the run-up to the July ban. This suggests the SEC’s focus on naked shorting is something of a red herring.


For the market as a whole, however, it appears to be a large and growing problem (see chart). Hundreds of smaller firms claim to have fallen victim to naked short-sellers (though some clearly only say that to excuse underperformance). Those worried about short-selling point out that options market-makers are exempt from naked-shorting restrictions: they can sell shares they have not located or borrowed if the aim is to keep markets liquid. But they can also, in effect, rent out this privilege to clients using derivatives contracts, under “market access” agreements. Hedge funds can, in theory, use these deals to launch bear raids in disguise.

It is impossible to know how big this problem is, but regulators accept it exists. The American Stock Exchange fined two market-makers for precisely this violation in July 2007. A month later the SEC proposed limiting or eliminating the exemption, but momentum stalled in the face of opposition from banks and exchanges.

The anti-short lobby, emboldened by the July ban, is again pushing for an end to the market-makers’ exemption. It has even grander ambitions. A group called American Entrepreneurs for Securities Reform has launched a ballot initiative in South Dakota that, if passed in November, would ban all naked shorting in the state, and force all brokers registered there to comply across the United States.

Opponents worry that the language is vague enough to outlaw all short-selling, though the initiative’s backers deny this is their intention. They have threatened action in a further 18 states if the SEC ban is not permanently extended to all shares this year.

How much does all this matter? Deliberate naked shorting has no place in a well-run market. But its effect on the big financial firms that keep regulators awake at night has been limited.

In any case, short-selling is not the only way to make money from a falling share price. As Bear Stearns began to reel in March, one canny (or bent) trader made a mint betting that the investment bank’s share price would halve within days, Bloomberg reported this week. The weapon used was not shorting, legitimate or naked, but put options, which give the buyer the right to offload shares at a fixed price in the future.

http://www.economist.com/finance/displaystory.cfm?story_id=11951246


PS>I SAY COX, WHO HAS REAL TIME DATA, KNEW THE FAILS WERE BUILDING AND EXACTLY WHERE. THEREFORE, WITH A GUN TO HIS HEAD, HE KNEW WHOM HE HAD TO PROTECT. THESE JOURNALISTS WHO ARE LATE TO THE PARTY JUST DON'T SEEM INCLINED TO THINK OUTSIDE THE BOX. REMEMBER. EVEN THE COMPANIES DON'T KNOW WHAT THE FAILS ARE IN THEIR OWN SECURITIES. ONLY THE DTCC AND SEC KNOW; THAT IN ITSELF IS REASON ENOUGH TO CAST DISPERSION ON THE ENTIRE ISSUE. WHY? WHY DON'T THE COMPANIES KNOW?

 

Re; Option MM

But they can also, in effect, rent out this privilege to clients using derivatives contracts, under “market access” agreements.
---------------------------------------------

I thought that was illegal. I don't believe that. It was my understanding the option mm naked short position was not to be sold or "rented out". I plead ignorance. Someone show me. In fact, I'm sure I read a prosecution against a mm for doing that (selling his naked shorts).

The article does not list an author.

 

the whole thing was misunderstood.

It was a ban on short selling while naked.

Fixed now.




Thats not Don is it?