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A Wikipedia Conspiracy and the Wall Street Meltdown
PatrickByrne writes "This is The Register's world-class investigative piece concerning one aspect of the meltdown on Wall Street ('naked short selling') and how the criminals engaged a journalist to distort Wikipedia to confuse the discourse. The article explicitly and formally accuses a well-known US financial journalist, Gary Weiss, of lying about his efforts to distort a Wikipedia page under assumed names, and accuses the Powers That Be in Wikipedia (right up to and including Jimbo Wales) of complicity in protecting Weiss. This is not another story about a 15-year-old farm kid in Iowa pretending to be a professor. This is like the worst Chomskian view of Elites manipulating mass opinion. But it is all documented." We discussed the alleged Wikipedia manipulation when The Register first wrote about it last December. The submitter is the CEO of Overstock.com and a major player in this drama from the beginning.
Excellent, Minitrue is working as planned. We can now commence with phase three or our diabolical plan.
I am becoming gerund, destroyer of verbs.
Elephants are an expanding computing market.
This case is direct evidence for Chomskian media theory. (As if there wasn't enough already -- Chomsky has compiled literally thousands of incidents)
Why do you think the press would be any different than Wikipedia? Because it is permanent? Nobody cares about yesterday's news anyway. Because you need to be hired to join? Getting hired is easy -- essentially any interested party can join. Because journalists have integrity? I won't accuse all journalists of being disingenuous, but this particular journalist was caught manipulating both wikipedia and the mainstream media.
Certainly, if you let a fox in your hen house, you should expect your dinner to get eaten -- whether the metaphorical hen house is Wikipedia or the mainstream media.
After all, I am strangely colored.
Maybe not, but in order to cover their shorts and make money, they would need to find sellers who are willing to sell at an artificially low price. They would run out of stupid sellers pretty quickly. Only the stupidest sellers would want to sell at a price lower than the dividend potential or the company. The fair price of a stock is always proportional to its expected long term dividend potential.
There is money to be made on the back of short sellers who manipulate prices. It is pretty damn easy to buy their under priced securities and only sell them back at a fair price. There is not much incentive to sell when you are getting dividend potential worth more than the value of the stocks. And if short sellers can't find enough dumb sellers, they will only be able to cover at a loss or wait in hope of a price drop while issuing dividends until they are forced to cover by a margin call.
The BADSITES pseudo-policy, which for a time led Wikipedia editors to be threatened with being blocked or banned for daring to link to antisocialmedia.net or Wikipedia Review (among other things), was a sterling example of Wikipedia's concept of "openness".
--Dan
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Admittedly that comes from Patrick Byrne's web site.
An excerpt from here.
And from here:
Also a paper (PDF) from the Cato Institute.
And back to Byrne.
I personally don't think naked shorts represent the cause or even a cause of the current situation,
Your argument seems to hinge upon the notion that without shorting stocks would be overpriced, and that thanks to shorting they are not. I refer you to every financial bubble in the last century as proof that stocks are quite capable of becoming overpriced despite the best efforts of shorting to keep them 'fair'.
Shorting is just one component in an unhealthy trading system that has little to do with directing investment capital to those ventures with the greatest likelihood of being productive and profitable. Rather, the financial system has degenerated into a collection of gambling rings where high rollers lose and win fortunes trying to game the system.
The stock market was conceived in an era that long predated instant communication and the ubiquitous availability of information. It was originally intended to make capital available to enterprise, though of course there has always been a gambling element to it. But today, with instantaneous communication and information availability, there is no need for a trading market for those who simply wish to invest and divest capital in companies they believe to have strong prospects for profitability. The day trading and manipulation of stock prices and markets are now artifacts of an obsolete, dysfunctional system.
Had the financial markets collapsed in the recent crisis, and if the trading floors were to close permanently, then they would be easily replaced by direct investment with individual companies by individual and institutional investors with an actual interest in the productivity and profitability of the companies in question. In the end, our economy would probably be better off. And even if the system were slightly less efficient, the difference would simply be paid for out of the pockets of wealthy investors who currently clean up to the tune of $500 billion or more each year. Companies and their employees in the working and middle class would almost certainly be unaffected, or actually be better off in the final analysis.
There is simply too much money to be made to ever hope that we could close the world's financial markets to all but legitimate, long-term investment, but 99% of the people in the world would almost certainly be better off for it.
A-Bomb
Well, sort of. Now (as in, since a few weeks ago) it is altogether banned, but historically it has been allowed in limited form. Particularly market makers have usually been allowed to naked short if they are unable to borrow shares, because they are responsible for maintaining liquidity and they were assumed to be legitimate enough to settle up when shares were finally available. And price manipulation by a market maker should normally be very easy to spot, so it was not considered a huge risk to allow it (there were a couple cases where market makers got busted for abusive naked shorting, though).
It probably makes sense to ban it altogether, though, as the marginal increase in efficiency is probably not worth the general sense that there's a loophole for exploitation in the market, whether or not people are actually abusing it.
The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him."
I'll just point out that Goldman has done reasonably well in all this, and that's probably because they did have good risk models. Warren Buffett recently invested in them, and he's one of the sharpest value investors out there.
Paulson's statement was broadly correct: what matters is the risk, not purely the leverage, and a fixed ratio for everybody did indeed give a less efficient use of capital.
Where things fell down wasn't the theory, it was the practice. The SEC, which has been a sharp and disciplined regulator for ages, apparently went out to lunch during the Bush administration, and specifically never followed up on this.
For a nice take on the SEC's abdication check out the "This American Life" episode "Enforcers". Not only does it have a great piece on the people tricking Nigerian scammers for fun, but the bit on the lameness of the SEC is very well done.
No dividends paid by the short sellers. They borrowed the shares, sold them on the open market, money deposited from the proceeds in their accounts (with a minus sign next to it on their statements). Then, when the price falls, of the underlying stock, they buy back the number of shares borrowed, That's the idea, of a short sale, anyway.
Now, when they sold the borrowed shares, if a dividend becomes due, then the buyer gets the dividend from the company issuing the shares. The holders of record are the recipients of dividends and those dividends are paid by the company, not by the previous owners of the stock.
Buyers of shares have no idea they are even participating in a 'short'. Why not? Well, for one thing, the law says you can only initiate a 'short' on an uptick in the underlying stock, meaning: The stock price is on a rise. So, another anonymous buyer of the security is participating in a rising market in that stock. I am dealing in Option contracts that represent the price movement, over time, of a security, not the securities themselves. The market maker simply prices the loaned shares, based on the next transaction in the stock after my order, I never actually see them. The Optiions market runs on the principle that you best against a market only when the most recent transaction in the stock or Index was higher than the previous, and you bet in favor of a rising market only when the most recent transaction was a downward movement in price.
I did Options in the 80s and early 90s, and back then (and still) the term 'naked' was slang for 'uncovered'. I was betting against certain stocks and the market, as a whole, at times. I did not own the S&P 500 Index, so if I sold a 'call' on the S&P, that transaction was naked. The most I stood to gain was the strike price on the Option, which represented, loosely speaking, the price movement up, or down, of 100 shares of the underlying security. As the contract reached expiration it was time to either close out the deal, or, if the stock or Index rose suddenly, to buy back the calls. If the Option was sold as 'covered', it meant I had the underlying stock, and if I wasn't paying attention, a person holding calls on the stock could 'exercise' the call, and I had no choice but to deliver the real shares.
Let's say there is 7 weeks to go on XYZ stock, and the last transaction in the Market, for sale of XYZ was 'up' 12 cents at $100.12, and I decide to sell a 'call' on the stock of XYZ at a $97.50 strike price. I am betting that the stock will be worth, equal to or less than, $97.50 in 7 weeks. So I sell, say 10 calls, representing 1,000 shares of XYZ and pocket $300 per contract ($3000). The most I can gain is my $3000 [If the stock does indeed head south in time]. I'm on a margin account, and as long as I have enough credit i can ride out what I hope are temporary upticks in the XYZ. But if it keeps rising, the price of each is rising out there also, and it's rising fast because holders of those calls, who bought them at lower prices are seeing price reaction based on the XYZ movement in the open market AND the fact that Time is running out for a turnaround in XYZ. If XYZ options are at 8 bucks and I get cute, the holders of the calls can 'exercise them, and all of a sudden I need to come up with 1,000 shares of XYX at over $100 apiece. My $3k deposit, from the sale of the options, is dwarfed by a $100k+ obligation. This is not for everybody, that's for sure.
But I never sold 'covered' options, only 'naked' ones. It was speculative and dangerous, because the maximum profit was the amount collected on the sale of an option, and the potential loss was, theoretically, sky-high if not infinite. In the 'naked' scene you had to pay very careful attention to both price movement in
Bullshit! GS survived because they have Paulson as the treasury secretary. Paulson let other companies fail from the CDS manipulation, but when the target became GS the government stepped in and banned short-selling (among a lot of other things). It's nice to have your ex-CEO as the most financially powerful person in the world. Even other bankers made note of who the bailout really helps.
Buffet invested in them for 2 reasons. Based on what Buffet has said it sounds like the government tapped him and begged him to get in the market to instill some confidence. So for his troubles GS (and GE for that matter) is giving him a 10% dividend! Even with those terms Buffet himself said it was risky and I have to paraphrase here...'if a government bailout doesn't get done, GE and GS will be the 2 largest investment mistakes I've ever made.'
The more worrysome problem there, though, is that the USA system (and probably a few others) works on IOUs that are indistinguishable from real shares even to those who own them. In your car analogy, essentially you'd sell the car, but when mom looks in her garrage, she still sees the car there.
But analogies aren't even necessary, let's look at the real thing. Let's say we have the following actors: Mr Investor who owns 1000 shares of IBM, Mr Broker who does the shorting, and Aunt Emma who's gotten into her head to invest her savings into IBM stock. Now the initial stages of shorting look like this:
1. Normal shorting.
Mr Broker borrows the 1000 shares from Mr Investor, and replaces them with IOUs. Then he sells the 1000 shares to Aunt Emma.
Hopefully temporary outcome: Mr Investor now owns 1000 IOUs for IBM shares, Aunt Emma owns 1000 IBM shares.
2. Naked shorting.
Mr Broker doesn't bother even locating Mr Investor, and just sells Aunt Emma some 1000 IOUs.
Hopefully temporary outcome: Aunt Emma now owns 1000 IOUs for IBM shares, Mr Investor still owns his 1000 IBM shares.
The problem, the way I understand it, is that in both cases, the IOUs are indistinguishable from the real thing by anyone outside the DTCC. (The big hub where those transactions take place.) In both cases, both Aunt Emma and Mr Investor can look at their portfolio at any given time, and they _both_ will see that they own 1000 IBM shares. Genuine shares, not IOUs.
In both cases, 1000 shares just became 2000 shares. And the effect can further cascade, as Aunt Emma's shares can be loaned by somebody else, creating another 1000 IOUs that are indistinguishable from real shares. And so on. At some point 10 different people can show up and demand vote with their 1000 shares each, but they're all the same 1000 shares, duplicated in that process. And someone can look and see the extra shares around artifficially inflating the supply on the stock market.
Basically to go back to your analogy, after all, temporarily Mom _and_ this guy own the same car as if it were two different cars. And the car can be further duplicated down the line like that, until the whole bloody neighbourhood owns a car each... and they're all the same car: mom's 2003 Saab.
I wouldn't have a problem with it, if the IOUs were clearly marked as IOUs, and not as real shares. Then either Aunt Emma or Mr Investor can look at their portfolio and go, "ah, I'm still owed 1000 shares by that guy." But they don't. They both see that they have 1000 shares.
I think understand the reasoning behind hiding those details. After all, Aunt Emma paid for her shares, might as well hide the details, delays and imperfections in the system, and just pretend that she owns the shares already. The actual transfer will happen in the background, all will balance out, and she doesn't need to worry her head with all that. Ain't life grand, when the system just makes things work in the background, and you don't even have to know when the actual transfer happened or how?
Well, yes, except when it fails. The more obvious way is when you still have the IOUs, but the person owing them to you just went out of business. Refco's fallout apparently left hideous numbers of IOUs out on the market, and nobody except the DTCC can tell which are real shares and which are IOUs. As long as the two are exactly the same for everyone else, it doesn't even matter if it was normal shorting (and Mr Investor is left holding the IOUs thinking they're real shares) or naked shorting (Aunt Emma is.) In both cases, some duplicate shares are left on the market, and are screwing not only the companies, but also the individual investors. But then there's obviously also the situation where the system is gamed and IOUs are just left around to accumulate, at either end, pretending they're real shares.
I just can't see how or why that kind of a system is even legal.
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