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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.
Comment removed based on user account deletion
Bad idea. So I can take as much short interest as I want up to infinity and that would be legally ok? Hmm, if that were the case, I could drive every stock down to zero then not worry about having to locate stock, because of the abundance available due to those getting margin calls.
A much better solution is to actually monitor the naked shorting occurring in the marketplace and enforce prohibition of the tactic. Stay tuned - the music has stopped on Wall Street and everyone is looking for chairs. Those who haven't paid off their powerful politicos enough will see the finger pointed directly at them. I'd think this is coming up pretty soon (unless they've all paid enough money into the political extortion fund... err, coffers).
Naked shorting is dirty, crappy stuff and those that engage in the practice should rightfully be put in jail. Unlike "normal" shorting, it does absolutely nothing for a society or market other than enrich the criminals perpetrating the crime. It puts small businesses (like overstock.com) out of business. It's just getting real attention now because ironically, the largest perpetrators of naked shorting (read: financials) are now becoming victim of their own practices.
(It should be noted that I'm a capitalistic heathen most of the time, but this naked shorting really is dirty pool)
If you can read this... 01110101 01110010 00100000 01100001 00100000 01100111 01100101 01100101 01101011
I've not read any of Chomsky's political theory. But this is definitely a case of the worst sorts of abuses that Wikipedia is susceptible to.
An editor with a nefarious agenda manages to keep a hold of his account for 2 years because the wikipedia elites have an axe to grind against the nefarious editor's opponents. Who in the end turn out to be correct.
If that's not emblematic of everything that's wrong with wikipedia i don't know what is.
Oh, and at least according to Weiss's blog, he's still a contributing editor for Condé Nast Portfolio. I don't know about you, but sustained and concerted efforts to distort a subject should be a firing offense for journalists.
There are lives at stake here!
Wrong. He wrote the entire article himself. Look at the article history. Gary Weiss is Mantanmoreland, Lastexit, and 70.23.245.232 And yet, believe it or not, those who attempted to restore some reason to this madness were the ones who were permanently banned from Wikipedia (myself included).
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.
In every market you've got supply and demand. They balance at the asset price.
Then comes naked short selling. The naked short sellers don't need to borrow shares before they sell them. So unscrupulous agents start creating supply out of thin air. What happens next? As every fool knows, an increase in supply causes the price to drop. Unscrupulous parties continue to naked short the stock, saturating demand through successive price floors. As the price drops, stop-loss orders are activated, exacerbating the decline. Momentum traders will also short the stock. Pretty soon the share price has crashed, the company faces bankruptcy, but the perpetrators can easily cover their position at bottom dollar making millions. All of this is perfectly legal under SEC's rules regarding short sales, REG SHO.
Naked short sales completely destroy the relationship between supply and demand. It allows well connected insiders to make millions or even billions by ruining the market for everybody else.
You'd have to go into a bit more detail on exactly what sorts of arrangements you mean to produce a good answer here, but I can give you a partial answer.
No fake money is created in these situations. Money is just a measurement of value - it's a raw form we can convert assets into. But implicit in its idea is a notion of debt as an asset. If I hold a tag sale and sell some stuff, and I get $50 in cash for it, what is my cash, exactly? It's a sort of free-floating, transferrable debt - it means that somebody gave up something that was considered worth something, and obtained a certain amount of purchasing power. By giving up some books and disused furniture, I've obtained $50 of raw purchasing power. Now, in practice, this money is considered to be backed by the US Government - but that is, in the end, immaterial - all that matters is that the green pieces of paper are considered to have an amount of purchasing power.
The thing is, debts and future predicted events have purchasing power. This is what happens when, for instance, I subscribe to a magazine - I send a company $20, and I get 12 issues of a magazine. But 11 of those issues don't exist when I spend my money - what I'm buying is future magazines. This is why subscriptions are cheaper than newsstand - the publisher likes knowing that they have the next 12 issues sold in advance. But in exchange for the inconvenience of paying out for a product that isn't in existence yet, they give me a steep discount off of what I'd normally pay. What I'm really buying, though, isn't the future magazines - it's an obligation to send me the magazines. It's an intangible good - but it's still a good that has value.
Similarly, I can buy a future debt. Why? Because debt has value. And as long as something has value, it is worth money.
Fake money applies differently to naked short selling because there's deception involved - you sell the stock as though you know you'll have it to deliver, and then go try to deliver it. But the person buying doesn't know that. So there's fraud involved. That's the difference - value is being paid for something that is not what it is thought to be. And there fake money comes into it - because something is being represented as having value that it is known not to have.
Philip Sandifer's academic website
A traditional short stock sale requires that you find someone who will loan you their shares in a stock you believe to be over valued. You then sell those shares to someone. When it comes time to return the shares you borrowed, you buy at the lower price that you expected and return them to the person you borrowed from. You get to keep the difference in price.
A naked short means you never borrowed the shares in the first place. You agreed to sell someone some shares and you have a certain amount of time to actually deliver the shares. The idea is that you will find someone to borrow from in the period during which you have to settle the transaction.
Problems arise when the settlement never occurs because the short seller can't find anyone willing to lend the stock and they are faced with buying on the open market at the current price. So they just don't bother to follow through because the cost will end up being, theoritically, infinite. When Broker B finds that Broker A hasn't delivered the stock, they can technically go out and buy on the market and have the bill sent to Broker A. But they rarely do this because what goes around comes around and they will eventually find themselves in the situation where one of their customers initiated the naked short. Whenever the shares aren't settled it's called a failure-to-deliver (FTD) and on any given day the value of the sales that aren't delivered is measured in the tens of billions of dollars.
Because of the FTD, buyers end up thinking they own stock that they don't. And brokers list the stock in the buyer's portfolio and tell the companies that the buyer is an owner of the stock. Companies can end up with more people thinking they own shares than actual shares exist. Leading to devaluation of the stock, limiting the ability of the company to raise funds by selling more stock, and affecting corporate voting.
Another problem is that companies with a small amount of stock in circulation and a fairly low market cap can find that on a daily basis there are more shares offered for sale than actually exist because short sellers are selling without ever finding a person to loan them the shares in the first place. Due to the massive amount of sales being offered the price plummets, defrauding honest investors of value.
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
Yeah, that's what bank regulations were supposed to be about. They were supposed to limit the amount of leverage or "margin ratio" as you call them. The government has clearly failed here.
want to read something scary? read this:
http://paul.kedrosky.com/archives/2008/10/03/quote_of_the_da_6.html
In fact it is so good I'm going to post it right here:
"Here is the quote of the day:
"...we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place."
Translated into English, this testimony from back in 2000 was from someone asking that major brokerage firms be permitted to increase leverage subject to oversight of their wondrous mathematical risk models. The request was agreed to four years later, in 2004, and it helped lead to the meltdown in independent brokers this year.
The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him."
While true, your comment doesn't address the potential for naked shorters to cause mischief. By selling stock that they don't really have, they artificially increase supply, and if done on a large enough scale, the price drops.
Of course, the shorter didn't change any fundamentals of the company, so you would expect the price to rebound as the shorters are forced to cover their position. But take human nature into account. The sudden price drop can trigger panic selling-- basically the naked shorter is making a bet on their ability to trigger a panic.
The short position wins when the naked shorter buys up the stock at the artificially low price to cover their position. Small companies are the usual victims, since their price is manipulated more easily.
Yes and such attacks are often accompanies by fear, uncertainty, and doubt spread in the press by a group of journalists, whose articles curiously seem to mirror the short positions of major hedge funds. This places companies in a quandary. If they response to each incident of biased journalism they look weak and defensive, but if they keep silent then misinformation is unchallenged.
Also, one point I"m not sure readers appreciate is how much many algorithmic systems and ordinary investors as well rely on technical analysis, that looks at patterns in price movement as a guide to future price changes. Naked short selling can readily "poison" such the technical picture of a stock and make it appear much weaker than it otherwise would. I've seen it happen in a number of stock I follow. Don't ever assume that the market trades on fundamentals.
So wrong, let me count the ways ...
1) Parent baselessly (and falsely) assumes that a drop in the share price will not affect the profitability or solvency of the company.
2) Parent laughably believes that companies with plummeting share prices have lots of capital to issue dividends.
3) Parent apparently believes in some exogenous, universally quantifiable "fair price" of a stock that exists independent of its supply and demand.
4) Parent believes that investors have perfect information and that they could distinguish between a stock price that is legitimately falling and a stock price and one that is the product of manipulation.
5) Parent apparently believes that shareholders who sells below the mythical "fair price" of a stock are "stupid" regardless of the profitability of the trade, the future trajectory of the stock price, or even anticipated future trajectory.
Time for a reality check. The parent suggests that he would respond to naked short market manipulation by buying tons of stocks. But would he?
First, I'll make the very generous assumption that he has a "rational" bank with a similar "understanding" of economics that is willing to extend arbitrary credit to finance his splurge on tanking stocks.
So I assume he could, even though he can't. But would he?
I doubt it. By the parent's own reasoning the stock price really can't deviate at all from the "fair price." Before issuing the order he would cast judgment thusly:
"The free market does not lie! The fall in price must reflect a change in the underlying value of the company. Of course if I knew the asset was trading below it's God-Given Fair Price, I would immediately enforce that price by my own hand. Heavens! I'd leverage to infinity if I thought somebody was making a mockery of the Free Market!"