More Power Centers at the SEC: The Wolves Will Be Roaming

One of the charming facts of the Chrsitopher Cox incompetency years at the SEC was that he was real good and creating burauratic infrastructure which slowed down and eliminated a lot of harrassment of Wall Street by the SEC.

Now that the clueless Mary Schapiro is in charge, she is listening to her hungry staff for clues. She admits this in a recent speech:

In speaking to our enforcement staff, I’ve been told that these [Christopher Cox]special procedures have introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed.

Following the advice of her staff, she is ratchtiing up the power of her staff big time:

At a time when the S.E.C. needs to be deterring corporate wrongdoing, the penalty pilot sends the wrong message. The action I am taking to end the penalty pilot is designed to expedite the commission’s enforcement efforts to ensure that justice is swiftly served to those public companies who commit serious acts of securities fraud.

Another immediate change I am putting in place to bolster the S.E.C.’s enforcement program is to provide for more rapid approval of formal orders of investigation — the permission slips given out by the commission that allow S.E.C. staff to use the power of subpoenas to compel witness testimony and the production of documents. When I was a commissioner, formal orders were routinely reviewed and approved within a couple of days by written approval of the commission or by “duty officer” — a single commissioner acting promptly and on behalf of the entire commission.

Today, however, many formal orders of investigation are made subject to full review at a meeting of all five commissioners, necessitating that they be placed on the calendar sometimes weeks in advance. In investigations that require use of subpoena power, time is always of the essence, and every additional day of delay can be costly. To ensure that subpoena power is available to S.E.C. staff when needed, I’ve given direction for the agency to return to the prior policy of timely approval of formal orders by seriatim approval or where appropriate, by a single commissioner acting as duty officer.

Schapiro is creating the opportunity for individual enforcement agents to create their own feifdoms, for harrasment, shakedowns and who knows what kind of corrupton. SEC harrasment of corporate America is going to increase dramatically under Schapiro. Of course, this will do nothing to stop the real bad guys of Wall Street becasue they are way, way ahead of Schapiro and SEC enforcement agents. They always have been. No further proof of this fact is needed then the news that the former head of the New York branch of the SEC invested his mother's money with Bernie Madoff.

From Clueless Cox to Something Else Schapiro: Meet the Future SEC Chairman

Christopher Cox may in retrospect look like an Aristotelian fountain of wisdom, compared to Obama's choice of Mary Schapiro as the new SEC chairman. Word is out that President-elect Obama will name her tomorrow as his choice to become the next SEC chairman.

Schapiro serves as CEO of the Financial Industry Regulatory Authority, created in 2007 through the consolidation of the National Association of Securities Dealers ("NASD") and the member regulation, enforcement and arbitration functions of the NYSE. She previously served as Chairman and CEO of the NASD, as Chairman of the Commodity Futures Trading Commission and as a Commissioner on the Securities and Exchange Commission. She is currently a director of Kraft Foods Inc.

Her stint at the CFTC during the Clinton administration began while the glaring lights were still on Hillary Clinton over her amazing first time futures trading success of turning $1,000 into $100,000.

Schapiro's philosophy on regulation appears to be that the big boys have different rules that they must play by then up and comers. In a speech in October 2007 while CEO of FINRA, she said:

FINRA regulates Goldman Sachs, which had revenues last year of $29 billion, right along side the over 2,400 firms that brought in less than a million dollars...We simply can't ignore the diverse nature of these firms.

It's important that, without compromising investor protection, FINRA distinguish between the different capacities and capabilities of these firms through its rulemaking and examination processes.

Hmmm. I wonder if that is why FINRA didn't catch Bernie Madoff either, since FINRA was also a watchdog of Madoff operations? He must have come under the diverse examination process.

But, things get more amazing. She posed for the cover of Equities magazine. To say Equities reports on some of the edgier parts of Wall Street is to put things mildly. There can not be a better example of clueless, than to pose and be interviewed by Equities, when you are a regulator. I'll let Gary Weiss take it from here since he wrote up this numskull event as it occurred last year:

I practically fainted when I opened up my mail today. No, not a bill or a threatening letter, but a copy of something called "Equities" magazine with the smiling face on the cover of Mary Schapiro, head of the Financial Industry Regulatory Authority (the merged regulatory branches of NASD and the New York Stock Exchange).

What amazed me was not just that Schapiro would give credence to a magazine with a history of featuring shameless penny stock hucksters, but that she gave a ringing endorsement to the magazine.

A lengthy Q&A with Schapiro begins as follows:

Equities: Mary, thank you for taking the time to speak to the readers of EQUITIES. Do you read the magazine?

Schapiro: Absolutely. It's fantastic! You can quote me.

I wonder what Schapiro finds so fantastic about the magazine. It regularly pushes some of the cruddiest stocks known the mankind, and is noted for giving publicity to stock promoters like Ray Dirks.

In fact, right next to Mary Schapiro on the cover is a promo of a softball article on Dian Griesel of Investor Relations Group, which specializes in promoting OTC Bulletin Board and other flyspeck companies. In Wall Street Versus America I describe how Griesel issued a press release proclaiming a lawsuit against citizen activist Floyd Schneider, without actually filing the suit.

Perhaps Schapiro thought the article on Griesel was "fantastic"? Or the microcap promotion articles peppered through the rest of the magazine?

I'd say that Mary Schapiro needs to think a bit more carefully before she gives a ringing endorsement to an investment tome.

Somewhere in Manhattan, the insiders are celebrating tonight.

A Stronger SEC Is Not the Answer

It's starting. The SEC's abysmal failure, at detecting the $50 billion Bernard Madoff Ponzi scheme, is drawing out critics who are calling for new stronger leadership at the SEC.

"The agency can't help but look bad," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does raise questions ... about the quality of the enforcement division generally. It's obviously something that the new (Obama) administration has to get to the bottom of."

"A few days ago we suggested that investors monitor potential changes at the SEC. We continue to believe that this would be important to the long-term health of the market," blogs Jeffrey A. Miller PhD and CEO of NewArc Investment.

What these critics don't understand is that, while the SEC leadership under Christopher Cox has been laughable, it is the nature of the SEC itself that is the problem. It is a government agency that, like all governmant agencies, reacts to political pressures. That is why they announced their absurd financial crisis fighting changes in short-sale rules that even Cox later admitted was only a publicity stunt.

It is why they are going after Mark Cuban on bizarre insider trading charges.

So far the SEC's only defense to missing the $50 billion fraud which Boston money manager and fraud investigator, Harry Markopolos, attempted to bring to their attention for 9 years is that they get lots of such tips.

That's the point, if you are average Joe, or even money manger, fraud investigator Harry Markopolos, the SEC is not going to respond to you. They respond to power politics. They are not there to protect average investors. They are there to design new rules that give the edge to politically connected insiders. And it won't change with new leadership. Ha!

Obama's man in charge of finding a new SEC chairman is Gary Gensler. Gensler spent 18 years at Goldman Sachs and did two stints at the Treasury. Nuff said.

If anything, Obama will do nothing but replace an incompetent political hack, with a competent political hack who will make the game even more rigged for the Goldman Sachs' push to control the world.

The SEC needs to be abolished. They are not protecting investors, they are protecting Goldman Sachs from competition.

The private sector can take care of policing the investment world. Indeed, the Madoff ponzi scheme has taught investors, all investors, valuable lessons: 1. The SEC won't catch the bad guys. 2. Some in the private sector will figure out the scam (at least enough of it to warn you to stay away) and 3. If you are not a professional, you need to check out investment opportunities with at least one or two outside professionals who have no conflicts of interest and can do an independent evaluation for you.

For the record, here's a list of some in the private sector who smelled enough of scam to stay away from Bernard Madoff and warn others that they should stay away:

Harry Markopolos

Aksia LLC

MAR/Hedge Magazine

Barron's

Doug Kass

Societe Generale

Salomon Konig

It's Time To Abolish the SEC

This is all you need to know about the Securities and Exchange Commission. Bernard Madoff put out a shingle as an investment advisor, instead of investing the money that was placed with him, he ran a huge Ponzi scheme. How big? $50 billion in losses.

As the multi-decade scam went on, WSJ is reporting that a complete outsider, a Boston money manager with no audit power, no subpoena power, nothing, Harry Markopolos, smelled a rat. For the last 10 years, he has been writing and otherwise contacting the SEC asking them to investigate Madoff. He told the SEC that Madoff couldn't possibly be making the profits he was reporting. Let me repeat, he has been contacting the SEC for 10 years begging them to investigate Madoff. Nothing happened.

Further, CNBC's Charles Gasparino reports that some hedge fund advisers were advising clients to stay away from investing with Madoff. The signs were there.

The SEC was clueless.

How did the SEC finally break the case,and bring charges yesterday? Madoff's sons walked into the offices of the SEC and said, "Our father just told us he has been running a Ponzi scheme and that he ripped off $50 billion."

Bottom line, the SEC is a political institution, it doesn't react to a Boston money manager who might be on to something, it reacts to politics.

It will run a show trial involving Mark Cuban.

It will pose as a battler of the financial crisis.

A complaint from a Harry Markopolos? Who the hell is Harry Markopolos? Put that at the bottom of the inbox. Hey, who knows, they might have gotten to it in year 11.

The only way you would have been protected from Madoff, was not from looking at SEC filings Madoff made (Oh yeah, he filed with the SEC and just made stuff up.), but by turning to wizened traders like Markopolos, who know what kind of profits can and can't be made, and what the explanation for those "profits" could really be.

The SEC won't even bust Social Security for the Ponzi scheme that it is.

You just need to go to the internet to find out the truth about SS.

Chris Cox and the SEC are jokes. The SEC should be closed down today.

The Coming Bizarre Show Trial of Mark Cuban

"It's about cheap publicity," one of Mark Cuban's lawyers, Stephen Best, said to me over the phone as I tried to grasp the bizarre insider trading charges against Cuban.

"The SEC is suffering from bad publicity because of the way the markets have crumbled around them," said Best. "Mr. Cuban is high profile and they want to move the focus away from the way they have handled the crashing stock market."

I wanted to know who at the SEC he thought might be behind this. "Do you think SEC Commissioner Chris Cox is involved in this?", I asked. "Yes," Best answered without hesitation. (Note: Cox recused himself from the vote on whether Cuban should be charged because of a bizarre series of emails between Cuban and and Fort Worth-based senior SEC trial lawyer, Jeffrey Norris, who called Cuban unpatriotic. “Either you are really an anti-American ideologue or your allegiance to making money is significantly greater than your dedication to your country,” wrote Norris. Cox was cc'd on some of the emails.)

Most people's view of justice in America is that of prosecutors and regulators going after bad guys, after carefully weighing evidence. But some prosecutors indeed have what Cuban was quoted as calling "win-at-any-cost ambitions". And their eyes can get especially big when a high profile name is involved. It's great for the resume when you move on to the private sector and there's nothing like going back home to Thanksgiving dinner when you're the guy at the family table going after the big name.

Two of the SEC lawyers involved in the Cuban case seem to be win at any cost, bragging rights around the Turkey Day dining table, types. Best pointed out to me that one SEC attorney on Cuban's butt is Robert Kaplan. Kaplan was recently under Congressional investigation for possible misconduct. Another SEC attorney involved with the case, Scott Friestad, recently lost a case in North Carolina and the judge found it appropriate to rebuke Friestad's tactics during the trial.

Best promises their will be bombshells coming out about the SEC's conduct in the Cuban case. He points out that the SEC has done a number of things from minor to major that do not follow general SEC policy. On the minor end, the SEC generally calls a client's lawyers when a client is about to be charged by the SEC. The SEC did not extend this standard courtesy to Cuban's lawyers. No calls were made to them by the SEC before the charges were made public.

On a more serious note, the SEC in addition to investigating Cuban was investigating Mamma.com. Mamma.com is the company in which Cuban sold stock that prompted the SEC charges. Best points out a very crucial timeline that is critical to the charges against Cuban. There is no insider trading charges against Cuban unless the president of Mamma.com testifies that he told Cuban he was about to get inside information and that Cuban agreed not to sell any stock.

So Mamma.com is under investigation and the SEC closes the case against Mamma.com just days before the then CEO of Mamma.com, Guy Faure, is to be questioned by the SEC about what was or was not said to and by Cuban. Best certainly is implying this timeline suggests that someone got to the SEC and let them know Faure would deliver Cuban on a platter, if Mamma.com was taken off the platter.

Now to the charge itself.

There are many sound economists who believe that there is nothing at all wrong with insider trading, see here and here. But the charges against Cuban are truly taking the concept of insider trading to a new bizarre outlier that could literally give CEO's the power to halt the selling of any major stockholder at anytime. With CEO's pulling down multi-million dollar salaries that are coming under attack,it shows just how desperate the SEC is to win some kind of case, somewhere against some "name" that they will literally create a tool under which CEO's will be able to freeze shareholders from selling stock whenever they want.

Here's what I mean. The charge against Cuban is that he received a call from Faure when Faure was president of Mamma.com and that Faure said to Cuban that he was about to give him some inside information. The inside information being that Mamma.com was about to sell more stock to raise more money.

Now there is nothing in writing about this, just a "he said , she said" between Cuban and Faure. If Faure really wanted to convey inside information to Cuban, he could have very easily have documented the disclosure by having Cuban sign a standard non-disclosure document. Faure did not do this.

In truth, the way it likely went down is that Faure was desperate for cash and decided to contact big bucks Cuban to see if he would invest more money. Upon hearing Faure's plan, Cuban must have thought this guy is a f#*king idiot and sold his stock. If it went down this way, there is no insider trading case.

There is only a case if the desperate Faure would have spent time, before asking Cuban for money, spouting off legalese about insider trading. How likely is that?

This is where the timeline Best emphasises comes into play. Who knows what the SEC found out about Mamma.com and Faure when they conducted their investigation of Mamma.com or who knows what Faure feared they might discover? So at this point you have an SEC looking for some good publicity and a possibly desperate Faure. If they charge Faure with anything, who is going to pay attention? But if Faure plays ball and suddenly "remembers" he turned into a legal gusher warning Cuban of all sorts of things during their phone call and that he then "remembers" that Cuban acknowledged Faure's gusher of legalese, then the SEC has Cuban as its target and you get regular national news coverage and as a bonus you get coverage on ESPN.

That's the case and it is hard to see how the facts in this case go anywhere near "beyond a reasonable doubt". It will be a major surprise if the SEC wins this case. But let's say they do somehow win. What they will have done is create a tool for fat cat CEO's to stop major shareholders from selling their stock. It will become known as a "Cuban situation."

Suppose a CEO fears a major shareholder may be selling stock or fears he might start selling stock, if the SEC wins its case against Cuban, then all the CEO has to do is call the shareholder up and tell him he is thinking of selling more stock in the company. This will freeze that shareholder from selling stock, as his stockbroker and his lawyer will remind him of what happened to Cuban, who received such information by phone.

The SEC, of late, has been marked by very little in the way of deep thinking. The latest charge against Cuban is more along this line. If the SEC succeeds in this case, it will do nothing but create another tool for fat cat CEOs to use against common shareholders.

UPDATE: Steve Best, one of Cuban's lawyer, writes: "The legal standard of proof in a civil case is beyond a preponderance of the evidence-- you cited the criminal standard."

SEC Bites A Big Dog

Does SEC Chairman Chris Cox have another public relations nightmare on his hands?

The billionaire owner of the Dallas Mavericks, Mark Cuban, has been charged with insider trading by the SEC. Note to SEC, Mark Cuban is not Martha Stewart.

The SEC may have thought they had another lay up on their hands, instead they appear to be going up against someone that is not afraid to rip at the core of the SEC and its enforcement actions. He is a fighter and has the billions to back up his fight.

The tough Mark "I go for the throat when you mess with me" Cuban is already in prime form. There are some very interesting allegations already developing out of a case that has been public news for less than 24 hours. But the allegations are not from the SEC, they are from Mark Cuban and his lawyers.

On his web site Cuban states (my emphasis), “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

Cuban's lawyer, Ralph C. Ferrara of Dewey & LeBoeuf LLP, stated (My emphasis), "This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission’s claims are infected by the misconduct of the staff of its Enforcement Division."

Another Cuban lawyer, Christopher Clark, told FOX news that the SEC's text of a phone call is completely wrong. "If there is a tape of them everybody can play it and it's not going to say anything like what the SEC quoted." This sounds to me like Clark is charging the SEC with lying.

Clark went on to make an even bigger charge:

People who criticize the SEC have a much higher chance of having an enforcement action brought against them and we're going to demonstrate that. Very persuasively. In the right forum.

Cuban runs a site called BailoutSleuth.com which tracks what happens with bailout money and monitors any questionable behavior by those who are receiving and handing it out.

This case has the potential to rip the SEC to smithereens. Get your popcorn ready.

ALERT: Plunge Protection Team Press Briefing Tuesday Morning

The following is a Treasury Press Release on tomorrow's press biefing:

Secretary Henry M. Paulson, Jr., Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair will be joined by the other members of the President's Working Group on Financial Markets to make statements in the Treasury Department Cash Room at 8:30 a.m. (EDT) on October 14, 2008 on a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets. Following the on-camera statement Treasury officials will conduct an off-camera, background briefing in the same room.

Who
Treasury Secretary Henry M. Paulson, Jr.
Federal Reserve Chairman Ben Bernanke
FDIC Chairman Sheila C. Bair
SEC Chairman Christopher Cox
CFTC Chairman Walter Lukken
OCC Comptroller John Dugan
OTS Director John M. Reich

In Defense Of 'Rumor' Mongering, Short Sellers

By Robert Wenzel

Investment banking stocks are crashing and regulators are all in a huff. They are aggressively harassing short-sellers.

SEC Chairman Chris Cox previously announced a ban on naked short selling, even though regulations already existed that banned that specific type of short sale. On Thursday, Cox proposed requiring hedge funds to post daily the short positions they have in stocks.

New York State Attorney General Andrew Cuomo, tried to one-up Cox, and has started a "wide-ranging investigation" of his own into short selling and has called for the SEC to put a " freeze on short selling of financial stocks on a temporary basis."

Republican presidential candidate John McCain, who apparently isn't satisfied with calling for war against Iran, Russia and China, wants to see battle also joined against short sellers. In fact on Thursday, he called for the firing of the wonderfully incompetent and ineffective SEC chairman Christopher Cox.

So what gives? Are short-sellers the evil monsters of Wall Street?

No there are not and, as Walter Block might say, they are, in fact, heroes.

To understand what is going on, one must realize that the structure of the now collapsing financial industry was built upon the money pumping ways of Alan Greenspan and the early Ben Bernanke. It was easy for the macho, testosterone fueled big swinging dick investment bankers of Wall Street to borrow the money that Greenspan and Bernake printed at the below normal market rates.

Since the Fed operates on the short term end of the interest rate spectrum, that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game. The more billions you borrowed, the more you earned. And the Fed certainly accommodated the Wall Street players. Even early this year, three month annualized M2 money growth was moving along at double digit rates. Indeed, in March, three month annualized money growth was 12.5% Then something peculiar happened a few months ago. Either Ben Bernanke became a closet Austrian economist (The only ones who really understand business cycle theory, and who would call for a complete end to money supply manipulation) or he really didn't understand mainstream economic monetary theory well enough to realize he was dramatically slowing the money supply. (Note: I'm not betting he is a closet Austrian. My bet is he is incompetent and bumbled his way into slowing money growth.) As of last Thursday, three month annualized M2 money growth was only 1.5%.

Now Wall Street investment bankers need fresh new money all the time, to keep the long term assets they bought with short term money, financed. With less new money being created, it was a case of musical monetary chairs. There were more investment bankers needing "financing chairs", then actual financing out there. Lehman was the first to find itself short of funds.With hedge funds being run by very aggressive, very savvy traders, it did not take them long to realize that there was a shortage of money to finance the current financial structure. Always seeking profit from whatever the financial situation, the hedgies poured over financial statements to see who was the most vulnerable investment bank. Who leveraged the most? and Who would never be able to find the money to support the previous financial structure? were the questions they asked. The name Bear Stearns popped up. And thus the hedgies shorted whatever Bear Stearns stock they could find. Once loaded up, they, of course, told the world what a financial wreck Bear Stearns was--and thus became labeled rumor mongers, In fact, they were speaking truth to Wall Street, not rumors.

Once Bear Stearns was wiped out, they moved on to identify and load up short positions in others who played in the Federal Reserve induced high leverage game. Next came Freddie Mac and Fannie Mae, then Lehman Brothers and then AIG. So what was the role of the short-selling hedge funds?

They scoured the balance sheets to discover who was overly leveraged--so we wouldn't have to. They leaked to the financial press who was in trouble--so we could get the news with our morning paper and they speeded up the financial crisis so that it occurred in just weeks instead of months or years. As a result of their aggressive due diligence, they pointed out a mis-match and shortage of funds that would otherwise have taken months, if not years to become clear and unwound. The economic mess would have dragged on and on. They are, indeed, heroes. And as if in an Ayn Rand novel, they will be harassed and investigated by the evil keepers of the ugly, manipulative, inflation created, status quo.

Christopher Cox, Andrew Cuomo and John McCain will pander to the unthinking masses, satisfy their status quo sponsors on Wall Street, and harass, interrogate, regulate and attempt to destroy the true heroes of this financial drama.

But the drama doesn't end here. There may be a kind of Benedict Arnold in cahoots with the hedge funds.

Very little on Wall Street is exactly as it seems. It is so even with our hedge fund heroes, since I suspect that Treasury Secretary Paulson may have played some type of role in the early short-selling escapades. While our hedge fund/short selling operators may have been involved in a noble cause, the role of Treasury Secretary Paulson may have been to use these short-sellers as his tool to wipe-out competitors, so that the Fed money printing game will be the exclusive domain of Paulson's old firm Goldman Sachs. It is noteworthy than Paulson's lapdog, Ben Bernanke, may have accelerated the money printing presses again at this time, just when it appears that Goldman Sachs may be the only major independent investment bank left standing--and just before the hedgies started to take a good hard look to see why Goldman shouldn't end up in the same trash bin as its competitors.

It is very important to keep in mind what Robert Novak reported about, one, Hank Paulson: "Hank is for Hank." And it is also important to keep in mind, as the inevitable hearings and mud slinging begins, that hedge fund short sellers are as much heroes warning of  dangerous balance sheets as was Paul Revere in his midnight ride and warnings.

Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.

McCain Would Fire SEC Chair Cox

Republican presidential candidate John McCain, campaigning in Iowa Thursday, is expected to call for the firing of Securities and Exchange Commission (SEC) Chairman Chris Cox.

In his prepared remarks, Sen. McCain (Ariz.), without naming Cox, said the chairman has “betrayed the public’s trust.”

“If I were president today, I would fire him,” McCain will say, according to his prepared remarks.

This is swatting a gnat while a tiger and lion are headed towards you. McCain doesn't have a clue.

This crisis is a Paulson and his lapdog, Bernanke, operation.

Except for his nonsense about short-sellers, Cox has been incompetently benign during this entire crisis. Incompetently benign in a bureaucrat is not a bad thing.

-Robert Wenzel

SEC Statement On Emergency Meeting

FOR IMMEDIATE RELEASE
2008-196

Washington, D.C., Sept. 12, 2008 — The U.S. Securities and Exchange Commission tonight issued the following statement:

Senior representatives of major financial institutions are meeting at the Federal Reserve Bank of New York Friday evening to discuss recent market conditions. Also participating in the meeting are Treasury Secretary Henry M. Paulson, Jr., U.S. Securities and Exchange Commission Chairman Christopher Cox, and Federal Reserve Bank of New York President Timothy F. Geithner.

-EPJ Original Documents

NY Fed Holding Emergency Meeting On Lehman's Future

From WSJ:

In attendance are New York Fed President Timothy Geithner, Mr. Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp., among others.

-EPJ Newsdesk

The SEC 'Naked' Short Selling Order Turned Out To Be A Joke

NYT's Floyd Norris publishes some interesting data from Sungard Astec about stock borrowing actiivity for short sales during the period of the SEC order for 19 stocks with regard to 'naked' short selling.

The data indicates that the strongest reaction in the markets to the SEC order came from market makers, who borrowed stock they didn't need to, because of the poor wording of the order.

Wrote Norris:

What is really interesting is that most of these shares were not hard to borrow before the announcement came. In other words, there was not much indication that these stocks were subject to abusive shorting — or a lot of shorting of any kind — before the commission acted. Had the S.E.C. put out a clear rule when it first acted, some of the additional borrowing might not have happened.

Norris concluded:

But the evidence that these stocks were not hard to borrow before the order was announced makes it seem more likely that the S.E.C. move did not have a lot to do with real worries about the then-current state of the market. Instead, it looks like an effort to do something, and to be part of a government effort to support the major financial companies and to send the signal that the government would not allow them to fail. If that was the goal, it has yet to show much success.

In short, as we sad from day one, a useless order, PR stunt.

Not A Chance Of A Serious SEC Investigation of the Bear Stearns Collapse

As I have written before, an insider at the CBOE told me that the government killed the CBOE's involvement in investigating who bought put options on airline stocks just prior to 9-11. Records were destroyed.

If the SEC didn't have the balls to step up to the plate and do a legitimate investigation of an attack on America, they sure as hell are not going to stick their necks out trying to take down the Wall Street establishment.

Bloomberg is featuring a story today on the semi-suspicious trading in Bear Stearns put options, and supposed investigations:

On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million...``Even if I were the most bearish man on earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration,'' said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. ``It's not even on the page of rational behavior, unless you know something.''...

During the next four days, New York-based Bear Stearns unraveled in the swiftest investment-banking failure in Wall Street history. Speculation about a cash shortage proved self- fulfilling, causing customers and lenders to demand their money back. Bear Stearns's stock sank 47 percent to $30 on Friday, March 14. That's when the Fed moved to stave off a panic by helping the U.S. Treasury arrange JPMorgan Chase & Co.'s purchase of the company for $2 a share, a price unimaginable to the firm's 14,000 employees and more than 500 shareholders.

In the aftermath, Bear Stearns Chief Executive Officer Alan Schwartz told Congress that the firm was toppled by rumor- mongering and abusive trading. Regulators have begun peeling back trading records, hunting for suspects...

Evidence of any scheme to bring down Bear Stearns is most likely buried in options data...

But even further, there was an important meeting at the Fed on March 11, where Wall Street's top players were represented, except for Bear Stearns.The s#@*t really hit the fan for Bear after that meeting broke.

Eric Salzman lists the participants at that meeting and suggests questions that should be asked of them:

[S]ubpoena the following individuals and have them testify what the subject of their meeting in New York Citiy was on March 11, 2008

Ben Bernanke - Federal Reserve
Tim Geithner - NY Fed
Lloyd Blankein - Goldman Sachs
Dick Fuld - Lehman Brothers
James Gorman - Morgan Stanley
John Thain - Merrill Lynch
Robert Rubin - Citigroup
Steve Schwarzman - Blackstone
Ken Griffin - Citadel

Cox should directly ask each of these individuals;

Was Bear Stearns liquidity situation discussed?
If so, what was revealed?
If so, what action did each participants take, with regard to their relationship with Bear Stearns, immediately following the meeting?

Further, it should be asked, why wasn't Bear Stearns at the meeting?

But take a look at that list again: Ben Bernanke, Tim Geithner, Lloyd Blankein and Robert Rubin are on it, and you can be sure Hank Paulson was somewhere lurking in the background. That group against the SEC's Chris Cox. It's like Russia against South Ossetia, and Cox is South Ossetia.

Maybe, Cox nails some fall guy, but that's not even likely, maybe we will hear it was just a hedged position some trader put on to protect his other positions.

The Bear Stearns takedown was done at top, top levels. A hedge fund couldn't possibly have done it on its own. Stay tuned

The Theatre of the Absurd: SEC Extends Short-Selling Emergency Order

SEC Chairman Chris Cox is on record as saying that none of the 19 stocks contained on the list of stocks singled out for protection against naked short-selling, through an emergency order of the SEC, were actually the victim of naked short sellers. Further, regs against naked short-selling, before the new Chris Cox order, were already on the books.

So what to do with this new order that is redundant and applies to stocks that are not impacted by naked short-sellers? Why extend the absurd order, of course.

The Securities and Exchange Commission voted to extend the temporary rules it put in place to restrict the naked short-selling, that doesn't exist, on the 19 stocks.

The SEC commissioners didn't take additional steps to expand the number of stocks affected by the rules or make them permanent, which some have called for.

The temporary rules were set to expire Tuesday, and the SEC extended the order until Aug. 12.

Plunge Protection Team Disses Senate Bill Harassing Speculators

The Plunge Protection Team gets one right:

The members of the President’s Working Group on Financial Markets (aka, The Plunge Protection Team) fired off a letter denouncing a Senate measure designed to curb speculation in the oil futures markets.

The working group — which consists of Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter Lukken — called the measure a bad idea.

The four noted in their letter that the bill would “significantly harm U.S. energy markets without evidence that it would lower crude oil prices.”

What’s more, they said, the bill’s “unprecedented restrictions on market participation could reduce market liquidity, hinder the price discovery process and limit the ability of market participants to manage and transfer risk.”

Cramer versus the SEC: Cramer Makes Sense

Even CNBC's Mad Money host Jim cramer gets how nutty yesterday's announcement about the change in naked short selling rules is.

Securities and Exchange Commission Chairman Christopher Cox doesn't know his own rule book, Cramer said during Wednesday's Stop Trading!, according to Tom Brennan at CNBC.

According to an SEC regulatory manual Cramer held in his hand during Stop Trading!, "Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security price is illegal." The report was dated April 11, 2005.

"I don't know what these emergency powers are," Cramer said of Cox's special announcement, "nor do you have to stop [enforcing the naked short selling rule] 30 days from now."

"I think Commissioner Cox should go back over his Division of Market Regulation bulletin," Cramer continued, "and realize he's had this power to stop this all the time." But the SEC has "not cared the least bit about this."

And he capped it off with this very insightful observation:

The regulators, frankly, are very naive about what really goes on.

WSJ Frontpage Coverage of Nothing

Given the near useless changes in naked short-selling rules announced by SEC Chairman Chris Cox, it is quite remarkable to see this front page headline from WSJ:

SEC Moves to Curb Short-Selling

The SEC didn't move to curb short-selling. As we explained, yesterday, it made a small technical change to its naked short-selling rules, which should have about as much impact on market activity as the impact of my eating a donut would have on global warming.

Apparently, WSJ staffers are taking to heart Rupert Murdoch's order to come up with headlines that sell newspapers, damn the truth.

Then, of course, Chris Cox must be a good source for WSJ staffers, since the ridiculousness doesn't stop with the headline. Get a load of these breathless WSJ lead paragraphs for an essentially useless change in naked short selling rules:

The Securities and Exchange Commission took unprecedented action against short sellers on Tuesday, acting on a widespread concern that negative bets against bank and brokerage stocks might be exacerbating the financial sector's woes.

In a dramatic emergency order, the SEC said it would immediately move to curb improper short selling in the stocks of struggling mortgage giants Fannie Mae and Freddie Mac, as well as those of 17 financial firms, including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Merrill Lynch & Co...

The actions represent one of the most extensive attempts by a government agency in recent years to control short selling.

Is WSJ serious? "Dramatic emergency order"? Useless emergency order is more like t.

Your SEC Chairman at Work

Christopher Cox, Securities and Exchange Commission chairman, told legislators today that the agency would issue an emergency rule to stop so-called “naked” short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market, according to FT.

This is remarkable news, since naked short selling is already illegal. With the minor exception that the Regs allow for limited naked short selling by market makers. Here are the 2005 technicals from the SEC on the banning of 'naked' short sales.

From the SEC, Key Points About Regulation SHO:

Regulation SHO

Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. Some of the goals of Regulation SHO include:

Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.

Locate Requirement: Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.

This "locate" must be made and documented prior to effecting the short sale...

Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. . ....

Second, there is no indication at all that this crisis in anyway was caused by naked short sellers, or short sellers with their clothes on, for that matter.

Bottom line, Cox is a poseur.


UPDATE: The SEC has issued a Press Release saying that it has "enhanced investor protections against naked short selling." It includes this somewhat deceiving statement from Chairman Cox, which is probably where the wire services picked up the idea that Cox says he was going to ban naked short sellng. It doesn't say that, but it comes mighty close, and certainly implies a much bigger step than the SEC actually took:

"The SEC's mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been," said SEC Chairman Christopher Cox. "Today's Commission action aims to stop unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets."

The difference between the old rules and the new ones. With the old ones:

Regulation SHO...requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.

The new order says:

The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.

Basically, the SEC is turning brokerage firms into fast food joints. Pay before you eat (Borrow the stock before the order goes in.), as opposed to paying after you sit down and eat (Borrow the stock after you place your order). Not a big difference, since brokers almost always check to see that there is stock to borrow.

Further, you always still had to pay, i.e. deliver borrowed stock, and naked short-selling to 'manipulate' a stock was always illegal.

Oh yeah, this is really the clincher that would have stopped the mortgage crisis, the Bear Stearns crisis,the Freddie and Fannie crisis, Global Warming and the Madonna/Alex Rodriguez Crisis. I'm real glad Cox thought of it. I never would have.