Well, the current state of the global financial markets is
certainly interesting. I mean, you have to be a bit sick in the
head, but if you think about it the right way, it really is
“interesting” — sort of like, oo-wee, look, the
girl in the cute leotard is falling off the tightrope,
there’s no net, and she’s going to go
“splat” when she hits that pavement. How interesting!
And check it out, the circus animals have gone berserk — the
tigers are tearing the trainer into bloody shreds, the elephants
are stampeding, the tent might very well collapse, maybe
we’re doomed, and look at those clowns – they’re
still smiling. How deliciously interesting!
Actually, I take it back — it is not in the least bit
interesting. It is terrifying. Despite early attempts by the
smiling clowns of the nation’s media and regulatory apparatus
to portray the dramatic market collapse of May 6 as mere
happenstance, it is now clear that this unprecedented event was no
“fat finger” accident. It was not a “black
swan” that appeared out of nowhere. And more than likely, it
was not some anomalous but innocent trade that triggered a
run-of-the-mill panic. What it was, exactly, nobody seems able to
say – and that is what makes it all the more scary.
But we can venture some educated guesses, and my best guess is
that this was an orchestrated attack on the stock market – an
attack that shaved 1,000 points off the Dow Jones industrial
average in a few minutes, and caused some stocks worth nearly $50
to drop to a penny in matter of seconds. I have been trying hard,
but I simply cannot imagine any natural confluence of events that
would cause this. I can, however, think of a number of criminal
market manipulators who have caused similar, though less dramatic,
events in the past. And I know that these manipulators would get a
kick out of triggering a full-blown market cataclysm. They
wouldn’t just get a thrill — they would also make a
boatload of money.
At any rate, this much is clear: our financial system is
seriously broken and the nation is vulnerable. If the May 6
“anomaly” was not an attack, there is every reason to
believe that something worse can happen. It can happen because the
Securities and Exchange Commission has done nothing to prevent it
from happening. Despite overwhelming evidence that market
manipulators contributed to the financial turmoil of 2008, not a
single criminal has been apprehended. And not only does the SEC let
the miscreants run loose, but it also stubbornly refuses to close
gaping loopholes that enable market manipulation to occur.
To its immense peril, much of America seems disinclined to
discuss market manipulation. I don’t know if it is indolence,
incuriosity, or simple complacency, but the discourse in this
country stands in stark contrast to the one taking place in Europe,
where politicians and the mass media have declared unequivocally
that the markets are under attack, with consequences that could be
quite dire, to say the least.
According to BaFin, the German financial regulator,
“massive” illegal short selling attacks have led to
excessive price movements that “could endanger the stability
of the entire financial system.” After beholding the drama in
the American markets on May 6, and seeing its own market tumble
precipitously, the German government finally took on the
manipulators, banning naked short selling of stock in its largest
financial institutions and restricting the trading of naked credit
default swaps, which are often deployed in manipulative
attacks.
Not all of the discourse in Europe has been helpful, however.
German Chancellor Angela Merkel declared that “speculators
are our enemies,” confusing law-abiding traders who passively
speculate on price movements with criminal manipulators who
actively seek to inflict harm on the markets. Chancellor Merkel
only made things worse when she said that this is a “battle
of the politicians against the markets” – a
proclamation that reinforced the notion that Europe’s
politicians harbor a disdain for the free market system. Our
enemies are criminals, not market freedoms.
The European response has also been characterized by a certain
degree of ineptitude. Germany had already banned naked short
selling in 2008, and foolishly lifted the ban last January. Having
given the market bullies the green light to attack, Germany’s
politicians now appear like the playground dweebs, panicky and
weak, hurling nothing more than small stones. It is presumed that
the naked short selling and other manipulation will simply move to
exchanges in London, where officialdom seems less inclined to
fight. But Germany’s ban on naked short selling —
though too little, too late — is perfectly sensible.
Which makes the American media coverage all the more
inexplicable. News Corporation's (NYSE:NWS) Wall Street Journal,
which has for many years seemed incapable of even uttering the
words “market manipulation”, reported that the German
ban on naked short selling “sparked uneasiness” and
actually caused markets to fall further. Sparked uneasiness? Only
criminals could possibly be “uneasy” about a policy
designed to prevent a crime. Perhaps some “uneasy”
criminals are members of the hedge fund lobby, whose talking points
tend to find their way into stories published by The Wall Street
Journal.
As for the notion that a ban on naked short selling would cause
markets to lose value – well, we’ve heard something
similar before. It was back in 2008, when the SEC issued an
emergency order banning naked short selling of stock in 19 big
financial companies, only to have the hedge fund lobby (and The
Wall Street Journal) holler that preventing crime would
“reduce liquidity” and put downward pressure on
markets.
This, of course, is precisely the opposite of what happened.
While the emergency order was in place, the stock market surged.
Then, on August 12, 2008, the SEC, for reasons that cannot be
fathomed, lifted its emergency ban, allowing the manipulation to
resume. The stock market duly tanked, and continued to spiral
downwards until September, when market manipulators wiped out a
large swathe of the American financial system.
It is not just me saying this. Respected economists, famous
hedge fund managers, former government officials, and current U.S.
Senators such as Ted Kaufman of Delaware have all studied the
events of 2008, and the consensus is that illegal naked short
selling and other forms of short-side manipulation contributed to
the demise of Bear Stearns, Lehman Brothers, Washington Mutual, and
countless smaller companies. In the months leading up to September
2008, criminal naked short sellers flooded the market with more
than $8 billion worth of phantom stock every day.
As further evidence that The Wall Street Journal just
doesn’t get it, consider that the newspaper reported this
week that “under naked short selling, investors can sell
securities before they have borrowed them. The practice is already
banned in the U.S…” This, unfortunately, is patently
false. Although the SEC took some half-hearted steps to prevent
naked short selling in the aftermath of the 2008 carnage, it did
not ban naked short selling outright — traders are
still permitted to sell shares before they have borrowed
them.
The SEC’s current rules state only that traders have to
deliver stock within three days, or in some cases, six days after
they have sold it. This means that market manipulators can flood
the market with phantom stock for three to six days, inflicting
serious damage on prices. When it comes time to deliver the stock
they have sold, the manipulators buy stock (at the newly damaged
price) on the open market and hand it over. Then they do it all
over again – flooding the market with phantom stock for
another three to six days.
In nearly every case, such naked short selling is designed to
manipulate prices, which is blatantly illegal. But the SEC turns a
blind eye to the manipulation so long as the manipulators deliver
stock before the three or six-day deadline. In fact, the SEC often
turns a blind eye even when the manipulators don’t deliver
the stock. Every day, more than 100 million shares go undelivered
before the anointed deadline, and that is in just one part of the
system monitored by the Depository Trust and Clearing Corporation.
Far more phantom stock is processed ex-clearing, and in other
shadowy regions of the financial system.
The SEC would do well to investigate these shadowy regions in
its attempt to identify the roots of the “freak
accident” that took place on May 6. But, alas, the officials
of that agency have been too busy picking buggers out of their
noses. Ok, not just buggers – they also wrote a 100-plus page
report on their investigation into the “market
events” of May 6, and this report is filled with all sorts of
statistics and enough head-in-the-clouds hypothesizing to bring a
smile to the face of any university economist (or SEC
report-writer) looking for a job at a market manipulating hedge
fund.
What the report does not contain is the names of any culprits,
or any evidence that the SEC is trying to identify specific
culprits. The report does not even contain a plausible explanation
for what happened. If the SEC were charged with writing a report on
the causes of the New Orleans flood, it would provide a hundred
pages telling us how many cubic meters of water there were, how
many molecules of oxygen and hydrogen the water contained, and
plenty of assurances that water is usually good for the health, but
it would forget to mention hurricane Katrina and the broken
levy.
Bottom line: the SEC’s report was designed to make it seem
like the bureaucrats have been busy investigating, when in fact
they have been counting beans and picking buggers out of their
noses. Meanwhile, the madness of the market circus continues, and
we look up at that teetering tent with great trepidation.
____________________
Mark
Mitchell is a reporter for DeepCapture.com .
He previously worked as an editorial page writer for The Wall
Street Journal in Europe, a business correspondent for Time
magazine in Asia, and as an assistant managing editor responsible
for the Columbia Journalism Review’s online critique of
business journalism. He holds an MBA from the Kellogg Graduate
School of Management at Northwestern University. Email:
mitch0033@gmail.com