If you want to know how Wall Street works - this article is for you!
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle
Excerpts -
Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.
What really happened to Bear and Lehman is that an economic drought temporarily left the hyenas without any more middle-class victims — and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country. And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked — and how completely even the government regulators who are supposed to protect us have given up trying to stop it.
It's important to point out that not only is normal short-selling completely legal, it can also be socially beneficial. By incentivizing Wall Street players to sniff out inefficient or corrupt companies and bet against them, short-selling acts as a sort of policing system; legal short-sellers have been instrumental in helping expose firms like Enron and WorldCom. The problem is, the new paperless system instituted by the DTC opened up a giant loophole for those eager to game the market. Under the old system, would-be short-sellers had to physically borrow actual paper shares before they could execute a short sale. In other words, you had to actually have stock before you could sell it. But under the new system, a short-seller only had to make a good-faith effort to "locate" the stock he wanted to borrow, which usually amounts to little more than a conversation with a broker:
Evil Hedge Fund: I want to short IBM. Do you have a million shares I can borrow?
Corrupt Broker [not checking, playing Tetris]: Uh, yeah, whatever. Go ahead and sell.
There was nothing to prevent that broker — let's say he has only a million shares of IBM total — from making the same promise to five different hedge funds. And not only could brokers lend stocks they never had, another loophole in the system allowed hedge funds to sell those stocks and deliver a kind of IOU instead of the actual share to the buyer. When a share of stock is sold but never delivered, it's called a "fail" or a "fail to deliver" — and there was no law or regulation in place that prevented it. It's exactly what it sounds like: a loophole legalizing the counterfeiting of stock. In place of real stock, the system could become infected with "fails" — phantom IOU shares — instead of real assets.
If you own stock that pays a dividend, you can even look at your dividend check to see if your shares are real. If you see a line that says "PIL" — meaning "Payment in Lieu" of dividends — your shares were never actually delivered to you when you bought the stock. The mere fact that you're even getting this money is evidence of the crime: This counterfeiting scheme is so profitable for the hedge funds, banks and brokers involved that they are willing to pay "dividends" for shares that do not exist. "They're making the payments without complaint," says Susanne Trimbath, an economist who worked at the Depository Trust Company. "So they're making the money somewhere else."
Trimbath was one of the first people to notice the problem. In 1993, she was approached by a group of corporate transfer agents who had a complaint. Transfer agents are the people who keep track of who owns shares in corporations, for the purposes of voting in corporate elections. "What the transfer agents saw, when corporate votes came up, was that they were getting more votes than there were shares," says Trimbath. In other words, transfer agents representing a corporation that had, say, 1 million shares outstanding would report a vote on new board members in which 1.3 million votes were cast — a seeming impossibility.
Analyzing the problem, Trimbath came to an ugly conclusion: The fact that short-sellers do not have to deliver their shares made it possible for two people at once to think they own a stock. Evil Hedge Fund X borrows 100 shares from Unwitting Schmuck A, and sells them to Unwitting Schmuck B, who never actually receives that stock: In this scenario, both Schmucks will appear to have full voting rights. "There's no accounting for share ownership around short sales," Trimbath says. "And because of that, there are multiple owners assigned to one share."
Trimbath's observation would prove prophetic. In 2005, a trade group called the Securities Transfer Association analyzed 341 shareholder votes taken that year — and found evidence of over-voting in every single one. Experts in the field complain that the system makes corporate-election fraud a comically simple thing to achieve: In a process known as "empty voting," anyone can influence any corporate election simply by borrowing great masses of shares shortly before an important merger or board election, exercising their voting rights, then returning the shares right after the vote is over. Hilariously, because you're only borrowing the shares and not buying them, you can effectively "buy" a corporate election for free.
Back in 1993, over-voting might have seemed a mere curiosity, the result not of fraud but of innocent bookkeeping errors. But Trimbath realized the broader implication: Just as the lack of hard rules forcing short-sellers to deliver shares makes it possible for unscrupulous traders to manipulate a corporate vote, it could also enable them to manipulate the price of a stock by selling large quantities of shares they didn't possess. She warned her bosses that this crack in the system made the specter of organized counterfeiting a real possibility.
"I personally went to senior management at DTC in 1993 and presented them with this issue," she recalls. "And their attitude was, 'We spill more than that.'" In other words, the problem represented such a small percentage of the assets handled annually by the DTC — as much as $1.8 quadrillion in any given year, roughly 30 times the GDP of the entire planet — that it wasn't worth worrying about.
It wasn't until 10 years later, when Trimbath had a chance meeting with a lawyer representing a company that had been battered by short-sellers, that she realized someone outside the DTC had seized control of a financial weapon of mass destruction. "It was like someone figured out how to aim and fire the Death Star in Star Wars," she says. What they "figured out," Trimbath realized, was an early version of the naked-shorting scam that would help take down Bear and Lehman.
Take the commodities markets, where most of those betting on the prices of things like oil, wheat and soybeans have no product to actually deliver. "All speculative selling of commodity futures is 'naked' short selling," says Adam White, director of research at White Knight Research and Trading. While buying things that don't actually exist isn't always harmful, it can help fuel speculative manias, like the oil bubble of last summer. "The world consumes 85 million barrels of oil per day, but it's not uncommon to trade 1 billion barrels per day on the various commodities exchanges," says White. "So you've got 12 paper barrels trading for every physical barrel."
The same is true for mortgages. When lenders couldn't find enough dope addicts to lend mansions to, some simply went ahead and started selling the same mortgages over and over to different investors. There are now a growing number of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like chump change," says April Charney, a legal-aid attorney based in Florida. Just like in the stock market, where short-sellers delivered IOUs instead of real shares, traders of mortgage-backed securities sometimes conclude deals by transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note — instead of the actual mortgage. A paper presented at the American Bankruptcy Institute earlier this year reports that up to a third of all notes for mortgage-backed securities may have been "misplaced or lost" — meaning they're backed by IOUs instead of actual mortgages.
How about bonds? "Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts! In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered.
The counterfeit nature of our economy is troubling enough, given that financial power is concentrated in the hands of a few key players — "300 white guys in Manhattan," as a former high-placed executive puts it. But over the course of the past year, that group of insiders has also proved itself brilliantly capable of enlisting the power of the state to help along the process of concentrating economic might — making it less and less likely that the financial markets will ever be policed, since the state is increasingly the captive of these interests.
The nation's largest financial players are able to write the rules for own their businesses and brazenly steal billions under the noses of regulators, and nothing is done about it. A thing so fundamental to civilized society as the integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no longer be protected, not even in a crisis, and a crime as vulgar and conspicuous as counterfeiting can take place on a systematic level for years without being stopped, even after it begins to affect the modern-day equivalents of the Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme for second-rate grifters in Brooklyn has become a major profit center for Wall Street. Our burglar class now rules the national economy.
Here is a link to video demonstrations on how naked short selling works -
http://taibbi.rssoundingboard.com/short-selling-vs-naked-short-selling-an-explanation
A more recent blog post from Matt -
No one mentions here that this is a carrot-and-stick story — the stick being that ordinary people have been robbed of the interest they should be getting in CDs and ordinary bank savings accounts by the various bailout programs and lending guarantees, which have brought the cost of capital down to nothing for the big banks, and punished those people who have been doing the right thing all along by saving. The Fed lends its money to Goldman Sachs and BOFA for free, why does anyone have to pay Grandma a high rate for her CD or her bank savings?
http://taibbi.rssoundingboard.com/good-news-on-wall-street-means%E2%80%A6-what-exactly
News piece from Matt's latest post -
The Securities and Exchange Commission hired a 29-year-old former employee in Goldman Sachs Group Inc.'s business intelligence unit as the first chief operating officer in the agency's enforcement division, according to people familiar with the decision.
http://www.latimes.com/business/la-fi-sec-coo16-2009oct16,0,6370675.story
Money is created by debt. Debt is inherently deflationary - you must pay back the original amount plus interest. The money for interest is never created. The only way the system can survive is to pump more and more debt (money) into the system. The additional debt (money) creates inflation as more money chases relatively same amount of goods. It is mathematically impossible for this method to continue indefinitely.
When the tipping point is reached (i.e. top of the business cycle) and the growth in debt slows or retracts....then debt becomes this big sucking vacuum that sucks all the available money out of the economy to pay back debt. Default is also a result as there is not enough money to go around.
We were at the tipping point in 1994/1995 but Greenspan's Sweeps program, initiated in 1994, kept the ball rolling. The Y2K problem helped as well as the resulting pump in the stock market.
We hit the tipping point again in 2000/2001 but Greenspan lowered interest rates to 45-50 year low (below the rate of inflation) which then caused a massive increase in debt consumption with the resulting high inflation that tripled asset prices in just a couple of years.
We hit the tipping point again in 2007/2008 and the basic premise is the government will spend our way out of it and prolong the game another 4 to 6 years. I don't think that's possible but everyone has an opinion on it.
One fact is clear - not a dollar is printed that isn't created by debt (either government or individual). That debt at some point in time must be paid back and is inherently deflationary.
The dollar vs other currencies is a whole different ballgame. As the world's leader in consumption (25%) if the dollar loses value the prices of goods from the rest of the world increase in price. Without enough money to go around US consumers consume even less. Overcapacity then occurs across the globe and prices fall as a result.
Remember that the US is not alone in the debt game. This is a world wide problem and the last boom was world wide. The resulting economic collapse will also be world wide. Historically these collapses in demand have been utilized to consolidate power and ownership of assets. Those who create the money know the game better than anyone else. Its simply a tool for a far bigger agenda!
A look at the agenda -
What is the purpose of the debt system we have in place today?
IMO it is a tool designed to transfer wealth. Look at the genius design of the system -
You want buy a .25 acre lot for $100k. You go to the bank to borrow the money. They create the money out of nothing (within the rules of course - 10:1 ratio....so with $10k of another person's savings they now create your $100k). You take the newly created money and buy the property.
The bank will either get the money back WITH INTEREST or they will foreclose and get the property. Either way they get extra money that they didn't create or a property.....what was their cost to obtain the money or the property?
Now keep in mind that the money for the interest was never created so someone, somewhere, will default and the bank will end up with their property.
With the Sweeps program - sweeping average checking account (demand deposit) balances into a savings account to loan out - we effectively have a zero reserve requirement. Not to be alarmed as other countries like Canada, Japan, UK, etc all have zero requirement...so there's absolutely zero guaranteeing the actual money....but because it is created by debt.....it will all be paid back with interest or the forfeiture of assets....or in other words, the transfer of all wealth to the bankers who created the money out of nothing!
Debt is the pit. In the end chaos will result when people realize how they've been played....gonna be some pitchforks thrown about!