
Documents Show How Goldman et al Engaged in 'Naked Short Selling' - llambda
http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515
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casca
That naked short selling is allowed is an anachronism coupled with the
lobbying of the self-interested. In the olden days, it was reasonable to give
a time delay to deliver the physical paper that proved ownership. Now
everything is electronic so _could_ be verified instantly. But there's a lot
of money to be made by doing it and the government will covert catastrophic
losses, so it should be expected that everyone does it.

Fortunately the solution is quite simple. Force short sellers to make the
shares available instantly at the time of the short. They could be held in
escrow by the exchange until settlement either way. Go go gadget SEC?

~~~
roel_v
What's the problem with it, really? If A promises B to sell him something and
then A can't deliver for some reason, then B will stand to be compensated by A
for any damages resulting from that. Why would it be special for stock? Of
course there is the risk that massive naked trades will influence the price of
stocks, but that should just be priced in, like any other risk, no? What am I
missing?

~~~
Yrlec
When you're selling something you don't own you're distorting the market's
price discovery mechanisms. In many contexts I think most people would
consider it fraudulent to sell something before you've bought it.

~~~
cynicalkane
I've never got the impression that most economists think short selling
distorts the market's price discovery mechanisms, and it's really dishearting
that the GP is being downvoted for, plainly and clearly, stating what is
economic orthodoxy.

Anyway, the futures market has functioned for centuries with people buying and
selling what they don't own, and the big institutional buyers and sellers
commonly use futures prices as their benchmark prices. It looks like the smart
money isn't too concerned about negative effects on price discovery.

Also, let's not confuse playing by the clearly established rules of the market
with "fraud". Moral objection is no excuse for equivocation.

~~~
Yrlec
Normal short selling doesn't distort price discovery. Khan Academy describes
this quite well: <http://www.youtube.com/watch?v=zAkMhEqWFF0>.

However, with naked short selling it's a different story. When you're short
selling something that you don't own you're in effect making it look like the
supply is bigger than it actually is. This distorts the price discovery
mechanism.

~~~
cynicalkane
Naked short interest is almost certainly too ephermal to distort the price,
but suppose it does due to illusory oversupply.

So what's the objection? If you buy, hold, and sell, you want prices to be
overall lower. Selling low isn't bad if it means you were also buying low. In
short, as Warren Buffet likes to point out, _low prices are good for
investors._

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tedunangst
Article lists a bunch of interesting details, and even is very careful to make
sure the term 'muppets' gets incorporated twice, but doesn't quite connect the
dots and explain just exactly how the naked shorting fucked the muppets. For
example:

    
    
        More damning is an email from a Goldman, Sachs hedge fund client,
        who remarked that when wanting to “short an impossible name and
        fully expecting not to receive it” he would then be “shocked to
        learn that [Goldman’s representative] could get it for us.”
    

I mean, there are all sorts of reasons why naked shorting is bad, but the most
damning thing we can say is "Goldman offered to make their customer happy"?
That's what passes for screwing the 'muppets'?

~~~
waterlesscloud
I'm lost on the mechanics here, but doesn't this mean that any profit on the
part of a short-selling customer was actually coming out of the pockets of GS?

I mean...where does the money to cover the customer's profit on a naked short
come from?

~~~
asmithmd1
Come on, you know it was not coming out of GS pockets. It was a heads I win
tales you lose situation.

Evidently there is some amount of time between when a stock transaction is
booked and when it clears - like a purchase made with a check. They were
essentially writing bad checks by selling stock they didn't own. If the price
of the stock went down, they would actually go out and buy the stock at the
new lower price. If the stock went up they would say, sorry that stock
transaction "failed" - darnedest thing, just happens sometimes.

"Instead, he preferred to just sell stock he didn’t actually possess. That is
what is meant by, “We want to fail them.” Trafaglia was talking about creating
“fails” or “failed trades,” which is what happens when you don’t actually
locate and borrow the stock within the time the law allows for trades to be
settled."

~~~
quantgenius
We want to fail them means we are going to issue a failure to deliver because
it turns out that the stock we thought was available is not. If you fail on a
trade, you don't cancel the trade, a trade is binding, it means you require
the customer to buy the stock back to cover the short sale since the stock
wasn't actually available. Since in this case the Goldman rep had told the
client they could get the stock even though the client thought the stock was
likely to be available, issuing a fail to deliver and requiring the client to
buy the stock back would lead to egg on the face for whoever the client spoke
to at Goldman. The other option for Goldman of course was to buy the stock to
lend the customer and hedge out their risk maybe with a put option or to keep
looking somewhere else for stock to borrow.

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krob
This kind of aggressive shorting makes me start to wonder are these type of
investors the real cancer behind the unemployment growth in this country? You
read more and more about these kind of shenanigans and start to wonder what
would happen if we actually started to lock-up/punish all of these crooks,
what would be the aftermath? Would we see a slow growth in this countries GDP
based on income growth from small & large businesses? Makes you wonder if we
came swinging with large hammers and destroyed their worlds what kind of
foundation would arise out of their financial destruction.

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CUR10US
Should the public have the right to see the full details of "fails"?

The SEC website says disclosing this info would put firms like GS at a
competitive disadvantage.

But someone has to know which sales cleared and which did not.

How can we accurately set a market price for something based on historical
sales data that may in part be false (i.e. sales that were never cleared)?

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rapind
Every time I read about complex wall street scams I get so unreasonably
infuriated. At this point I can't help but unfairly assume that anyone who
works at an investment bank is a complete douche. Just thinking about the
bailouts gets me worked up.

~~~
twoodfin
The bailouts that have largely been paid back? At this point, even if you're a
high income taxpayer, these guys lost very little money that you didn't choose
to give them.

And really, getting your blood boiling is just about all Taibbi is good for.

~~~
rapind
I'm not sure I'd say largely paid back.
<http://projects.propublica.org/bailout/main/summary>

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asynchronous13
Ok, here's the full quote:

    
    
      Last week, in response to an Overstock.com 
      motion to unseal certain documents, the 
      banks' lawyers, apparently accidentally, 
      filed an unredacted version of Overstock's 
      motion as an exhibit in their declaration 
      of opposition to that motion. In doing so, 
      they inadvertently entered into the public 
      record a sort of greatest-hits selection of 
      the very material they've been fighting for 
      years to keep sealed.
    

And now let's parse it:

    
    
      Last week, the banks' lawyers filed an 
      unredacted version of Overstock's motion 
      as an exhibit in their declaration of 
      opposition to that motion. 
    

This means that Overstock's accusation is now public. This says nothing about
the veracity of the accusation.

~~~
Natsu
> This means that Overstock's accusation is now public. This says nothing
> about the veracity of the accusation.

The information about this comes from _internal Goldman emails produced during
discovery_ which admit to the practice. Emails that Goldman has fought in
court to prevent the release of, only to have one of their own lawyers screw
up by filing something not under seal.

EDIT: If you want to quote the actual emails, I've added most of the quotes
from them below:

"Fuck the compliance area – procedures, schmecedures," chirps Peter Melz,
former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill
Pro), when a subordinate worries about the company failing to comply with the
rules governing short sales.

"He should be someone we can work with, especially if he sees that cooperation
results in resources, both data and funding," the lobbyist writes, "while
resistance results in isolation."

“We are NOT borrowing negatives… I have made that clear from the beginning.
Why would we want to borrow them? We want to fail them.”

“Two months ago 107% of the floating was short!”

“We have to be careful not to link locates to fails [because] we have told the
regulators we can’t,” one executive is quoted as saying, in the document.

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CUR10US
Has anyone read the motion (available from an economist.com server)? This what
the Rolling Stone article is based on.

Is the issue whether and how GS makes money from the practice of naked short
selling? Maybe the issue is that feeding the market with info about short
sales that are never actually cleared (but which the market assumes will be
cleared), can destroy the value of a company's stock.

Obviously if you can sell something without ever having to own or deliver it
(is that really a sale?), you can do a lot of selling; and you can exert
considerable influence on the market for a stock.

Maybe what happened here is a company, Overstock, believes they got screwed by
naked short selling.

I need to read the motion to get a better idea of what happened.

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rottyguy
I started reading Patrick Byrne's adventures in Naked Short Selling in the
beginning but have since trailed off (this is like 10 years ago mind you).
Perhaps his infamous "Miscreants Ball" diatribe kicked everything off which
has been ridiculed since day one but begins to be prescient as more and more
news of NSS surfaces. He now funds/participates in
<http://www.deepcapture.com/> which is fun reading from time to time. It's
been quite a ride; I must give him kudos for his stamina but having read his
speech from Pan-Mass <http://www.pmc.org/articles.asp?ArticleID=110> regarding
his life, one can't help but root for the guy.

