Skip to comments.The $10 Billion REFCO Smoking Gun
Posted on 10/23/2005 10:31:49 PM PDT by abletruth
Sunday, October 23, 2005
The $10 Billion REFCO Smoking Gun
The listing for the assets and liabilities of REFCO was just made available, and guess what just happens to be hiding in the liabilities column?
A $10 billion liability, at TODAY's mark to market valuation, called "Securities sold, not yet purchased."
$10,590,379,000 - to be precise.
Securities that have been sold. But they haven't been bought.
Welcome to the wonderful world of naked short selling.
Now, one might say, "hey, wait a minute, but Thompson of the DTCC said it's only a $6 billion per day problem."
And here is REFCO with well over $10 billion of securities it sold, but hasn't delivered.
There are three possible explanations:
1) Mr. Thompson parsed the truth with such dexterity that the number he advanced was incorrect in the extreme.
2) The number Mr. Thompson advanced did not include ex-clearing FTD's. For a complete primer on the implications of this, as well as the terminology, Click Here.
3) Those are all legitimate short sales. Possible. Somehow though my gut says that isn't the case. Legitimate short sales would have shares borrowed prior to selling and would have the borrowed shares shown as an asset, offsetting the sold shares. Based on that reasoning the "sold but not yet purchased" shares should be nil. But why speculate?
I think it's time that we find out, no? Why guess any longer - let's get it out on the table.
Because the way it looks to me, REFCO is only one entity, and has over $10 billion on the books of FTD's. And until I see differently, there's not one bit of data to suggest that most of the $10 billion is legit.
These guys were being sanctioned for being involved in a prior naked short selling scheme, and were known as the go to guys for questionable types desiring greater "flexibility" in their trading. They lied to their auditors, the SEC and the public about their financial condition. Their CEO has been cuffed. I think there's reason to believe that this liability is the smoking gun the industry has been dreading.
What we do know is that the wild eyed conspiracy theories that I have been accused of spinning now look tame. One company appears to have over $10 billion in FTD's. That is no longer a speculation or a conspiracy theory. It is a fact. As in immutable, manifest, and clear.
You heard about this here first. Many months ago. In March, when I was speculating about a catastrophically large level of fails in the system, being covered up by the brokers and the SEC. When I was writing about special purpose entities being used to hide the size of the problem.
And here we are.
The whole BK filing can be viewed with horror here.
I'm not going to go into the 2% of their claimed assets that are intangibles. Or the offsetting assets which collateralize the FTD's. It doesn't really matter. If I'm right. the first time some of those shares are bought in the $10 billion will likely jump to $20 billion, and several large hedge funds will likely vaporize as their cash requirements eclipse their assets.
This is the systemic risk issue I've been warning about.
And this is just REFCO. One company. Only one.
I think we need to know what the composition of the $10 billion actually is.
Because the problem is now one of credibility. Our regulators and the DTCC appear to have been misstating the extent of this crisis to the point where their numbers don't even begin to speak to the real size of the problem. No wonder they hate discussing it. No wonder they grandfathered in all the prior fails. No wonder it justifies secrecy rivaling the Manhattan Project. I'd like to see a list by security of those FTD's. There's no point in keeping them secret anymore. I'd like to see how many NFI shares, and OSTK shares, and TASR shares, and NAVR shares are in there. And I'd like to understand who is violating the rules to the tune of $10 billion just at REFCO. I think that is reasonable. The hackneyed platitudes that the SEC "doesn't want to cause volatility or give away the trading secrets of the participants" are hollow. We don't want speculations and more guesses as to how much of the $10 billion are FTD's. We deserve facts now.
And guess what? We know the trading secret now. You just print shares in the back room to your heart's content. It isn't a secret. And frankly, IT NEVER SHOULD HAVE BEEN.
I'd like to see a Congressional hearing immediately, and I'd further like to hear Shelby share with us why he didn't feel that it was time yet to convene the Senate Banking Committee about the matter, when Bennett was pushing for it.
I'd like to see a special prosecutor cut through the secrecy and BS and tell us how many billions, hundreds of billions, have been stolen from us, and by whom.
And I'd like to see the system do its bare minimum job, and settle the trades.
This is going to be the biggest crisis to hit Wall Street in our generation. Mark my words. Cat's out of the bag now. And the SEC and Wall Street have some explaining to do. And some stock to buy, seems like.
$10 billion with just one company at today's wildly depressed prices. If those are all, or mostly FTD's, Houston, we have a problem.
If you've been wondering why your stocks don't ever seem to go up much, you now have a likely answer. The system has been printing billions and billions and billions of dollars worth of shares and selling them with predatory, unbridled aggression.
The class action attorneys are going to go crazy over this. What do the other, larger brokerages have hiding in the back room? How much bigger can this get? Are we talking trillion dollar real world contingent liability? Can anyone even guess at this point?
Is it really possible that the SEC has allowed Wall Street to steal trillions from us, using counterfeit shares? I don't know about you, but it sure now seems like any money I've lost in the market wasn't so much a function of bad luck or ineptness. It was theft, pure and simple. I was robbed. So were you. And now we see that the robbery isn't in our imaginations.
It's no longer speculation.
It is now a matter of the public record, and it is a national disgrace. Tell us what the $10 billion means. Level with us. It's about time.
And if those are FTD's, it's time to settle the trades, and make the perpetrators start paying their bills.
posted by bob obrien at 4:47 PM 7 comments Thursday, October 20, 2005 An Introduction to Naked Short Selling - Failing To Deliver I've been asked a number of times over the last week to come up with a one-stop shop where interested readers could learn enough about the naked short selling crisis to be dangerous. It isn't an editorial so much as it is the intro to a chapter in the book I am working on, thus it has been moved to a more appropriate place than the Sanity Check op-ed blog.
The piece has been made a permanent part of the NCANS.net site. It can be viewed here.
posted by bob obrien at 12:00 PM 10 comments
I agree with that statement partly. The end of the article and the writer is going off into la-la land, but he does bring up a valid point that I agree with. Naked short selling is a major market manipulation tool and is being heavily abused by the major brokers.
Whats even worse is stock exchanges like Germany's openly allowing this. Call me paranoid, but I've been extremely weary of the potential manipulation of the US markets by foreign investors and entities who cordinate massive shorting schemes of american equities. The individual and small investors are being utterly screwed over.
I get the sense that guys like Soros and people managing major pools of money can profit off the massive cordinated naked shorting of american companies while creating tons of misery for the US economy. Companies that in no way deserve such shorting pressure considering their revenue numbers.
The manipulation is happening.
I have no problem with shorting stocks. Its naked shorting which is a MAJOR problem.
Naked Short Selling causes a unnatural drop in share price by artificially boosting the supply of shares available to the market. This reduces market efficiency. Companies who are doing a stock offering will have to issue more shares to raise the same amount of cash. Naked short selling can threaten the stability of stock prices because stocks can be sold without having to first aquire them from existing owners. Also, present naked shorting rules allow brokerages to make large profits doing "bona-fide market making" while stock markets are falling. Since retail investors are not allowed to do naked shorting, this presents an unfairness or uneven playing field.
The most likely way that Hillary made this lucky score was that her friend at Tysons Foods made parallel but opposite investments with the same firm. Then, the transactions which did poorly were credited to his account, and the ones which prospered were assigned to his. Ultimately, she had a $100,000 gain, and he absorbed a $100,000 loss.
If so, then this was just a minor league version of the $10 billion gap just discovered. It's a matter of playing games with the short sales system, contrary to the laws on such transactions. If this outfit would play footsie with Hillary, and fast and loose with the SEC on that, it would surely do it with others for whom it wanted to "do a favor."
The only question now is who, beside the grateful taxpayers, will bear the losses just exposed. It won't be the fat cats who have already taken their money and run off into the woods. Laughing.
ping to me
ping to me
Greenspan saved Goldman Sachs from it's Long Term Capitol debacle. Who will save this company, thereby saving the markets once again?
Look, you want good investment - invest in some safe low growth high dividend equities and stick them in a drawer and forget about them. You want to try to score big? Sure, play the market, go to the dog track, buy a lottery ticket. Then shut the hell up, I don't want to hear your mystical, magic reasons about how you lost a boatload, or you blab how smart you were on the one in a hundred shot where you made a few bucks.
You want to MAKE MONEY? Get a job, you lazy bastard.
Oct. 24 (Bloomberg) -- A buyout group led by the Dubai government and billionaire Ronald W. Burkle topped two rival offers for Refco Inc.'s future trading units, heating up the bidding for the collapsed New York-based company.
The Dubai group's offer of $828 million, based on the value of the futures business's regulated capital on Oct. 17, the day Refco filed for bankruptcy, beats a $768 million bid by J.C. Flowers & Co. and $790 million from Interactive Brokers Group LLC. Man Financial, a unit of Man Group Plc, and New York-based Marathon Asset Management may also make bids, according to papers filed in bankruptcy court in Manhattan.
More than 100 lawyers packed U.S. Bankruptcy Judge Robert Drain's hearing today as Refco and potential bidders argued about the rules under which an auction for Refco's assets should be held. The flurry of new bids may generate more money for Refco's creditors, who are owed more than $16 billion, according to the company's estimate as of the end of August.
Uh... You wanna tell us again how you REALLY feel? This time with a little more emotion???
"Naked short selling is a major market manipulation tool and is being heavily abused by the major brokers."
Watch the last hour of the Dow and you will see market manipulation five days a week. That has become a way of life on Wall Street. As the Pros say, Learn it or stay out.
You didn't mention Greenspan and his tricks to cause bubbles. I wonder if Bernanke will be as good at it. My bet is, "Most certainly!"
I got out of the market a couple of years ago and now stay in mutual funds. I like the slower movement of 500 companies.
"stick them in a drawer and forget about them."
When I read this I stopped reading. There isn't any investment on the face of Gods green eath that should ever be forgotten about!
The suits are going to take this country down.
Don't worry about Al Qaeda worry about the crooks on wall street.
I know of several stocks that are being affected by this very thing. With absolutely NO foundation for the precipitous drop, the stock tanks. Small investors, frightened or on margin, are ruined. Taser (TASR) is probably one and Calpine (CPN) is another. Refco's books prove this is going on -- hello SEC?
All I needed to know.
It fellows like that who need to be on the list when things change.
Very well written. Now, when is something going to be done about it?
May you live to see the day you regret having written that. You can not tell others how to invest their money. You are not the arbiter of all manner of investing. Those of us who invest DO work -- what did you think we were doing, just sitting here reading what YOU write? Your depraved comment floated by in an otherwise steady stream of good information, and like the useless flotsam it is, was removed.
Once the public's confidence in the market is compromised, the end will come.
I have'nt seen anyone really address the "Fail To Deliver" ("FTD") issue or the author'r request for the system to perform its mimimum function - settle the trade.
This is not the first time I have seen mention of artificially created shares essentially being created by the DTCC and firms. The issue for the firms is fairly straightforward - making the most money on trading without putting net capital at risk with REPORTABLE open contractual commitments.
Sometimes, ignorance really is bliss, or at least, a better night's sleep.
Typically, short selling done naked, even on the US exchanges. But, you still need to pay for the stock on settlement day (typically 3 business days after the trade date).
What a short sale works out as is "borrowing" the shares you do not own from the firm. Some one (the buyer) is expecting shares that they bought to be delivered to their account. IF you have sufficient a/c equity, firms will often let keep a short position open for LONG periods of time after they should have settled. This is a "book entry" settlement between firms. As far as the short seller is concerned, the trade is unsettled, since the short seller has not actually covered their short. This is what the piece is partially referring to - unsettled trades of various flavors, including a "fail" when actual shares do not change hands.
The real problem is when firms play the "float" of the settlement period, this was also alluded to in the original post. I have seen estimates that a significant number GREATER THAN a corporation's outstanding shares are on some one's (Firms, Shareholders, and DTC) books on any given day.
Now, the short selling that firms do overseas is "downtick" short selling. This is prohibited by US Law - you can only shortsell on an price uptick or zero tick. And yes, it is damnably hard to catch an downtick short sale executed on a foreign exchange.