Posted on 12/16/2008 2:00:42 PM PST by CutePuppy
Edited on 12/16/2008 2:48:04 PM PST by Admin Moderator. [history]
Forget Bernard Madoff
(Excerpt) Read more at cnbc.com ...
What makes financial system different, and thus more vulnerable to this type of attacks and manipulations, from other industries is that banks are simply conduits of the system and are, by design and necessity, leveraged and relatively illiquid, i.e. they trade liquidity (often borrowed from other banks or Fed at lower rates of interest than they can charge for issued loans) for fixed RE assets that generally slowly appreciate, and steady interest income from mortgages.
Short selling of large financial institutions, combined with often untrue rumors, and ensued panic exploited this inherent lack of liquidity by creating what amounts to "run on the bank", which further strips the banks of liquididity and operating capital. Without additional liquidity or guarantee thereof (by credit line or loan from Fed, or equity sale) due to lack of trust from other banks and custormers, it will lead to a quick demise of financial institution under attack. What's even worse, reliance on stable banking system in all phases of commercial and personal activity, creates a downward cascading effect and shut ting down of economic activity. And since banking is system is now increasingly of global nature, it spreads like wildfire across the globe and affects entire global trade and economies, particularly of large industrial and economic centers. And we saw this play out, initially in slow motion starting in early 2008 (BSC), and then sharp acceleration in early-mid September starting with Lehman ("September / October surpise?").
P.S. As much as I liked Chris Cox when he was a Congressman, he seemed out of his depth in executive position at SEC, just like several other people on President Bush economic team.
Reference: http://www.freerepublic.com/focus/f-news/2137328/posts - Anatomy of Morgan Stanley Panic
Shouldn’t this be ‘naked’ short selling? Which has been illegal for 75 years, but nonetheless just as destructive.
bookmark
Yes and no, because naked short selling is alive and well, and a real part of the mess that happened on Wall Street. However, short selling has become so aggressive that it’s a game to see how far they can push it. The Uptick Rule was removed and it gives an advantage to short sellers, IMHO.
It is all about winning now, and if they can drive the stock down by betting against it, and totally destroy the company they will...there are so many of these people it’s like being in a sea of perona’s.
Read later ping.
I frequented the Google Finance boards in the period before the Lehman take down. It was very organized. At the end of Friday people were joking .. “oh, who’s next? WACHOVIA NEXT”. They were all short sellers. They destroyed Lehman with help from bad decisions by Ben & Hank.
He seemingly has no problem with stock manipulation.
It’s not the short sellers only. It’s much more that ruined the US economy and the banking system.
- Bankers who gambled at the wallstreet casino ignoring that financial markets should represent real values.
- You, me and John Doe. Most US citizens spent too much money on things they could not afford.
- The world who believed in the “strong” US economy ignoring the facts. If you take a look on the US balance sheet we have not only the strongest budget deficit, but also the strongest trade deficit.
- The FED which ignored and still ignores the tumble of the dollar. Instead of giving credit to banks they should give it to the real economy. Why can’t your company get a 0% loan from the FED but the bank does ?
Short selling is a very destructive process and should not be legal. There is no good description of it in common knowledge which makes any sense. No investor in his right mind would “lend” his stock to be sold short since it directly contradicts his financial interest by expanding the supply of stock in the market. Anyone wishing to bet against the stock can simply sell calls or buy puts.
Fraud is at the bottom of this. Brokers allow stock held in margin accounts to be used by short sellers for a fee. Most of those with margin accounts are not aware of this. Brokers profit, speculators may profit and stock owners get screwed.
The CAPM system also shares a lot of the blame, as dividing up those mortgages into so many sellable pieces until they are dumped into Tranches did a lot of the damage too...it was a combination of factors.
Sholes and Black created CAPM equation system, and one of them got a Nobel Peace Prize for it and other one got zilch, and then after the crash one of the Professors (on FoxNews Special) said that had been tried three different times and it did not work.
sounds like the same kind of people who are computer hackers
see 9.
This reminds us of the manipulation of the stock of the New York Central in the 19th century.
“Short Selling” is selling stock you’ve borrowed.
I think “Naked Short Selling” is selling stock you haven’t even borrowed, and which you thus then cannot deliver to the buyer. Some folks apparently manage to get away with it.
Bookmark
CDSs were so unregulated that traders could buy insurance on other peoples' companies, and they could buy multiple policies.
So now shorting a stock not only reaps you the rewards from the trade, but then you can collect on the CDSs policies on companies that you cause to fail!
It's a real "win-win"! ;-(
If shorts are outlawed then only outlaws will short.
Jim “Bubblevision” Cramer and his assorted ilk have only themselves to blame. The risk of failure is inherent within capitalism. Without those risks, people will take greater and greater risks under the mistaken assumption that all is well until everything explodes. People like Cramer believe that there should be only one direction for equities, that is up. In fact their livelihoods depend on it, for a world without buyers is a world without fees.
Goldman Sachs, Citi, etc. and all the investment banks themselves make extensive use of short selling to make money. When the shoe is on the other foot and they themselves are rightfully so the targets of a short attack due to their colossal stupidity, they will cry to mommy (Washington) to get the bad men to stop because they are “special”.
You are right in that the financial system is unique and that they are merely conduits for capital. They have no productive value in and of themselves whatsoever yet get fat off the frictional costs associated with borrowing and lending.
Almost every bank in America was insolvent at the time.
Blaming short sellers is nuts.
Short selling is fine, has been around for hundreds of years (since 1609 iirc) and with the exception of naked shorts, does good things for the financial system in general. It’s too damn bad if someone decides to short the stock of the firm you work for. You have to be on top of that and fight back. If you’re too weak, too bad. Someone else will make better use of your productive assets.
Well said.
The problem is the criminal corruption of the currency, in defiance of the Constitution’s requirement that currency be gold based.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.