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Investing 101 - Oct 7, 2009 - Printable Version
- Will the SEC Finally Help Investors?
by Mark Faulk
In a much anticipated and long overdue SEC sponsored debate last week about naked short selling, proxy voting issues, and other problems involving short selling, it was the head of a small Midwestern bank who provided the only real fireworks. The six panels, which discussed issues ranging from naked short selling, voting proxies, and public disclosure of short sales, were populated by the usual suspects, including executives from (who else) Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Credit Suisse (NYSE: CS), State Street Corp. (NYSE: STT), and Citadel Investment Group, L.L.C. But it was Dennis Nixon, Chairman of International Bancshares Corporation (NASDAQ: IBOC), who repeatedly raised issues about naked short selling and even questioned the fairness of what he considered to be manipulative legal short selling against his company. The first day’s events at the SEC’s Securities Lending and Short Sale Roundtable were, to put it mildly, uneventful. With the exception of a representative of the New Orleans Municipal Employees’ Retirement Fund and Christianna Wood of the International Corporate Governance Network, nearly every participant seemed to be hand picked by Wall Street. My early written comments included the observation that several speakers kept talking about how short selling “increases liquidity” and “improves market efficiency” as if they were by definition synonymous. In this writer’s opinion, the real definition of an efficient market is one where the fair market value of stocks is determined by the fundamental laws of supply and demand.
By early afternoon, my note taking had been reduced to the words “WATCHING PAINT DRY” scrawled across my SEC-issued notepad, and even fellow advocate Dave Patch’s threat to yell “you lie!” at an appropriate moment in the monotonous proceedings didn’t make it any more exciting.
I was disillusioned enough with the first day’s lack of relevant debate to title my second day’s notes “The Goldman Sachs Roundtable,” and Leslie Nelson and William Conley of Goldman Sachs held true to form by reciting talking points taken directly from a pamphlet that had been handed out by the company to members of Congress during the days leading up to the roundtable. Their comments were parroted by minions from a number of other Wall Street companies. The success of Rule 204, which places tepid restrictions on delivering shares from short sales, was touted repeatedly by the panel discussing controls on naked short selling. According to Wall Street insiders, the rule resulted in an over 80% drop in fails to deliver, but oddly, the chart they provided in their pamphlet showed that almost all of the reduction in short fails occurred before Rule 204 was originally enacted in September of 2008. That seems to imply that either short covering occurred because of the September stock market crash, that Wall Street covered short sales in anticipation of Rule 204, or that short covering occurred to give a false appearance that the rule was effective, thereby avoiding stiffer regulations.
The panel discussing naked short selling was allotted only an hour and twenty minutes of time out of the over eight total hours of panel discussion, but still managed to provide the only real debate of the entire conference. IBC’s Dennis Nixon finally began to voice the concerns of most Americans, who have begun to awaken to the rampant manipulation in our country’s financial markets. After hitting a high of just over $30 in September of 2008, IBC’s stock lost almost 80% of its value in less than two months. During one stretch, the stock, which normally trades around 300,000 shares or less per day, traded over a million shares per day on 55 out of 60 trading days. On March 23rd, the day it hit a ten year low of $6.55, it traded over five million shares. Short volume rose by 891% to eleven million shares. Nixon said, “We’ve spent thirty years building this company, only to have it destroyed in 45 days.”
Nixon detailed the lengthy process that companies are required to go through to issue new shares, saying “I don’t understand why the long side of the market has such stringent regulations while the short side of the market is the wild, wild west.” Gesturing to the industry insiders on the panel, he added, “Why does this go on? Because these guys make a lot of money doing this.”
In what sounded more than a little like veiled threats, almost every Wall Street insider promised to pass on any costs of pre-borrowing stocks for short sales on to their individual clients. Never mind that those clients are among the taxpayers who just last year bailed out Goldman Sachs and other Wall Street institutions to the tune of hundreds and hundreds of billions of dollars. And never mind that those same Wall Street institutions who were begging for help then are paying out hundreds of billions of dollars in bonuses less than a year later, including a record $11 billion to be paid out to Goldman employees alone. There was no mention of cutting bonuses to help share the cost of cleaning up the market, nor did Goldman offer to return any of CEO Lloyd Blankfein’s nearly $43 million in annual compensation to help embattled customers. With retirement and pension funds decimated, a 9.8% unemployment rate, and a Wall Street triggered record national deficit, most Americans are in no position to bear any more assaults on their pocketbooks.
I did manage to speak to SEC Chairman Mary Schapiro for a couple of minutes between sessions, and asked her why the panels were so heavily biased towards industry insiders. Her response was that it was difficult to find experts to represent the other side of the issue, although economists such as Rob Shapiro and Susanne Trimbath are well known for their work on naked short selling and fails to deliver. Plus, the SEC actually turned down Overstock’s Jonathon Johnson’s offer to participate, claiming that they already knew his position on the issues…as if they didn’t know exactly what Goldman Sachs’ executives had to say long in advance.
When I suggested to Schapiro should “keep in mind that brokers don’t always represent the best interests of the individual investors,” she replied “Oh, we know that.” I added, “With all of the industry representatives on the panel, don’t forget about the individual investor.” Schapiro said, “That’s why the sign on my door says ‘How does this help the investor?’”
In the end, while I was encouraged by the mere fact that the topic of naked short selling and fails to deliver is finally being officially discussed (after years of either denying or ignoring the issues), it remains to be seen if the SEC follows through and enacts regulations that aren’t full of loopholes big enough for Wall Street to continue to drive Brinks trucks through. Only then will we see a fair and efficient stock market, which, in the long run is the only thing that will truly help investors.
Check out this article at FinancialWire.net and his new Investrend Weblog
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