Gaming Wall Street

[Parsad]

This documentary that just came out about the whole Robinhood/Gamestop/Citadel saga discusses naked short selling.  A subject many Fairfax and Overstock.com shareholders are familiar with.  It's taken nearly 20 years for this subject matter to be taken seriously...stated in the documentary as arguably the greatest fraud in Wall Street history.  

 

Fairfax's and Overstock's lawsuits from back in the day, laid the foundation for the investigations and prosecutions into many hedge funds by the Justice Department, but ended unsuccessfully for Fairfax and Overstock overall.

 

Now, roughly 12 years later from the end of that saga, naked shorting is at the forefront of the Robinhood/Citadel saga.  I remember when some of the main culprits on Wall Street, along with their crony analysts and journalists saying how ridiculous the idea of naked shorting was, and how crazy Prem and Patrick were.  Even when there were fail to delivers going on nearly a year in some cases!  Artificial shares used to drive down prices and drive companies into oblivion.  I was warned by someone that the guys even I was writing about could put me in danger...that these were bad guys!  Patrick was going after them with alarming gusto through his blog DeepCapture...he was getting threats. 

 

Some of the people in those lawsuits were charged, fined, prosecuted or shut down.  Most got away scot-free!  Some started their own blogs or media businesses, distancing themselves from their pasts, and even becoming "respected" writers.  A couple even disappeared or died mysterious deaths!  And some are reappearing in this whole Robinhood/Citadel debacle as proteges of the Sith Lord.  Many on CNBC and elsewhere laughed at Byrne when he came up with that moniker for a well-known hedge fund manager, who owns a baseball team and was sanctioned by the Justice Department.  These guys just keep funding proteges who end up doing the same thing over and over again like their predecessor...rinse, wash, repeat! 

 

Well worth watching!  Cheers!

 

https://www.cheatsheet.com/entertainment/gaming-wall-street-why-hbo-gamestop-stock-documentary-must-watch.html/

 

 

[Gregmal]

Agree. The car title analogy was great too. So many people, even financial professionals, fail to be even remotely aware of the “plumbing” of the system. Then they wonder why their fundamental research may be right but still ain’t making them any money. 
 

“Backstage at Wall Street you better know what’s going on” 

 

yup. Yet there’s people who willfully ignore the “non fundamental” stuff. And pay dearly for it 

[Gregmal]

Overall a great message to this documentary. The best defense against all the shit is to educate yourself. Be open minded. follow the money. And pretty much anyone can do it you just have to cleanse yourself of the framework that the system puts in place. Been saying it for ages, it’s no coincidence NONE of this shit gets taught in high school and what gets taught for $40k a year in college classes, MBA programs, etc, is a total waste of time and money.

[Paarslaars]

I paid 600€/year for those courses though.  

[Spekulatius]

One fellow stated that naked short selling has driven thousand of companies out of business. Can you tell me one that was driven out of business by short selling, and more specifically naked short selling? People are mixing up cause and effect here. 
 

Even Overstock or Gamestock were not driven out of business by short selling. Nobody mentions promotes like 90% of the SPAC’s, Chamath and many others in this lengthy TV special.

[Parsad]

Bear Stearns...Lehman Bros...there were a ton of FTD's during the financial crisis.  Overstock.com was not driven out of business because they had no debt.  If you drive the stock price low enough, and equity issuances would result in massive dilution, and you call the debt...you drive the company out of business unless they can get cash like Fairfax did from Cundill, Markel and Southeastern Asset Mangement.  

 

Yes, virtually every business that got hurt from naked short selling was already in a vulnerable position.  But that's why the hedgies target these businesses.  The goal is to drive the price down as far as you can with artificial shares, so that they have no choice to capitulate to the debt holders, find a white knight or go under.  In the meantime, the hedgies and their cronies sell their shorts and walk away.  Wash, rinse, repeat!  Cheers!

 

https://www.federalreserve.gov/econres/notes/feds-notes/the-systemic-nature-of-settlement-fails-20170703.htm

[Spekulatius]

24 minutes ago, Parsad said:

Bear Stearns...Lehman Bros...there were a ton of FTD's during the financial crisis.  Overstock.com was not driven out of business because they had no debt.  If you drive the stock price low enough, and equity issuances would result in massive dilution, and you call the debt...you drive the company out of business unless they can get cash like Fairfax did from Cundill, Markel and Southeastern Asset Mangement.  

 

Yes, virtually every business that got hurt from naked short selling was already in a vulnerable position.  But that's why the hedgies target these businesses.  The goal is to drive the price down as far as you can with artificial shares, so that they have no choice to capitulate to the debt holders, find a white knight or go under.  In the meantime, the hedgies and their cronies sell their shorts and walk away.  Wash, rinse, repeat!  Cheers!

 

https://www.federalreserve.gov/econres/notes/feds-notes/the-systemic-nature-of-settlement-fails-20170703.htm

I would seriously doubt that Lehman and a bear sterns failed because of short sellers. Lehman ran at a ~30x leveraged ratio going into the GFC with a lot of impaired assets. There was no way they could remain solvent.  They were already dead, they just didn’t know it yet in 2008. Short selling has nothing to do with this.

Edited March 6, 2022 by Spekulatius

[Gregmal]

It’s a yes and no thing. Some companies rely on capital markets more than others. Correct that no company has even failed who didn’t have some responsibility themselves. But also true that people manipulating the capital markets can be a death blow for a company already in trouble. 
 

Real world example. You have a mortgage broker. Lives like one. Spends more than he makes. High on the hog. Life’s good. But he s a little behind on his taxes and relies on next paycheck to fund his past months extravagances. Ex girlfriend Sally goes on Facebook and says he’s abusive(subjective) and his employer cans him. He then loses everything because of the lost income stream. His fault, kinda. Not his fault? Kinda. Life? Yup.

[Spekulatius]

19 minutes ago, Gregmal said:

It’s a yes and no thing. Some companies rely on capital markets more than others. Correct that no company has even failed who didn’t have some responsibility themselves. But also true that people manipulating the capital markets can be a death blow for a company already in trouble. 
 

Real world example. You have a mortgage broker. Lives like one. Spends more than he makes. High on the hog. Life’s good. But he s a little behind on his taxes and relies on next paycheck to fund his past months extravagances. Ex girlfriend Sally goes on Facebook and says he’s abusive(subjective) and his employer cans him. He then loses everything because of the lost income stream. His fault, kinda. Not his fault? Kinda. Life? Yup.

Yes, I get this example. Reflectivity is a real thing when you are in a confidence business like any company in the financial sector. I just don’t think Lehman would have made it either way.

[Peregrine]

1 hour ago, Spekulatius said:

I would seriously doubt that Lehman and a bear sterns failed because of short sellers. Lehman ran at a ~30x leveraged ratio going into the GFC with a lot of impaired assets. There was no way they could remain solvent.  They were already dead, they just didn’t know it yet in 2008. Short selling has nothing to do with this.

 

It's liquidity that does companies in, not solvency. You can have the most well-capitalized bank possible, but they won't be able to withstand even 5% of their deposits leaving at a time.

 

Same for companies that require financing for working capital. There's a surprising number of non-financial companies that require short-term financing for the basic functioning of operations.

[Parsad]

4 hours ago, Spekulatius said:

Yes, I get this example. Reflectivity is a real thing when you are in a confidence business like any company in the financial sector. I just don’t think Lehman would have made it either way.

 

You're correct.  Lehman was done for because it's funding was already cut by the Treasury and they couldn't find buyers for their CDS...extremely overleveraged.  The naked short selling sped up the process.

 

Again, these are companies that are vulnerable.  When you push their price down fast enough, and naked shorting does exactly that, their ability to raise capital dries up.  If their stock price drops from $50 to $10, how likely are they to raise equity without massive dilution?  Or what is the likelihood financial institutions will let them borrow?  In most cases, financial institutions usually cut the lines of credit for such companies.  

 

Fairfax is the perfect example.  Because of FTD's on the NYSE, and planted articles in the media, we know the stock price collapsed from the mid-$200's USD to $58 USD in a very short period of time...less than 3 months after listing on the NYSE.  I doubt Fairfax could get loans at that point, and any equity issuances would have been massive dilution.  How do you sell insurance businesses that are now under media and analyst scrutiny as "finite insurance?" 

 

They had to turn to three long-time colleagues that knew the company and knew they needed short-term capital.  Once they had that capital, and insurance results started coming out, the stock turned up.  It was a period of roughly 6 months in 2003 that all this happened.  As soon as they delisted from the NYSE and raised that money, the FTD's stopped, the stock recovered and the rest is history.  But naked shorting sped the process up so that the hedgies could make a killing and possibly kill the company.  Why didn't the same thing happen to Fairfax on the TSX at the same time?  Because the TSX did not allow naked shorting, and fined market makers for not processing transactions within T+3. 

 

There were many companies, Overstock.com being one, where I saw FTD's that were 6 months to 9 months old!  Meaning the share certificates had still not been delivered for 6-9 months to the proper owner, and the market maker was not being fined.  Just nuts!  As soon as the SEC closed these loopholes and started fining, the FTD's dropped like a rock, and short sellers were scrambling for shares to cover their shorts and paying up to 25% interest to borrow.  This is similar to what happened with the Meme stocks, but this time shareholders screwed the short sellers because brokerages started closing trading or loopholes in those Meme stocks, and asking for higher collateral against the hedgies naked put options.

 

Until they get rid of the timing issues between paper and electronic trading, they will not be able to fix this entirely.  So naked shorting unfortunately is probably here to stay for a while, unless the SEC gets really tough with market makers or we see blockchain work its way into day to day trading.  Blockchain would effectively kill naked shorting, since the certificates would transfer immediately from buyer to seller.  But we are probably at least a decade away from seeing this happen!  

 

Cheers!