Skip to comments.Goldman Sachs fined $450,000 (Gets wrist slap for hundreds of short sale violations)
Posted on 05/08/2010 8:12:52 PM PDT by SeekAndFind
U.S. regulators and stock exchange authorities fined Goldman Sachs $450,000 Tuesday for hundreds of violations involving short sales.
The Securities and Exchange Commission and New York Stock Exchange Regulation fined the bank for continuing to write naked short sale orders after regulators banned short sales two days after Lehman Brothers collapsed in September 2008, USA Today reported.
Short sales are deals in which an investor borrows an asset, then sells it, betting the price will go down. The investor agrees to buy the asset at a later date. If the price drops, the investor makes money.
A naked short sale is the same, except the investor skips formally borrowing the asset.
In Washington, Sen. Arlene Specter, D-Penn., has suggested strengthening the financial reform bill to force financial brokers to bet on the same side as their clients, The New York Times reported.
On Monday, the beleaguered firm said six lawsuits had been filed against it for "breach of fiduciary duty, corporate waste, abuse of control and unjust enrichment," The Wall Street Journal reported.
Last month, the SEC charged Goldman with loading bonds with securities secretly designed to fail.
NYSE Regulation, part of NYSE Euronext, imposed the fine. Half the penalty is to be paid to the US Treasury, whose Secretary is a an income tax evader.
According to NYSE Regulation, between Dec 2008 and January 2009 GS accepted roughly 385 orders to short equity securities in which it had open 'fail to deliver" positions, without first borrowing or arranging to borrow the securities as collateral. Charges are the GS failed about 68 times in the same time period to notify customers about these lapses.
A short sale occurs when a customer borrows a security, sells it in a bet that the price will go down, then buys it back later at the lower price to reimburse the security's lender. A "fail to deliver" occurs when a clearing intermediary firm fails to satisfy its obligation to deliver a particular security on a particular date.
Goldman consented to the hand-slap and the $450k fine without admitting wrongdoing.
Some investors have the means and connections to arrange shorts, some do not. And become the victims of shorters, if they choose to sell at the bottom out of fear, which is what shorters hope for and try to instill in small investors. All profit, in a very real sense, comes from commerce, and is based on faith in the validity of a promise. Is knowingly failing to honor that promise a criminal act? Is it treason, as well? You be the judge.
Well, I’m in a hard place here...
Hitler had the Jews
Obama has Goldman Sachs.
As I have yet to believe Anything coming out of Obama’s trap, I don’t know what to believe about Goldman.. and I’ll wait to see..
this was a speeding ticket for a world wide crime.
So when the contract is agreed, no one has bought or sold anything.
Since no one in his right mind would agree to a forward contract selling a stock he owns at below the current market price, a short contract makes no sense unless you plan to acquire the stock at a lower price at a date at or near the contract delivery date.
The securities rules require you to borrow the stock at the current price (really, you get a loan on the margin & pay interest to the stock holder for the loan). Your profit is the expected difference between your negotiated sale price and the (lower) actual price at the contract expiration, minus any interest and other transaction costs.
a) In some ways it's not much different than buying an out-of-the money put option.
b) if these were OTC short contracts negotiated with Goldman, I assume the counterparties were not ordinary investors but other big fish;
The real issue is whether Goldman was making use of insider knowledge of other financial institution's bad positions to make the short contracts, e.g. knowing Citi's mortgage backed securities were junk before anyone else did.
I want to short sale and make some easy money. Why isn't everyone doing it?
I thought something was funny about that guy.
Virtually legal counterfeiting......sure they got a small civil fine, but the one who really got slapped, is the small investors whose share values were diminished a result of these blood suckers.
You short an asset when you think its price will be lower tomorrow than it is today. From the article,
A short sale occurs when a customer borrows a security, sells it in a bet that the price will go down, then buys it back later at the lower price to reimburse the security's lender
If the price goes up, then you have to buy it back later at the higher price. There are many ways to short assets. Stocks are the most obvious, but there are numerous ETFs that short entire market sectors. ETFs also exist to short gold, silver, US treasuries and so forth.
I think a short sale is a sale of borrowed stock which you must some day return to the owner. It is not like a put or call which are options and can be allowed to expire. You have to cover a short at some time in the future, at least theoretically. In the meantime there is a charge for borrowing the stock.
In the case of a short, your losses are theoretically unlimited since you are on the hook for any increase in price of the stock after you sell it and before you cover.
Traditionally a Democratic booster, and one of Barack Obamas top sources of funds in this past election, Goldman has always had some particularly strong allies within government.
Emanuel is one such ally. An interesting early chapter in the Goldman-Emanuel relationship took place in the setting of Bill Clintons campaign for the White House in 1992. Clinton hired Emanuel as his chief fundraiser. At the same time, however, Emanuel was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to introduce us to people, in the words of one Goldman partner at the time. This is certainly a noteworthy relationship, but its one that has almost entirely escaped scrutiny. (snip)
In his four terms in Congress, Emanuel has raised $74,750 from Goldman, making the firm his number four source of funds.
Goldman has helped Emanuel. How has Emanuel helped Goldman? The most obvious answer, as mentioned in this column two weeks ago, is in Emanuels lead role in shepherding the $700 billion bailoutfirst proposed by former a Goldman CEO, Bush Treasury Secretary Henry Paulsonthrough the skeptical House.
Of course, back in the Clinton days, Goldman benefited from NAFTA and the bailout of the Mexican currency, with Emanuel pushing NAFTA through Congress, and Rubin hammering out the peso bailout.
Did Goldman improperly funnel money to the Clinton campaign by subsidizing Emanuels salary in 1992? Did Goldmans help to Clinton spur the Democratic president to push NAFTA and the Mexican bailout?
The answers to these questions are opaque, and with Emanuel burrowed deep within the Obama White House, the continued relationship between Goldman Sachs and Obamas right hand man wont be easy to follow.
Watch which regulations of Wall Street Obama fights for. Watch where the bailout money goes. And dont be surprised to see Goldman soon sitting pretty once again.
“Can anyone explain what short sale means to a doorknob like me?”
The above URL links to an online presentation — 100 slides, approximately an hour — that explains it all: short sales, naked short sales, stock IOUs, Failure-to-Deliver, (FTD), the role of the DTCC, the role of Broker-Dealers, the collapse of Bear Stearns and Lehman, the almost unreported Refco scandal, and most importantly, why the SEC has not, and will not, do anything about fundamental systemic corruption in the capital markets.
From a basic “public choice theory” analysis, the reason the SEC is so ineffective — see, e.g., the $450K fine to Goldmam — is that the SEC has been in on this whole thing for many, many years. In public choice theory terms, the SEC is a “captured” regulatory agency; i.e., it serves the interests of the very industry it’s supposed to be keeping an eye on. These points, too, are gone over in the above-linked presentation.
Maybe someone pushed the wrong button when it was suppose to be a $4,500,00 fine.
Naked short selling ought to be illegal. Naked short selling has been used to destroy companies when traders borrow, buy, and sell stocks that they don’t own and may not even exist.
I want to short sale and make some easy money. Why isn’t everyone doing it?
because it requires real money to cover if it goes wrong. I personally have always thought it was easier to spot a “dead man walking” and bet on it’s demise than decide which one out of hundreds of great athletes will make it to the finals...
Right now underfunded mid caps that are sell high end type goods are due to get hammered ... RUTH Chris steakhouse is down 25% in a few weeks from over $6 to $4.36 ,, they were almost bankrupt a few months ago (trading at $2) ,, sold their newly built HQ building and had what amounts to a secondary offering to raise cash... when the Obamacare tax kicks in and the economy tanks nobody will eat there even if they have the money ... they’re dead...
This fine is just another innoculation... so they can say “that’s old news”. Naked shorting is terribly destructive and should be heavily fined maybe 100% of the gross value of the shares sold,, not by the person placing the sell order but the house that allows it to go through..
I just think a lot of people seem upset about the 'naked' shorts when the bigger issue is whether Goldman abused it's insider knowledge.
The list, ping
Can anyone say how the new rules for short selling, to take effect later this year, will affect short sales of ETFs like SPY?
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