Posted on 08/31/2010 4:23:43 PM PDT by unspun
Financial expert Zubi Diamond, author of Wizards of Wall Street, says that Republican proposals to fix the economy are deficient because they fail to protect invested capital in the stock market from the hedge fund short sellers.
Republican Representatives Paul Ryan and John Boehner, who voted for the $700 billion big bank bailouts that began under President Bush, have put forward much-publicized proposals to solve the economic crisis.
But Diamond says he has had no luck in getting Boehner?or other top Republicans?to pay any attention to his detailed and specific plan to save the economy by reinstating the safeguard regulations that protect invested capital and shareholder rights.
He argues that, until and unless the hedge fund short sellers are prohibited from looting the publicly traded companies, real economic growth cannot take place. It is this capital, he notes, that funds the loans for borrowers, the day-to-day operations of the corporations, their payrolls and the funds they needed for growth and expansion. “This is the money needed for job creation and employment,” he asserts.
Diamond predicts that the current crisis?and the failure of Congressional Republicans to offer a viable alternative?will give President Obama the excuse he needs to nationalize the banks and further the process of socializing the U.S. economy.
According to a story in The New York Times, small investors have fled the market to the tune of $33.12 billion in the first seven months of this year. “One of the phenomena of the last several decades has been the rise of the individual investor,” noted the Times. “As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.”
The hedge fund short sellers are represented by the Managed Funds Association (MFA), considered the most powerful special interest group in Washington, D.C. Its president is Richard F. Baker, a former Republican member of Congress. Another hedge fund operator, Paul Singer of Elliott Management, a member of the MFA, is a major contributor to the Republican Party and gay rights causes.
The MFA spent $980,000 on lobbying federal officials and members of Congress in the second quarter of this year. The MFA spent $1.37 million on lobbying in the first quarter. Members of the MFA also raise money for members of Congress.
Their mission is to maintain secrecy over their operations and remain free from federal regulation. “Unlike mutual funds,” notes the Associated Press, “hedge funds don’t have to register with the SEC [Securities and Exchange Commission] and thus don’t have to disclose who runs them, how much money they manage and what securities they buy.”
Ryan’s economic “Roadmap for America’s Future” has received rave reviews in the conservative press but contains no proposals to reform Wall Street and regulate the hedge fund short sellers. It proposes tax cuts, spending freezes and reductions, and private Social Security accounts.
House Republican Leader John Boehner’s August 24 remarks to the City Club of Cleveland on jobs and the economy were noteworthy for the call to fire President Obama’s economic team. He recommended Ryan’s proposal and called for tax cuts, spending reductions, and more free trade agreements. But his speech failed to include proposals for reform of Wall Street.
Alluding to Republican distaste for federal regulation, Diamond said, “Proponents of deregulation should have the common sense to differentiate between good necessary regulations that are required to protect property ownership, the value of our homes, and investor capital, from bad unnecessary regulations which hamper free market capitalism and business freedom.”
Republicans, however, have continued hammering Obama over the scheduled termination of the Bush tax cuts.
“Tax cuts are good but they will not solve the economic crisis or create jobs in the private sector,” Diamond argues. “What is needed is legal protection for the invested capital, and the protection of the value of our homes.”
As such, Ryan’s much-ballyhooed budget proposal for personal investment accounts for future retirees, in order to provide “additional capital stock for the U.S. economy,” does not provide any real security or capital. Ryan calls for the government to “guarantee” those contributions, putting the taxpayers on the hook for the depletion of those accounts if and when the hedge fund short sellers loot the economy.
Without safeguards, the “additional capital stock” will be ripe for the picking, and the government will be on the hook for these losses as well, producing even more debt, Diamond says.
The Ryan proposal is not new. Some conservative columnists and commentators have long noted that Social Security is going broke but then argue that letting people invest some of their Social Security taxes in private accounts will help save the system and produce more benefits in the long run.
Diamond notes that the assumption behind such a scenario is that the stock market continues to inspire confidence in people. But the exodus of small investors from the market means that ordinary Americans have seen the volatility in the market, brought on by hedge fund short sellers who use computerized programs to devastate companies and entire sectors of the economy, and want out.
The “flash crash” on May 6, 2010, went beyond anything that should rationally be expected in trading activities and was a wake-up call to ordinary investors.
The hedge fund short sellers discovered on this day through “price discovery” that no one stepped up to buy Accenture (ticker symbol ACN) until the stock price dropped as low as one cent from $44.
Zubi Diamond asks, “How would you like your home and bank account to be subjected to price discovery and have your whole net worth sold for one cent because no one stepped up immediately at that very moment to put a bid on your net worth as they manipulated the price downward through unrestricted short selling.”
On the other hand, he asks, “How would you like to be the person who paid $44 per share and then the computerized hedge fund short selling kicked in, drove down your share price to one cent in the name of price discovery, forced you into liquidation and they walk away with your invested capital? That is the reality and evil of unrestricted computerized hedge fund short selling.”
Until Congress fixes the problem, he argues, there will be no investor confidence and people will have no faith in private accounts of any kind.
Diamond says, “If you want to speculate on the direction of the price of a stock which you do not own, it is allowed in America, but with some rules and regulations to ensure that you do not manipulate the stock prices causing it to move in one direction or the other to suit your purpose.”
Members of MFA lobbied the SEC to remove those rules and regulations by claiming that short selling is useful for price discovery?that is, the price for a specific commodity or security through basic supply and demand factors?even if it is unrestricted.
Diamond says that Republicans have to get beyond the Bush-era playbook of tax cuts and deregulation and understand that it was the Bush Administration that began the process under SEC chairman Christopher Cox that opened up the market to blatant manipulation by the hedge fund short sellers. Only when regulations such as the uptick rule are brought back, and mark to market accounting is completely ended and replaced with book value cost accounting, can there be any hope of restoring confidence in the system. Only then is real economic growth possible.
Diamond says, “The countries that restrict short selling will see their economy grow and expand. The countries that have unrestricted short selling will slide into a depression with no hope of recovery until short selling is either restricted or banned.”
He notes, “India banned short selling. Their economy is growing, expanding, and over-heating. China banned short selling. Their economy is growing, over-heating, and expanding. Australia has a short sale restriction regulation. Their economy is growing, expanding and over-heating.”
He notes that Germany in mid-May 2010 banned naked short selling and just three months later their economy registered a record GDP growth expansion.
To make matters worse, Diamond notes that the Financial Accounting Standards Board (FASB) is proposing to impose mark-to-market accounting on bank loans. It previously did this to bank assets with disastrous results.
“They want the banks to use mark-to-market accounting on their outstanding loans, forcing them to lower the value of the outstanding loans to what someone will be willing to pay for that loan today instead of using the book value of the loan. This will cause a lending freeze and whatever life that is left in this economy will come to a halt. It will devalue the banks and plunge us not only into a double dip recession but a depression.”
“The enemies of capitalism are at it again,” he says.
Businessman Pieter Samara agrees, saying the change to mark-to-market accounting in November, 2007, constituted “one of the greatest crimes against the American people” by collapsing private sector access to credit and transferring control of capital, production and productivity from the private sector to the federal government and Federal Reserve.
This is why, in the accelerating crisis, which some say will be a double-dip recession or even a depression, Obama seems to be leaving it to Ben Bernanke and his promise that the Fed will do “all it can” to try to ensure an economic recovery.
Samara, who believes that the U.S. is undergoing “regime change” away from free enterprise capitalism to the establishment of a socialist government, says that while the Republicans understand that Obamanomics has failed, they must quit acting like “Democrat light” in the current crisis and recognize that the Federal Reserve has become part of the problem.
Cliff Kincaid is the Editor of Accuracy in Media, and may be contacted cliff.kincaid@aim.org.
“I absolutely DO know what I’m talking about. I trade for a living.”
Whoopee. You and a million Japanese housewives day trade on your computers, now you’re all financial experts.
Now let’s have you expand your mind a millimeter with a thought experiment you evidently haven’t thought of, Mr Crickets Chirping. There are thousands of listed companies a fraction of the size of Apple, companies that aren’t selling an immensely popular consumer product.
These companies burn cash as they attempt to develop new products, particularly true in the biotech industry. It may take years to bring a product to market or get FDA approval. They survive by selling new shares, or by taking on debt against their capitalization. Now what do you think happens to such companies when their stock gets driven to near zero in a prolonged short attack? Do they just sell some more of that “product that appeals to consumers” that you imagined in your previous post? Apparently in Crickets Chirping Land only popular consumer products firms sell stock.
A market is comprised of ALL its participants, regardless of who they are, how much trading capital they have, or what motivates their trading decisions. Any theory of market analysis that has any validity must be able to account for actual market action. That means it has to account for the behavior of any and all participants—including governments, central banks, investment banks hedgefunds and evil multibillionaires.
There is a large cohort of traders who are consistently profitable over time, in spite of news events, natural disasters, government intervention and attempts at manipulation. Some of them are billionaires, but most have much smaller amounts of trading capital, and have absolutely no ability (as individuals) to move the market.
Traders can be consistently profitable using precisely the same techniques that professional gamblers use to consistently make money: Money management, risk management, self discipline and trading based on the relative probabilities. Markets are not deterministic, but neither are they random. It is usually possible to determine when the probability is far higher that the market will rise and not fall, or fall and not rise. Just as it is usually possible to determine when you probably have a winning hand, and when you probably don't.
I dunno. I’m thinking we all need to move to sourcery’s land, where driving a company’s capitalization to near zero is a painless affair with no consequences.
Companies just go merrily along doing business as usual. Their creditors don’t get spooked. Their suppliers don’t demand cash. Now that’s the place to do business. Unicorns crap rainbows there, too.
Short sellers add liquidity to the market, both because they provide supply of shares to those who would like to buy, and also because they bid for shares from those who would like to sell (when they decide to cover their short positions.)
But more importantly, burn this into your brain: Every transaction requires both a buyer and a seller. You can't sell short without a couterparty who is willing to buy, and you can't go long without a counterparty who is willing to sell. Price doesn't move AT ALL because anyone goes long or short, but rather because the equilibrium, market clearing price changes. And that's a function of the collective psychology of all market participants, and not a function of whether or not someone decides to short. Were that not the case, markets where shorting cannot occur would not suffer major declines or crashes. For example, have you checked the price of real estate lately?
The old rules against shorting did not prevent the crash of '73-'74, nor the crash of '87, nor the '98 unpleasantness, nor the Y2k dot.com bear market.
Most companies that rely heavily on equity financing that fail do so because their business plan fails, NOT because they were raided by short sellers. Shorting generally does NOT work without some basis behind it. There has to be an exploitable weakness first. Do you have statistically-significant evidence otherwise? If not, you're just arguing from emotion, and not based on empirical evidence.
“Stock price changes affect the wealth of traders, not companies. The difference is crucial. If you don’t understand the difference, do yourself a favor and don’t trade.”
Do yourself a favor. Read this classic and learn that there is more to the world of securities than just day trading:
http://www.amazon.com/Security-Analysis-Benjamin-Graham/dp/0070239576
The initial post concerns reform of the markets, not day trading. You’ve been posting nothing other than a simplistic rationale about trading. I’m pretty sure it’s because you know little else about finance.
A few months back there was an incident known as the "flash crash". I think somebody exploited a weakness there and it showed. It wasn't because of somebody buying longs in the market. People (investors) get hurt in these kinds of chicanery.
That Ben Graham book is one of the very first books on "investing" I ever read.
Here's one that's far more valuable: Trade Your Way To Financial Freedom (by Van Tharp—hokey title, but well worth the read). You are very unlikely to be able to be a profitable trader by trying to follow the precepts of Ben Graham—or of any other guru or trading methodology—unless and until you master the material in Van Tharp's book. Most will also need to master themselves and their emotions.
You have no evidence for your assertion.
There is a whole bunch of carping going on here when there is something extremely important to be learned.
Just how many companies have been driven into the dirt by the subject at hand?
why is it in anyone’s interest to drive any viable business into the dirt.
Not everyone on Wall street is a dirt bag seeking their own aggrandizement at the expense of others.
The investment and banking industry should be driven by integrity, and doing what is right by and for ones customers. Yea I know! Yew topia. Spelling on porpoise.
I thought the cigarette industry was the only one killing off their customers.
I was not in favor of the bank bailout.
So why and how does one get a handle on the activity that appears to be so prolific but which I don’t see all that often, (that does not mean it isn’t happening) I’m not a short or long type. I leave that to those more knowledgeable than I.
The real reason such activity takes place, other than making a buck.
Excellent question!
When I passed the Series 7 back in 1982 there was an uptick rule. It was enforced until Chris Cox’s tenure at SEC. Why do you suppose the uptick rule was enacted? Do you know?
No one is suggesting that shorting be abolished. The discussion is and has been about re-instituting the uptick rule and prosecuting FTD. So while your little excursions into trading theory may entertain you, they are essentially irrelevant.
“The old rules against shorting did not prevent the crash of ‘73-’74, nor the crash of ‘87, nor the ‘98 unpleasantness, nor the Y2k dot.com bear market.”
This is indicative of your confusion. Those are market crashes. Reinstituting the uptick rule and prosecuting FTD are for the protection of individual securities, not something to prevent market crashes.
“Most companies that rely heavily on equity financing that fail do so because their business plan fails, NOT because they were raided by short sellers. Shorting generally does NOT work without some basis behind it.”
“Most.” “Generally.” Of course that’s true “most” of the time, and “generally.” The reforms are intended to address cases when it isn’t “most” and “generally”, when there is market manipulation using tactics that once were or currently are prohibited.
“Do you have statistically-significant evidence otherwise? If not, you’re just arguing from emotion, and not based on empirical evidence.”
Good idea. I’ll wait for you to post your “statistically-significant evidence” proving your case, otherwise you are just arguing from emotion.
“why is it in anyone’s interest to drive any viable business into the dirt.”
Well for a naked shorter, the profit margin of doing so is 100%.
Does that seem like a sufficient reason?
I have nothing to prove, since I’m not advocating any change in policy. Justification of policy changes rests with those making the proposal.
Using a term such as "manipulation" imposes a value-judgement that has nothing to do with reality. The use of that term serves merely to make an emotion-based argument in favor of limiting the freedom of market participants to engage in trades because some consider the result "unfair." It's no different than arguing that the results of a game that was played according to the rules should be invalidated because you didn't like the result.
To be valid, the full utility of the rules of the game must be considered, both the good and the bad. Restricting short selling has consequences, some good, some bad. What's the net effect, and how do you know? Any analysis that doesn't honestly attempt to analyze the question fully, looking at the full net effects, is intellectually dishonest.
“A few months back there was an incident known as the “flash crash”. I think somebody exploited a weakness there and it showed.”
It is unlikely that the flash crash was intentional. It appears to have been triggered when computers went down at some main exchanges. Large sell orders already set to go at market got instantly rerouted to subsidiary exchanges. The small exchanges lacked the liquidity to handle those large market orders. Once you blew through a small number of buy orders there was nothing to support the price.
“I have nothing to prove, since I’m not advocating any change in policy. Justification of policy changes rests with those making the proposal.”
Nice try, but you’re going to have to pony up statistical proof to bolster your own case when you require that of others.
You found the exacting terms “most” and “generally” to be sufficiently accurate for your own argument.
If I understand naked shorting, it is selling short what you don’t own at all, ie no skin in the game. So how do you meet the call, should there be one, if you don’t own it, and how do you profit 100% on something you don’t own?
IIRC I flunked the series 7 twice in 1987. Not by much but it wasn’t horseshoes or hand grenades.
“Using a term such as “manipulation” imposes a value-judgement that has nothing to do with reality. The use of that term serves merely to make an emotion-based argument in favor of limiting the freedom of market participants to engage in trades because some consider the result “unfair.” “
I was using manipulation in reference to the uptick rule, which for decades had limited market participants in order to prohibit... manipulation.
You remember why the uptick rule had been in effect for years, don’t you? I asked you in a previous post but you appear to have forgotten to answer. It used to be part of the Series 7 exam.
But then again, day trading stocks doesn’t require you to master the arcane lore of the NASD. So perhaps you don’t know what the uptick rule is or why it was instituted.
looky
Thanks bitt. I don’t really keep up with all the trading, investing stuff now, seems like a bad time for ‘money making’ plus I hate to lose more than I care about making a small amount, lol.
My Teacher’s Credit Union actually gives me better interest rates than some CD’s! Beautiful homes are sitting and not selling now. I really fear something happening to lifetime savings, don’t trust the government. Even have thought of paying cash for another nice home just so the money can’t be lost.
That may sound dumb to those seriously involved in all this but my 4 kids would at least have some solid ‘things’ to sell off at a future time. I do not trust those in charge!
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