Posted by
Derrick Michael Reid on Sunday, February 21, 2010 11:48:38 AM
Le Patron (aka Bill Murphy at lemetropolecafe) Memo Archive discloses several missives, a couple of which discuss naked short sells.
Short Sells and Naked Short Sells
SHARES are used for allowing the formation of capital with limited shareholder liabilities so that corporations can be formed and expand business. The purpose of shares are 1) shareholder immunity from ristk, 2) formation of capital, and 3) to expand business. One can buy and sell shares, and the price of the shares comes from that buying and selling shares. Puts and Calls can be used in shares for hedging.
There is ABSOLUTELY no justification for short sells or naked short sells, as both are inherently fraudulent, selling something you dont own. short sells and naked short sell serve TO DESTROY market value and corporations' ability to fund operation, completely INCONSISTENT with the whole reason for having shares in the first place. The only justification, is freedom on contract, and that includes OTC derivatives, but freedom of contract is limited in scope, just as voiding contracts for murder. The use of short sells and naked short selling SHOULD BE OUTLAWED as contrary to public policy and the rationale for shares in the first place. There remains plenty of tools necessary for those who wish to invest in the growth of corporations, the goal of shares. Some may like them, use them successfully, and I am sure are useful tools, but the tempetation to use concentrated short selling to destroy corporations for personal greed is just to high, in my view. Commodities futures are another story. Here, short selling is necessary. Naked short selling is NOT.
I proposed that re futures, transparency laws should be enacted such that over a percentage of all shorts outstanding, say 5%, the entity must disclose its concentrated short position, JUST LIKE IN SHARES, and that may be enough to crub criminal prima-facie manipulative short concentration in the commodity furtures.
Le Patron,
Our Manipulated Markets,
Lets all be very honest with each other, and discuss shares and commodities futures. The SEC is just now catching allot of heat, and rightfully so, as I see it, as I sense there is much trouble in the financial world in which big players play. As a true American, proud of the USA, seeking to maintain strong and viable markets, manipulation must be rooted out. After 35 years of Engineering, Law, and Financial employments, training, observations, and study, I would like to propose again something that I did some time ago, to the SEC. DO NOT ALLOW ANY SHORT SALES, and especially NAKED SHORT SALES of shares. Make the rule simple.
Share puts and calls are acceptable derivatives, along with the owning of shares. Short sales where shares are borrowed and sold, and, naked short sales where no shares are borrowed, but only a finacial transaction is entered, both inherently fradulent by their nature, in selling something one does not own outright, and this provides the big money players with the opportunity to cheat, destroy, and manipulate in the equity markets. The SEC should change the rules, an outlaw short selling, and keep it simple. Those who believe a stock is going down, can simply sale their shares, that is sell their own shares. When many so think so, the share price goes down, based upon a lack of buying interest. One does not need shorting means for pounding down share prices, if the company is unproductive, as simply selling owned shares in the face of a lack of buying shares will slowly move the price down. This is the market correction necessary.
Those who want protection on the down side, can buy puts. There is no need for short sells or naked short selling, none whatsoever. Puts are the way to engage and hedge the market on the down side. No one needs to make profits by short selling. Lets all make money building up companies, rather than making money destroying companies. We don’t need shorts sells, in any market, for the vast majority of Americans who buy shares and hold long as investments for retirements and savings. Nor should these buying Americans be faced with the unlawful criminally and destructive forces of manipulatory short sellers.
In so doing, eliminating short selling completely, you eliminate the ability of massive short manipulations, which is contrary to the whole purpose of investing by nearly all investing Americans, yet, retains correction forces by selling owned shares sold, and makes the market truly fair for every American, regardless of financial size. Everyone is on a level playing field. The short selling only really gives the big players means for manipulating markets for profits by destroying companies' capitalization, to the disadvantage of the vast majority of common share holders.
Removing short selling also reduces volatility and calms markets for increased participation by all. There is absoulutely no justification whatsoever, to allow short selling or naked shorting. NONE WHATSOEVER. Freedom of contract should be respected, but contracts to murder companies and their investors, based upon inherently fradulent practices, should not be enforceable or even allowed. Do this one thing, and stocks will be much more favored by all Americans, all will be fair, regardless of income or purse size, and it retains fairness, and will substantially reduce fraud and manipulations in the markets. Do it, do it now, and get it done! In so doing, the SEC may just ignite the greatest bull run in US stocks this country has ever seen, imediately increasing the net worth of corporations and citizens. The FED wants to bail out the banks in socialism. That is not necessary. Stop short selling is the FED's solution, right here, and right now. Why not simply try some good old honest and fair market capitalism?
Why borrow and give others chances to keep secret their schemes to make money destroying a company's capitalization, when the seller has no interest is seeing the company thrive? We share investors and the law are here to build corporations, to build value, wealth, jobs, money, and net worth in them. The purpose of shares is to promote corporations, hence, the limited liability to sharesholders, the fundamental reason for shares in the first place, so that, capital can be risked without personal liabilities, to start and build and expand businesses. The purpose of shares is to promote business, not destroy it. The selling of borrowed shares is pre se fraud. Selling of borrowed shares destroys capitialization. The use to shares by short selling to fradulently destroy corporations, is inherently contrary to the purpose of having shares in the first place, to commit fraudulent crime upon the investing public, and thereby give rise to potential manipulation of share prices, another big no no in share law. The SEC should ban all short selling and naked short selling. There is simply no reason for either of them, other than the principal of freedom of contract, but freedom of contract never extends to fraud or crimes, or actions against public policy, which is the need to raise capital to support the creation of corporations, just like free speech does not reach obscene speech.
There is another very important sector that involves short selling, and that is commodities, but there, the share price of a miner is the not primary basis of consideration, but rather, the price of the commodity and the lawful and necessary ability of producers, bankers, and speculators to bring product to market in a way that enables all three to hedge, for many very good reasons. Lets consider the gold and silver markets, which have been the subject of a decade long running battle between the gold and silver bugs and the SEC, over perceived manipulation and inaction, respectively.
A producer may forward sell its production to lock in prices to ensure continued future operation at a profit, a worthy goal and purpose. A consuming buyer will buy their forward production to lock in prices to ensure continued future operation at a profit, a worthy goal and purpose. An intermediary Banker facilitates the futures, and buys from the producer and sells the same on the exchanges with a small spread for profit, by buying long the forward production from the producer and selling short that production on an exchange that a consumer can then engage and buy long forward production to ensure a source of supply. That is the basic future system. Its works, and is of great commercial value in the world of commodities. A producer will sell short, a bullion banker buy long and then sell short with a spread for profit, and the consumer can then buy long.
In comes the speculators, who are neither producers or consumers, but futures exchange players who seek to hedge other positions or simply to make profits, mostly on price momentum, and therein lies the potential problems of concentrated manipulation so often complained of by the bugs to the SEC.
In comes the major miners, the top tier of the producers having a ready cash flow and providing vast production supplies. Other miners may not have such large cash flows. Some miners, particularly explorers, and junior producers will sell equity and sell forward futures production to raise capital to put a mine in production, and will sell their expected forward production to the bullion banks to accomplish the same. This is a very valuable financial accommodation to get mine projects built and in production. The problem arises, however, when a major miner, having a ready cash flow, and hence a good share price, does not sale equity to expand, but rather sells short their forward production, because, when any production is sold it is a short sale and it necessarily suppresses prices, contrary to the major's obligations to shareholders to maximize profits, and such suppression will also hurt other miners, because of a lower commodity price, and if weaken sufficient, the major, in an anti-competitive move, will forward sell, that is hedge their future production, to drop the price of the mine output supply, to weaken competitors, and with the Major now with lots of selling cash, will buy up mine competitors, in a predatory method to monopolize production supplies and a market. Barrack gold, for example, the largest miner, is suspect number 1. There is no legitimate reason for a Major to have a "hedge book", that is, a forward selling position, because, their large size can manipulate markets and facilitate monopolization.
In the current gold and silver bull run, expected to last at least another 15 years due to past price suppression and low mine output, a hedge book, that is, a position of sold future production, will begin to cause unrealized profits as the price increases, with the forward sells locked into a contract fixed price. This is why majors have been reducing, that is, "dehedging", their hedge book, that is, their forward sold production, buying back their sold forward productions, to gain more profits in a rising price bull market. It is alleged that the BARRACK GOLD hedge book has enable it to monopolisticly acquire competitors on the cheap as an anti-trust predatory thug, and has one billion dollars of unrealized lost profits. That may seem fine to BARRACK, in the long run, with their competitors having been already bought out on the cheap, in a rising price bull market.
In comes the conspiratorialists, who claim that the government in collusion with bullion bankers and major miner hedgers, is facilitating the anticapitalistic, interventional, secretive, and regular suppression of the gold and silver prices through the use of concentrated futures short positions and international gold agreements, such as the WAG2 agreement of EU bankers to limit sells of gold, which is by definition, is a GOLD CARTEL.
GATA, the Gold anti-trust action committee, for example, claims that the US government and other EU banks, holding vast hoards of bank gold are not only selling their gold, but also surreptitiously leasing, swapping, and loaning central bank gold to the bullion banks for shorting on the exchanges to suppress the price of gold on the exchanges. GATA claims that the US holds 1/2 of the gold it actually reports it has. As gold and silver are barometers of financial health, an leading inflation indicator, and an alternative store of wealth from the dollar, the government, with its so called strong dollar policy, is alleged to regularly intervene, to suppress the price of gold. GATA claims that such selling and surreptitious disposition of bank gold, is inherently anti-competitive and anti-capitalistic, whereas others mainstream analysts look at it as sound government management, the difference really being merely the choice of words used. Regardless of intent, motive, and illegality, until the US government conduct a lawful and open audit of the nation's gold reserves, any reasonable person should conclude that GATA is right.
Hence, the alleged collusion and conspiracy, that is THE GOLD CARTEL, is a combination of international governments, major miners, and bullion bankers, all acting for various purposes to effectively suppress the price of gold and silver. Currently, there is a massive concentrated short position on the comex, where gold and silver future production has already been sold, and the price has, thereby, necessarily, been suppressed. The futures price is not a result of so-called "price discovery", but rather a "paper price" of gold and silver determined by manipulators. For example, to actually buy a 1 oz silver coin in hand, at your local coin dealer, you have to pay a huge dealer premium. For a 1 ounce silver US eagle, the premium is 5$ over the "spot" futures' paper price, for the physical price. Hence, the futures paper price is a manipulated unreal paper price, whereas the physical prices are the real prices, that are, what a willing buyer would pay and seller would take for actual in hand possession. The greater the premium over the futures spot paper price, the more is the affect of the collusive price suppression by the CARTEL. The difference between the paper prices and the physical prices is screaming unfair manipulation to anyone who is willing to hear the hue and cry.
Normally, manipulative price suppression would be illegal, but the governments, and their agent bullion banks, and their agent major minors, get a pass, as the king can do no wrong, under governmental immunity, with the purported objective of the strong dollar policy. The government wont admit this direct intervention, but manipulative intervention it is, regardless of being illegal or not. Such is the real world in which the bugs live, and must endure the farcical nature of the government's strong dollar policy and the suppression of bullion prices.
The problem, of course, lies in an attempt to determine what is criminal manipulation and what is a legitimate purpose, a problem perplexing the SEC and enforcement of anti-manipulation laws. The SEC is not going to go after the US government and its gold suppression practices, and, its strong dollar policy. That aint going happen! The gold bugs' complaints in large measure get ignored.
However, there are now just a few (2-8) majors banks with an outrageously large concentrated short position on the futures exchanges, the calling card of the commodities manipulators, to which the SEC has heretofore turned, intentionally so, a blind eye, mostly due to the problem of actually determining proper hedging and short selling, for legitimate purposes, and those for manipulative purposes, in view of government complicity and inherent immunity. As such, the commodities exchanges are the wild west, anything goes, criminality, suppression, momentum speculation, and legitimate hedge long selling and dehedging short selling. It’s a raucous market for sure with high volatility. The momentum players drive prices high and low, and the very big manipulators can trip stops to the ruin the small guys, over night. Also, the world is globalized, and hence US laws may not be effective in the global context. So, what should or could the SEC do, if anything? They have a very subtle, difficult and expansive job for sure, and we should respect their best efforts, and wish them luck.
It seems that very simple commodities futures rules could be enacted to cure the perceived problem of bullion manipulation. One could start with some known parameters, from which to devise a scheme, a set of simple rules defined by these parameters to control the futures markets, to level the playing field, to prevent excessive speculation and manipulation. These parameters could include: 1) the amount of short/long futures positions on an exchange; 2) the amount of gold/silver stored in the exchange warehouses; 3) the amount of last year's miner production, and 4) the amount of short/long position by any one entity, for examples. A rule could be that the amount of short/long positions can not exceed the amount in warehouses, but this would be too restrictive. A rule could be that the amount of short/long positions can not exceed the amount of last year's production.
A better rule could be that no entity can lawfully have an interest in short/long positions on any one futures exchange in excess of a percentage, say 5%, of the total number of contracts, without full disclosure, just like with shares. This disclosure requirement, to provide transparency for those few major manipulating players may just be enough to prevent manipulation, yet, allow a free market. Simple rules could be fashioned.
Currently, there is a massive concentrated short position on the comex, which is prima facie manipulation, but that is it, its only prima facie, giving rise to cries of manipulatory conspiracy and SEC inaction. The problems with articulating unrestrictive regulations is problematic as there are many variables in play. The SEC, to properly clean up the manipulation, on the exchanges, has allot work ahead of it.
The potential evils of momentum and manipulatory short and long postions in both shares and commodities futures is real and great, but involves the same acts that are lawful for one purpose but unlawful for another purpose. The SEC, to formulate suitable regulations to control the unlawful manipulations in shares and commodities is immense to properly clean up our manipulated markets.
Derrick
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