Refco and Naked Shorting!

On August 25th, I posted in The Problem of “fails to deliver” (FTD)

There have been allegations of illegal naked short selling, and regulators are smarting over allegations that they gave super hedge funds a free pass because regarding “fails to deliver”. Regulation SHO included a “grandfather clause” to fix the FTD problem, but the FTDs are so massive a problem that even with a six months notice it has not been cleaned up.

Yesterday I posted in Refco Bankruptcy Filing, the bankruptcy filing of Refco was made available and listed as “Securities sold, not yet purchased” was $10,590,379,000. Bob O’Brien of Sanity Check – The Blog believes this is a “naked short” position.

At the National Coalition Against Naked Short Selling – Failing to Deliver (NCANS) there is a discussion of the Systemic Risk of FTD’s caused by naked shorting:

Because of this unbridled FTD manufacturing, a tremendous contingent liability for the industry has been created over time, as the large float of FTD’s represents stock that needs to be bought back at some point in the future, but for which there is no guarantee that stock is readily available. In some instances there are reports of companies where FTD’s represent multiples of the issued genuine shares.

How many companies are affected? Records reveal there are about 600 companies listed on the NYSE, AMEX and NASDAQ that have FTD problems and another 800 companies that trade in the “pink Sheets”.

The collateral used to secure the FTD at the NSCC (the clearing and settlement system) is cash, but it is marked to market against the price of the stock at the end of the day, and any overage is available to the seller. This means that if the FTD was created at $20 per share, and the stock has been run down to $5 per share, the seller gets to withdraw the $15 dollar difference. This creates a dangerous situation where the system is hopelessly under-collateralized for the true risk – the shares will cost far more than their current depressed price to cover, as the depressed price is often a function of massive selling of FTD’s. This is the contingent liability risk. It is likely considerable, and is ignored by the system.This risk creates a situation where the brokerage community has a vested interest in seeing the prices of victim companies stay down once they are down, as their best customers (hedge funds) have taken out the over-collateralization dollars over the years from the FTD’s, and used them to collateralize other securities – many times, more FTD’s.

I posted on October 17th, in What is a Wells Notice? about some of the run-ins that Refco has had with the SEC.

From The Faulking Truth

In our opinion, REFCO is not the tip of the iceberg in this issue, it’s nothing more than an ice cube floating in a sea of icebergs.

Earlier The Faulking Truth says

We’ve been telling the world about this massive scandal for over a year and a half, and in fact, said that it could be “the biggest financial scandal in the history of the world”

Stay tuned!

Refco fails to deliver naked short mover mike

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4 Responses to “Refco and Naked Shorting!”

  1. I like the daily clean slate as found in the futures market.

    It is not like the postponement of recognition of unsound positions is anything new. It is the reoccurring theme over hundreds of years . . only the mechanisms change.

  2. Ron, if by futures market, you are referring to commodities, you should know there is one area where there is no clean slate. I believe, and GATA has much supportive evidence, that gold reserves of the world’s central bank have been leased to others, and those “others” sold the gold and reinvested the proceeds elsewhere. Now that the price has gone up from $250 to $480, some central banks want their gold back, but it is gone! That means there is a massive gold short to the tune of 12,000 to 15,000 tons and it exists much like the naked sharts exist. The only way to prevent disaster is to continue to sell gold into the world, but unlike stocks which you can manufacture, the supply of readily available gold is running out. I expect we will have another much larger “Refco” on our hands!

    Mover Mike

  3. A lease of gold by a government entity that also controls the money supply could be looked at as just a special kind of treasury bond. Either of them can be covered through the creation of more fiat money. Thus both are pegged to the general concept of the level of confidence in a country’s economy (and inflation rates) and their central bankers.

    The gold that was sold is gone. It is not unlike physically transferring gold between countries to accommodate for trade. There has always been the specter of large multinational companies taking on characteristics of sovereign entities; holding a little gold would just fit right in (from an objective view rather than normative).

    If we oversold grain then we might have a problem. I’m only joking, but only slightly. Argentina has been forced to sell grain to raise foreign currency to cover debt, even at the expense of the hunger needs locally. In a simplistic sense I would look to our ability to obtain the oil that is necessary to raise lots of grain for export. I still have confidence that we could wage war through selective selling of grain even if the dollar plunged relative to other currencies. Folks can’t eat oil or gold, but they need good soil to convert oil to food.

  4. Ron, as much as I respect your writing, in this case I don’t believe you understand the seriiousness of the problem.

    If you own a house and you lease it out, you expect to get it back when the lease expires. What happens if the property has goes up two fold and you want to sell the property and reposition the proceeds elsewhere. You go to the lessee and he tells you he sold the property! It is not your problem, it’s the lessee’s. Legally, you can compel him to compensate you, but whether he can make you agree to take cash or get you the house back, he must go into the market and buy it back or come up with the cash. That’s the problem. The lessee who sold the property never expected it to go up two fold and he is in trouble.


    That is what has happened in the gold market. The central

    banks leased out half the gold and it was sold. The central banks knew it was sold, they were complicit. Now they don’t want others to find out that 12,000 to 15,000 tons of gold is gone. They do not want gold to go up. If they were to demand their gold back, the short covering would send the gold to the moon and it would expose the deceit to the nations. Just as I think it is a tragedy to squander our silver supply, at least it was done in the open. The gold, our national treasure, has been sold in the dark.

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