Who Stole your 401K, Savings, and Taxpayer TARP

[Sandra]

Naked short selling

Who Stole your 401K, Savings, and Taxpayer TARP

- Dr. Ileana Johnson Paugh  Thursday, September 1, 2011
 

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Selling Short is a legal form of stock buying when you borrow shares you do not own from your broker, sell them, and pocket the money. When the price of that stock drops, you buy the number of shares at the lower price and return them to the broker, plus interest and commission, and you keep the difference.  When you buy the shares back, you have covered the short position.

The risks are as follows:

• the stock could go up instead of down
• the drop in price may take a long time (Timing is important since you are paying the broker interest.)
• if the stock goes up more than you made from short-selling the stock, you will be forced to pay more to cover your short position

Selling short tends to increase when the market is booming. Short sellers believe that a correction is due, a drop in price, especially if the economy does not seem to grow as fast as stock prices are rising.

The SEC rule states that if a company has had at least 550,000 shares sold short or a change of short interest of at least 250,000 in the month, it must report the daily average volume of shares sold short.

The names of the companies with the largest short positions and the greatest change are tracked, as well as the recent history of short interest. The short interest ratio explains the number of days it would take to cover the short interest in selected stocks if trading continued.

Short sellers can be caught in a squeeze. A stock that has been heavily shorted begins to rise. Short sellers scramble to cover their short positions, resulting in heavy buying, thus driving up the price even higher.

A former rule established by the SEC required that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.

The uptick or “plus tick rule” was formulated in 1938 to regulate short selling of stocks and was eliminated on July 6, 2007. The uptick rule simply states that a stock cannot be sold short unless the sale price is above the last sold price. The previous sale price can be matched if it is higher than the preceding sale price.

Short sellers want prices to fall and their sales help those prices to fall. By only allowing short sellers to sell during price rises (when they’d rather not sell), the uptick rule helps to eliminate the recurring cycle of falling prices leading to more short sales leading to even lower prices and more short sales. The effectiveness of the uptick rule is debatable, detractors say, it is largely the reason it was eliminated under SEC Chairman Christopher Cox. Proponents claim, the uptick rule’s dismissal exacerbated the financial crisis in 2008. The existence of the uptick rule helped the market recover after the Great Depression.

“The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business” thus in risky trading activities.

Named after Carter Glass and Henry Steagall, “It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of securities; and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks.” (The New York Times)

President Obama’s Glass-Steagall act for the 21st century is the “Volcker rule” named after former Federal Reserve Chairman Paul Volcker. This act aims to stop banks that take deposits from running hedge funds, making private equity investments, using their money to take bets on markets, and stop big mergers between banks.

Glass-Steagall forced commercial and investment banks to separate. Commercial banks were not allowed to underwrite sales of stocks and bonds, while investment banks could not take in deposits from customers.

Glass-Steagall was repealed in 1999 through the Financial Services Modernization Act, promoted by Gramm, Leach, and Bliley. The Republicans who repealed this act allowed banks to retail, invest, and become insurance companies. This law is widely blamed for the financial crisis that created the financial bubble in 2008 and TARP.

The U.S. taxpayers were forced to bail out Wall Street including several large foreign banks headquartered in Europe and the AIG insurance giant. Even AIG creditors did not take a loss, the Treasury paid them in full with taxpayer dollars.

The U.S. taxpayers were forced to bail out Citigroup. If the law had not been changed in 1999, Citigroup would not have been allowed to exist after Citibank announced the intention to merge with the insurance giant, Travelers.

Another safeguard to investors removed on November 15, 2007, was conventional accounting standards; it was replaced with mark-to-market accounting standards. Conventional accounting valued assets at the price at which they were acquired. Market-to-market accounting valued assets at the price at which they could be sold currently.

Each day, if the value of assets declined, the holder of assets had to produce cash to offset the decline. Banks had to find quick cash in order to offset the decline in values. This created a liquidity problem that finally led to the Troubled Asset Relief Program (TARP), a $787 billion bailout of foreign and domestic financial institutions. The panic was in place, stoked by politicians, the Secretary of the Treasury Paulson and the Federal Reserve Chairman Bernanke. Americans lost $10 trillion in 401k, investments, and retirement accounts, a decisive turn in favoring a Democrat candidate and electing a progressive President. From October 2007 to November 2008, the Dow Jones lost from 14,000 points to almost half of its value.

Americans soon learned they’ve been cheated financially. On May 6, 2010, the Dow dropped almost 1,000 points in a few minutes. The media was quick to excuse it that some trader added too many zeroes to the shares sold, others blamed it on Greece’s economic situation in the EU.

Some economists blame the short sellers triggering the drop since the drop occurred after 2:30 p.m. when there was no safety mechanism in place to halt trading if the Dow dropped 10 percent. Had it happened before 2:30 p.m., the Dow’s computers would have automatically shut down. Days earlier, this “alternative” uptick rule (halting the trade if the market drops 10 percent before 2:30 p.m. but not afterwards)  had been put in place by the new SEC Chairwoman, Mary Shapiro.

Hedge fund traders clearly controlled the market. Short sellers drove the price of many stocks so low, some down to a penny, then bought them back, drove the market back up and made close to a trillion dollars in the process.

Hedge funds are not bound by the same rules as mutual funds. In addition to short selling a stock, hedge funds can trade in derivatives, “financial instruments based on things such as mortgages that are designed to reduce the risk associated with owning the underlying securities.” (Nelson D. Schwartz and Louise Story) Bad mortgages were usually bundled with good mortgages and sold as a financial instrument to a third party.

When John McCain had asked for Christopher Cox’s resignation and stated, “we have no tolerance for naked short selling,” it was already too late, the damage had been done, in spite of the fact that the uptick rule had been reinstated in February 2010 and market-to-market accounting relaxed in March 2009.

The Managed Fund Association (MFA), a group of hedge fund investors, was believed to have lobbied the SEC to change the rules in order to engineer a financial meltdown whose victims were Lehmann Brothers, Wachovia, and the American taxpayers. Hedge fund owners, traders and an inexperienced candidate to the highest and most powerful office in the world were the victors.

Some economists believe that the Managed Fund Association, the Federal Reserve Board, and Wall Street answer financially to a higher power, the Bildebergers, whose ultimate goal is to install a one-world government with the help of United Nation’s Agenda 21.

As we now know, the Lehman’s bankruptcy caused a run-on-banks by panicked investors who wanted to withdraw their cash. Paulson and Bernanke convinced most politicians and the public that TARP was not just necessary but the only solution to our gloom and doom.

TARP was not necessary and it was not a wise move. Unsound financial institutions should have been allowed to fail. The “too big to fail” mantra turned from a big lie into another manufactured emergency that placed the American people into deeper and unnecessary debt.

http://canadafreepress.com/index.php/article/39944