This American Life

Catch It This Weekend: 'Naked Short Selling'

It sounds a tad obscene, and maybe it is. This weekend, contributing editor Alex Blumberg hits the airwaves and podcast pools of the world with a This American Life segment on "naked short selling" — an arcane financial maneuver that would seem to make no sense.

I heard the rough mix of Alex's piece in an edit some weeks back. It's called "Now You S.E.C. Me, Now You Don't." I'm here to tell you that the segment makes loads of sense. The practice, well ...

So give it a listen, if you'd be so kind. It plays live this weekend and goes to iTunes on Monday. We're also planning to have it here next week. Let us know what you think, will ya?

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THE NAKED SHORT SELLING PIECE WAS PROBALY THE MOST IMPORTANT PIECE OF NEWS ON THE AIR IN RECENT HISTORY AND I DO NOT EXAGGERATE...THIS ARTICLE PUT THE LISTENERS WHO LISTENED AND UNDERSTOOD RIGHT AT THE HELM OF THE TITANIC AS IT APPROCHED THE TIP OF THE OMINOUS ICEBURG ONLY TO FEEL THE SHUDDER AND IMPENDING DOOM AS THE HULL PEELED BACK AND THE OCEAN OF TRUTH POURED IN...MY PRAYER IS THAT CHRISTOPHER COX, CHAIRMAN OF THE S.E.C. IS THE LIFE BOAT APPROACHING TO SAVE THOSE WHO HAVE BEEN INJURED BY THE FRAUD..AND THE MASSIVE HULK OF THE REMAINING SHIP OF FOOLS AND HEDGE FUNDS AND MARKET MAKERS SINK TO THE BOTTOM WHERE THEY BELONG.WATCH AND SEE WHO GETS THE LIFE PRESERVERS FIRST..FANNIE? FREDDIE? LEHMAN? MERRIL? THERE ARE OVER 100 BANKS ON THE LIST TO FAIL.. DON'T LET THE PRAYERS OF THE SHAREHOLDERS GO UNHEARD ONLY TO SAVE THE WRETCHED BANKS WHO STEERD US RIGHT INTO THIS DISASTER WITH GREED AS THEIR ONLY COMPASS....

Sent by BILL COLLINS | 11:28 AM | 9-13-2008

Your piece on naked short selling significantly clarified my understanding of what the SEC is actually about these days. The "regulator" is remaining consistent with the radical free-market ideology espoused by bankers and the current political regime. By focusing on an element of the market that has nothing to do with current economic woes, Cox is remaining true to his Wall Street backers while providing a patina of protection that politicians and bankers can use as an example of regulatory strength. While doing nothing to fix the problem, it allows Wall Street to stave off pesky regulations that an enraged public might seek to impose on their fun. If unsophisticated investors are inspired by the supposed regulations, that's just more money for the coffers of those who are in the know. Talk about regulatory capture.

Sent by Colin | 1:37 PM | 9-13-2008

This series will be one to subscribe to listen to each episode several times - what an education!

Sent by Inga Holmquist | 3:04 PM | 9-13-2008

It is impossible to overstate the importance of this problem. You will meet fierce resistance to the story. Do not give up. There are thousands of us out here who have been robbed by market miscreants and know about it, and millions of people who havge no clue what has happened.

People are paying good money for stock and the brokers are not delivering real shares. They are delivering markers, and the buyer has no way of knowing if there are real shares behind the markers or not. This can be a larger collapse than the mortgage crisis.

Sent by Fred Dashiell | 4:47 PM | 9-13-2008

Thank you. Finally people are becoming aware. The attacks on Patrick Byrne have only made us stronger. Pressure the SEC. Email, email, email. Congress, the President. Watch deep capture.
http://www.deepcapture.com/

Sent by Steve "Oldepro" Walker | 1:37 AM | 9-14-2008

Laura Conaway, I can't find this program scheduled anywhere. This American Life has a show on Chad this weekend. What am I missing? Thanks

Sent by Steve "Oldepro" Walker | 2:09 AM | 9-14-2008

thank you, harknessds, for taking the time to state your thoughtful opinion. it inspired me to add the following comment to the radio spot on naked short selling referred to by the poster of this thread.

~~~~~~

naked shorting is, without question, one of the foundational problems in the american marketplace today. specifically, its effect on the attitude of investors who believe in playing by the rules is akin to the effect on citizens and voters in an openly corrupt political system - they give up on the concept of democracy itself and stop voting. or worse yet, decide they have to play the same game in order to survive. the cynical, corrupt values then trickle their way down the ladder and embed themselves in the psyche of society for a generation or more. that's what happening today in america for millions of individuals who are coming to understand that stealing in broad daylight is openly condoned by the very government and agencies charged with policing it.

unfortunately, naked short selling is so widely practiced by so many "reputable" institutions that an overnight solution would also bring down the entire system overnight. the SEC, et al have understood this for many years but, now finally being forced to address the issue, are faced with untying the proverbial gordian knot. the problem, of course, is that the knot cannot be cleanly or quickly untied - it can only be cut and that, in turn will gore too many ox in the process,,, thus, the glacial pace at which the SEC has moved on the issue since it first began coming to the attention of concerned senators and congressman more than 3 years ago. it's a high stakes game of "pick up stix" and the SEC is committed to taking the slow approach in order to allow the system and its players to unwind positions as innocuously as possible. in bottomline, the SEC believes it cannot move more forcefully on the issue without exposing the unexposable. any measure of diligence applied to an open-minded investigation of naked short-selling reveals this disturbing truth. on a personal note, my own realization of this state of affairs was devastating to my faith in the american system and our leaders at the highest levels.

with regard to the story on "This American Life", i just discovered it, having missed its airing yesterday, and eagerly look forward to hearing it when it's made available for recast. If this particular show is done to the program's usual high quality standards, kudos are in order for Ira Glass and the show's for speaking the truth to the american people. there's precious little of it being done these days.

Sent by jonathan king | 1:46 PM | 9-14-2008

Naked short selling (NSS) is part of the greater Fails To Deliver(FTD) problem.

Exascerbating the situation is that the SEC allows brokers to place "securities entitlements" into our accounts when brokers opt not to "buy-in" to the market and purchase the shares they accepted money for from we retail investors.

Even though the Securities Exchange Act of 1934 mandates prompt and accurate trade settlement,our top cop, the SEC, allows brokers to place securities entitlements into our accounts rather than force a broker "buy-in" and delivery of an actual share. Thus, allowing an FTD which may exist in investor accounts for months..days...years,... unknown by the investor who believes they have real shares in their account. Imagine the notion of securities dilution that can occur. Imagine how stock prices could be manipulated with this strategy of issuing IOUs, and not buying the shares you claim trade in.

When the sizable trading firm REFCO went into bankruptcy in 2005, they had listed in their liabilities account...10.5 Billion dollars in "securities sold, not yet purchased". Can you believe that? And the SEC was allowing them to make an Initial Public Offering (IPO) of their stock just before accounting fraud surfaced and unraveled them.

And at the level of our biggest national clearing agency, the NSCC, subsidiary of the DTCC, then CEO Jill Considine acknowledged in a 2005 letter to then SEC Chairman Katz that unmatched trades are automatically cleared. And that significant changes need to take place to improve trade matching. As is, within the DTCC, a Stock Borrow Program is used to lend out shares already accounted for in broker accounts to be reaccounted again to loan towards these otherwise unmatched trades. The same share may be accounted for to balance multiple trades using this system. It is voodoo accounting.

In a 2005 shareholder meeting, Taser (TAZR) had an outstanding share structure of 60 million...and had 80 million shares voted at that meeting. That represents a 33% dilution.

Dr Leslie Boni conducted a study for the SEC into the situation. IN 2005 she concluded that the markets contain pervasive "strategic" FTD's. That is, brokers choose to Fail To Deliver stocks significantly, inorder to maximize profits. For example..stock prices may be manipulated down by not buying into the market to match buys with sells. Supply is artificially increased with "entitlements" replacing actual shares of securities, and upward price pressure is nullified as no real share was ever purchased and delivered. Later, at lower prices, and perhaps after "independant" analysts have coordinatedly lambasted the company, the shares may be bought into and delivered at a price lower than they should have been had the trade been promptly and accurately settled.This happens. Overstocks chairman Patrick Byrne is presently fighting this exact type of case in court.

Famed attorney John O'Quinn , of Tobacco and Breast Implant class action notoriety, is representing many companies with pending cases.

See deepcapture.com for more info.
And visit the NIPC National Investor Protection Coalition website.
Also Bud Burrell and Bob O'Brian have informative blogs regarding this subject.

Sent by C. Rice | 4:27 PM | 9-14-2008

Naked shorting = selling fake shares for real money. Fake shares are unlimited, cash is limited. Naked shorting can dilute or flood a company's share into worthless.
Cox is way too slow in action of enforcing the law. US financial market in historical turmoil, significant part of attribute to naked shorting. These people flood market with fake shares and cash themselves out. Fake shares flow into market and with value value stolen.
Cox needs to enforce the law.!!!

Sent by JW | 5:24 PM | 9-14-2008

Your piece on "Naked Short Selling" left me furious. How can Congress permit such criminal behavior? I urge you "replay" this piece everyday, until election day. I have no confidence in our elected officials.

Sent by toni | 11:42 PM | 9-14-2008

Cox needs to go to jail.

Sent by cephalis | 1:17 AM | 9-15-2008

I usually have trouble listening to such a lengthy program when so many concepts are explained. But Alex presented the story in such an engaging way - illustrating how naked short selling works - that I was compelled to sit in my car until it was over. I wish I'd had professors like Alex in college!

We citizens of the U.S. are a pretty pathetic lot right now. We desperately need to educate ourselves on the ongoing crises that will impact our ability to find and keep our jobs, pay our bills, and provide our children with a secure future. We need to quit "passing the buck" as though "it" was someone else's responsibility. The bucks we are losing in this financial crisis came right out of our own pockets and nest eggs!

We need to look beyond the partisanship of politics as usual and try to really understand what the problems are and how we think they should be solved. Alex's piece offered exactly the kind of education we need on a daily basis!

Thanks, Alex! Keep it up!

Sent by Terry Detrich | 11:51 PM | 9-15-2008

Thoughtful, thorough, brilliant, informative reporting. Wow. Excellent work Alex. You helped me to understand the complexities of Naked Short Selling and the important role that the SEC should have, but failed to play. We need more reporting like this to help Americans understand the issues and to hold those accountable for this mess.

Sent by S. Kirsch | 1:13 PM | 9-16-2008

i think this kind of story is what NPR was born for. i only wish, as another commenter said, that this story could e replayed more often, along with the mortgage securities show.

thank you.

Sent by fully clothed | 10:36 PM | 9-16-2008

Alex
I am mixed on this piece.
And I am very confused as to how so many commenters who are clearly concerned about the problem of Naked Short Selling / Failures to Deliver (NSS and FTD's) are not more piqued at your dismissal of the problem as a fringe issue. The problem is real, it is huge and although you were at the dock on time, you somehow missed the boat.
[I am chalking it up to a case of people hearing what they want to hear.]
I listened to your piece a couple of times and although you describe how ridiculous NSS is, you seem to accept the depiction of it as a "sideshow." This is a complex issue, there are potentially trillions of dollars at stake and millions have been spent on obfuscating the truth and misleading the public. If you are going to take on a subject like this, be prepared to wrap your head around it completely.
Did you seek out the leading authorities on the subject? Patrick Byrne and his investigative journalism team at deepcapture.com are a great start, counterfeitingstock.com provides a detailed explanation of the mechanics of the crime.

I don't think Chairman Cox is culpable (although, it remains to be seen). And, it is certainly ironic that he chose these banks as his first step toward stopping NSS. But, he is the first chairman to finally take action (unwinding this problem all at once could be catastrophic- I mean total collapse of the dollar, blood in streets, violence, riots- are you getting the picture?)
Your accompanying cartoon references Patrick Byrne, but you make no mention of his crusade in the piece??
Nary a mention of the real crooks, the short hedge funds- hello? How about the complete lack of transparency into the DTCC? And the fact that they are an SRO, not a governmental institution.
Did you watch Bloomberg News' documentary on the subject? (just to mention a couple issues off the top of my head)

Finally, you conclude (smugly) that the 2 week experiment was ineffectual. This self-satisfying, incorrect conclusion was also reached by many other lazy "journalists" from the main stream press- so don't feel bad, you're in "good" company.
I'm going to let you do a little research of your own here- It will take you about 2 minutes:
Ask yourself, if Warren Buffett announced on Monday a.m. that he was going to buy XYZ stock on Friday, do you think that the price would go up on Monday or would it wait until Friday? (just in case, answer: monday)
Similarly, what do you think is a fair date from which to measure the impact of the SEC Naked Short Rule? The date it was announced publicly or the day it was actually implemented? (answer: when it was announced)
Now, go look at the stock price movement of the institutions that were covered in the order on the date of the announcement of the plan.

Whoops, huh?

Presented with new information, now is your opportunity to show what kind of financial reporter you intend to be.

Sent by Jeff K | 4:10 PM | 9-17-2008

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