Tuesday, October 06, 2009

Rampant Mis-Information - and the Responsibility of Financial Bloggers

It's not that I don't like Matt Taibbi. I have a subscription to Men's Journal, and Taibbi's sports-related pieces are always worth reading and usually laugh out loud funny. For example, from his piece several months ago on all-time ugly athletes:

"Then there’s Kevin Youkilis. Youk has only three body parts, all hideously oversized: an enormous set of gnomish, bushy forearms; a massive, casaba melon–size white head; and a cauldronlike belly. He has a truly awesome bristle of thick red chin hair that makes his face look like a cross between a vagina and something out of The Hobbit. At the plate he disgustingly gushes sweat by some means previously unknown to science in which the moisture travels upward along his body, racing in a cascade from his balls and armpits up his neck, over his head, and back down over the bill of his helmet to shower the plate. Whereas a guy like Teixeira was born with a swing so gorgeous you want to paint it, Youkilis fighting a middle reliever to a nine-pitch walk looks like a rhinoceros trying to fuck a washing machine."

See - that's accurate, well written, and funny. If I want to read a lucid comparison of Youk's face to a Hobbit-esque vagina, I'll look for Matt Taibbi's name in the byline. However, if I want to read factual financial articles that demonstrate a solid understanding of what is actually happening, I am knowledgeable enough to know that Taibbi has very little idea what he's talking about. This is the reason I'm bothering to write a post about a little tete-a-tete between Taibbi and Clusterstock's John Carney on the subject of naked short selling. There are few things less rewarding than internet blog post battles - one of them being interfering in other people's internet blog post battles, but I take my self appointed role as "Protector of the Accuracy of Financial Information on the Internet" very seriously, so I'm stepping into the fray. We'll just stick to this week's happenings, and ignore the stuff from last week where Taibbi posted a presentation from GS about market structure and reached the conclusion that GS was using the presentation to lobby congress to allow naked short selling.

First, Taibbi posted a video that purported to show a trader nearly instantly obtaining a locate (which you need to do in order to short stock) on "tens of billions of shares" of a stock that only had 4.5B shares outstanding. Clusterstock's Carney misread Taibbi's post, and responded that Taibbi was a sucker for believing that someone actually shorted tens of billions of shares of said stock, and that some common sense would allow anyone who understands the process to reach the conclusion that there is no way that trade happened.

Matt Taibbi retorted that Carney was an idiot, and that he (Taibbi) never said that the trade happened (although, Taibbi DID say that: ":17 At seventeen seconds, at the bottom, you see that the firm Penson has now approved the trade and” located” the multibillion amount of shares. The trade goes through.") - insisting that he claimed only that the trader was able to quickly obtain a locate which 1) should have been impossible to obtain and 2) should CERTAINLY have been impossible to obtain so quickly, and that the actual trade was for only 100 shares. Taibbi is absolutely right on these two points - the locate should have been impossible to obtain, especially with such speed. But here's the kicker: Taibbi's video shows nothing of the sort. I'm not going to link the video here, because I'm not going to take part in spreading the mis-information - but what is shown in the video is a simple audit trail requirement. Let me explain.

Daily, traders and brokers will obtain a list of easy to borrow stocks, which get loaded into their trading system. If you go to short GE, it's on the "easy to borrow list," and as long as you don't try to short 10,000,000,000 shares, you won't have to call your stock loan department to "borrow" shares to short - everyone knows the stock is readily available. Other stocks, however, like Citi (which is almost certainly the stock in Taibbi's video) can at times be difficult to borrow - like during the summer when they were doing an exchange of preferred stock for common stock, and everyone wanted to be short the common (and long the preferred) to arbitrage the spread between the two share classes.

So, if you try to short Citibank (a few months ago), any good execution system will check its easy to borrow list, see that Citi is not on the list, and ask you where your "locate" is from - in other words, which broker agreed to lend you the stock. There are also many electronic systems where you can request a stock locate electronically - but this is not what's in Taibbi's video! What the video clearly shows is that the stock in question (let's call it C) is on the hard to borrow list. The trader gets a warning message saying that the stock needs to be borrowed, and asking for the trader to either submit the borrow information or elect not to submit the trade.

The trader in the video is NOT submitting a request for the stock to be borrowed - he's entering information into an audit trail point asking WHO the stock was borrowed from, HOW MUCH was borrowed, and WHEN it was borrowed - exactly to prevent problems related to naked short selling! This way, if the seller fails to deliver shares, the broker can easily pull the exact reference that was used for the short sale. Of course, just because I say that I was able to obtain a locate for a gajillion shares of C doesn't mean that I actually was able to - and that's why especially hard to borrow stocks should have another level of compliance checking embedded in them. If this trading system in the video allowed a trader to claim a locate that was clearly impossible, then that's a condemnation of the inadequacy of this trading system - not of the borrow market and the legitimacy of short selling. Fortunately, there was no naked short sale of tens of billions of shares of C on this trade, and Taibbi's post is a gigantic misunderstanding of what was actually going on. Of course, it's especially scary when people jump to his defence (in the comments of both his posts and of Carney's posts) and thank him for highlighting such injustices - never failing to mention how Goldman Sachs is stealing money from poor old grandmothers at the same time.

Journalists with the clout of Matt Taibbi need to take special care to ensure that their reporting is accurate, especially when dealing with topics that the general public clearly doesn't understand. It is essential that we provide MORE clarity to the uninformed, rather than misinterpreting the facts and stirring up a hornets nest of anger when none is warranted.


disclosures: I am not currently, and have never previously received any type of compensation from C, GS, Men's Journal, Matt Taibbi, John Carney, or Clusterstock.


Kieran McCarthy said...

Here, here! I'm also a Taibbi fan, but he Tony Romo'd this issue big time...

Mike Nute said...

I think you're missing the point pretty badly on this one. I haven't watched the video, but assuming you're right about everything above, Taibbi's point, both in this post and earlier ones, is that naked short-selling takes place and that it's fraud. His point is further that the safeguards in place to prevent are so toothless as to be prone to, for example, leaving an "audit trail" with this kind of thing in it. Your post doesn't seem to dispute that this was an example of naked short-selling made capable by a fraudelent audit trail entry. He may have mixed up a nuance of the event but seems to be on fairly solid ground from a broader perspective.

Anonymous said...

Explain Mike's point. How does adding an entry purporting to borrow more than all the outstanding shares of a stock show that the trader isn't naked shorting?

Kid Dynamite said...

Mike, Anon - I am quite sure that some naked short selling probably takes place. I disagree with Taibbi that it's a big problem - and I'm adamant that it had nothing to do with the collapse of Bear Stearns, Lehman, Fannie, Freddie, AIG, Overstock, or any other company.

But that's besides the point - the POINT, Mike, which you think I've missed, is that Taibbi published a video which he claimed at first showed naked short selling (he definitely claimed this, despite his later backtracking) - it does not. He then said that the video showed the impossible obtaining of a locate of shares to short - IT DOES NOT.

The video does not show anything Taibbi claims it does - it is COMPLETELY irrelevant to the discussion. that's the point. It shows no evidence of illegal short selling or inconceivable locates.

Unknown said...

1. I don't know his background, but I'd venture to guess Taibbi has never studied, worked in, around, or near Finance before he decided Goldman Sachs was an evil vampire squid.

2. Internet battles are geh, but just like in MSM, good for ratings (at least in the short-run).

3. You sure that stock wasn't BAC?

4. "...Journalists with the clout of Matt Taibbi..."

I stopped reading there.

Btw, shoot me an email, gotta question for ya.

Anonymous said...

Here is another article related to the Rolling Stone Article by Matt.

Rolling Stone Interviews Cast Member of Financial Film "Stock Shock-The Short Selling of the American Dream"

Former DTCC operations manager and star of "Stock Shock" Susanne Trimbath is interviewed by Matt Taibbi for his latest article in Rolling Stone. She blows the whistle on the world's largest central depository by revealing that she warned them 15 years ago of an impending financial crisis.

New York, NY -- Rolling Stone's own Matt Taibbi interviewed industry expert Susanne Trimbath, Chief Economist at STP Advisory Services, LLC in Omaha, for his latest article in the magazine article about financial corruption. The piece spotlights naked short selling and fall of Bear Stearns and Lehman Brothers.

In his new article, Trimbath tells Taibbi the story of how, in 1993, she tried to get senior management at the world's largest central depository (Depository Trust Company) to stop allowing shares of stock in US companies to be multiplied through stock lending and excessive short selling. "You can't balance the world," was the response she got from regulators. She contends this is because "Wall Street is self-regulated and they don't want to write regulations against themselves." By 2003, the size of the problem had increased ten-fold; by 2008 it contributed to the collapse of major financial institutions and the global financial crisis.

Trimbath is also featured in the financial film, "Stock Shock: The Short Selling of the American Dream" which documents the alleged massive short selling of Sirius XM radio stock. Sirius XM stock sank to five cents per share earlier this year. In the film, she explains in great detail the process of naked short selling and the impact failed trades have on shareholders and the American economy.

Susanne Trimbath holds the Ph.D. degree in economics from New York University. She is an expert on post-trade securities operations and is featured in several films about Wall Street. She frequently acts as an expert witness in securities litigation. Trimbath is a former mid-level operations manager at Depository Trust Company (now a subsidiary of Depository Trust and Clearing Corporation in New York). She currently heads STP Advisory Services.

"Stock Shock" was recently released on DVD and has received good reviews. The movie trailer can be seen at

Anonymous said...

Hey, I've got an idea.

If someone is illegally shorting, then take them down.

And if Obama illegally fired walpin, the inspector general, then take him down, too.

Get taibbi on the illegal firing of the inspector general. Oh, i forgot, He doesn't care about that sort of illegality.

Anonymous said...

Wonderful post, KD. Spot-fucking-on. We need more bloggers like you and far, far fewer of the MT, Clusterstock etc. etc. variety.

Mike Nute said...

The statement that no naked-shorting takes place, period, in that video is different than was implied by the original post, at least the way I read it. But if you and MT can agree that it does take place, I'd encourage you to take on some of the points about the impact of naked-shorting in his rolling stone article. I feel sheepish commenting because I haven't read that article either, but it was the research for it that got him hot and bothered about the naked-shorting in the first place.

Anonymous said...

I think the critical points in his article can be fact checked fairly easily. 1) Is it possible for there to be shadow stocks as MT described? Where 100 shares get loaned out to 5 different people at the same time, in effect making it seem as if 500 shares are out there?
2) Were there massive short sells going on in Lehman and Bear immediately prior to their collapse? Is that typical or a weapon? and 3) Are there inadequate safeguards in place to restrict phantom shares from being used against a company?

The nitpicking of the video seems like a distraction next to the structural questions.

Kid Dynamite said...

anon - you are clearly talking about a different article - Taibbi's latest big piece. the facts of THIS article/video are easily verified, which is exactly what i've shown here: the video shows NOTHING of what Taibbi wants it to show.

now - as to your points: companies do not go bankrupt from people shorting their stocks. BSC and LEH went out of business because they had a run on their assets - this can happen to any bank, and is unrelated to the stock price. so, NO - shorting stocks is NOT typically a weapon, because it doesn't affect the business of the underlying company

i would guess that stock actually can be loaned out multiple times - just like bank deposits can!