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Investing 101 - Sep 18, 2009 - Printable Version
- Financial Armageddon In Retrospect
by Mark Faulk
(Editor's note: This article was originally posted in two parts at FinancialWire.net and on Mark Faulk's new Investrend Weblog , along with an excellent forum for reader's comments.)
“A small group of thoughtful people could change the world. Indeed, it’s the only thing that ever has.” ~Margaret Mead
August 12, 2009 (FinancialWire) (By Mark Faulk) — It began when Bear Stearns began to fall apart at the seams in March of 2008, triggering the SEC’s first emergency weekend meeting in over 30 years. Over the next few months, all of America, in fact, the entire world, watched in trepidation as our financial markets unraveled like a slow motion train wreck, one that the vast majority of Americans had been oblivious to until it was too late. Over the next few months, the train wreck began to pick up speed, prompting SEC chairman Christopher Cox to invoke a one-month ban on July 15, 2008 against naked short selling in 19 battered financial stocks, including Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), Lehman Brothers (OTC: LEHMQ.PK), Credit Suisse (NYSE: CS), Merrill Lynch (DOA, as in dead on arrival), Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE). The emergency rule, designed to eliminate the illegal downward manipulation of those companies’ stock prices, stated that no one could short sell stock in those companies unless they had “borrowed or arranged to borrow the security” and that they settle the trade on the required settlement date. Of course, as usual, even that rule imposed absolutely no penalties for anyone who violated the rule.
It proved to be too little, and decidedly too late. On September 15, 2008, our economy officially imploded: Lehman Brothers filed for Chapter 11 bankruptcy (its stock now trades for less than a nickel a share), Bank of America took over troubled Merrill Lynch, and AIG (NYSE: AIG) sought $40 million from the federal government under the guise of being “too big to fail” (the following day they received $85 billion from the fed, setting off what would become the largest government bailout of private sector businesses in history). And Washington Mutual was teetering on the brink of collapse.
What a difference a day makes. On September 19, the SEC enacted another temporary ban, this one prohibiting short selling of 799 financial firms. Why short selling was considered a crisis in those particular firms but was deemed okay in other publicly-traded companies remains a mystery, but it didn’t matter. The markets continued to tank, with the Dow eventually losing over 60% of its value by March of this year.
But as is generally true with any collapse, the cracks that first began to appear in our financial system in early 2008 were simply the physical manifestation of serious structural problems that began long before. For years, a handful of stock market reform activists, as varied in background as they were in geographic location, have preached a singular message, one repeated like a mantra. Although the message evolved as more and more people joined the cause, exposing an ever-growing circle of greed and corruption, the mantra remained the same: our financial system is rigged, and left unchecked, our nation is headed for a financial collapse of epic proportions.
Sometimes it hurts to be right.
Years before SEC chairman Christopher Cox invoked his one-month ban in July of 2008 against naked short selling in 19 battered financial stocks, an eclectic “small group of thoughtful people” sounded the alarm about a financial system gone horribly wrong.
The “small group of thoughtful people” who sounded the alarm about a financial system consumed by its own rampant greed came from all walks of life. Some were experts, Wall Street insiders or economists who had seen the warning signs. Some were small publicly-traded company owners or CEOs, while others were simply investors who had watched their money disappear down a sinkhole that more closely resembled a cesspool.
Activist Dave Patch started InvestigatetheSEC.com in late 2003, and in early 2004 I began reporting on financial fraud on my website The Faulking Truth. At around the same time, the late Gayle Essary began to utilize his own forums, Investrend and Financial Wire, to bring greater exposure and an air of credibility to the cause. Others, including Bud Burrell, Bob O’Brien, Rod Young, DeWayne Reeves, Darren Saunders, Mary Helburn, and economists Suzanne Trimbath and Robert Shapiro, worked tirelessly to warn the country about the potential train wreck years before it happened. Efforts to reform our financial markets were further galvanized when Overstock (NASDAQ: OSTK) CEO Patrick Byrne, along with fellow crusaders Judd Bagley, Brent Baker, and Mark Mitchell, joined the rapidly escalating war. Forbes writer Elizabeth Moyer and Euromoney magazine’s Helen Avery covered the scandal for the financial media, but the Wall Street controlled corporate media for the most part either ignored the issue or attempted to discredit those who exposed the corruption.
At first, the focus of stock market reform advocates was something called “naked short selling”, a predatory trading practice used to illegally manipulate stock prices. The fraud appears to have originally been fueled mostly by Canadian brokers and offshore lenders and hedge funds, who victimized small, struggling companies and their investors. They utilized naked short selling and a lending practice that became known as “death spiral financing” because targeted companies were often forced into bankruptcy. The con artists bet against the company and its shareholders by taking advantage of a trading system that allowed them to “sell” shares that they didn’t own, and in many cases, never even borrowed. They could literally destroy the company, and its shareholders, by creating so much negative pressure that the stock eventually collapsed under the weight of the massive selling. But the key to the scheme was the con artists’ ability to short sell the companies’ stock without having to ever acquire the shares to cover their positions. They could buy and sell stock that didn’t exist, shares that were never delivered, in effect creating an unlimited supply of counterfeit stock.
Because regulators who were assigned the task of policing the financial markets ignored naked short selling and other types of blatant fraud, the criminals became bolder, moving from small penny stock companies to larger companies such as Overstock, Delta Airlines (NYSE: DAL), Krispy Kreme (NYSE: KKD), Netflix (NASD: NFLX), Martha Stewart Living (NYSE: MSO), Global Crossing (NASD: GLBC), and TASER (NASD: TASR). Hedge funds grew exponentially during the first decade of the 21st century, and began to come under the control of Wall Street’s largest players, with Goldman Sachs and J. P. Morgan eventually becoming the world’s largest hedge funds. In the end, they began to devour their own and turned on each other, adding to the market collapse that began in September of 2008.
It wasn’t just the media and federal regulators who aided and abetted Wall Street in their financial assault on middle-class America. This was the most lopsided redistribution of wealth in the history of the world, and our political leaders in Washington blatantly ignored it until it collapsed around them. They squandered countless opportunities to fix the system long before it collapsed around them, and in fact, for the most part denied that a problem even existed. Our country runs on a system designed by millionaires for the benefit of billionaires, and as long as the money kept flowing, they could bury their collective heads in the sand at their private golf courses.
A clear majority of Americans have finally gotten the message. They realize that our financial markets are in turmoil not because of the natural ebb and flow of our economy, but because of a flawed and corrupt system. Our markets were intended to mirror our free enterprise system, but instead have begun to strongly affect our economy in a decidedly adverse manner. The tail has begun to wag the proverbial dog, and the results have been devastating to our country and the world’s economic well-being. The SEC has decided to make permanent a temporary ban on naked short selling that was set to expire on July 31st, but activists recognized long ago that naked short selling is simply a symptom of…here’s that mantra again…a financial system that is rigged from the ground up.
As a country, we’re now in the “what next?” phase of this epic crisis. The recent ban on naked short selling by the SEC is nothing more than a band-aid on an amputated limb, but it’s a start. If we are not diligent in holding President Obama’s and Congress’ feet to the fire we will end up with new regulations that are just as wrought with deliberately placed loopholes as our current system. Lawmakers and regulators, answering to the same moneyed special interest groups who sold us down the river in the first place, will close one door of corruption, only to open three more. That is a fact that has been borne out throughout history.
Over the next few months, I’ll address some of the individual aspects of the stunning collapse of our economy, how we got here in the first place, where we are now, and what we can all do to move the process forward in a positive way. But whether the topic is the failure of the SEC and our elected officials in Washington to protect investors, the massive follies of the Bush/Obama bailout, the imminent overhaul of the SEC, or any other of the myriad of issues that we face both as a country and worldwide, the message will remain the same, the mantra will continue to be repeated until every American hears it in their sleep: The financial system itself is broken, and it’s up to us to hold our public officials, from the White House to the halls of Congress and the SEC, accountable for their past inaction and their current actions that affect our country’s economic future.
Mark Faulk, author of “The Naked Truth: Investing in the Stock Play of a Lifetime”, which chronicles the story of CMKM Diamonds www.thenakedtruthbook.com , has written over 150 articles on the topic of financial reform and naked short selling since 2004, and has logged hundreds of hours in radio and television interviews. His articles have been reprinted or excerpted in numerous major publications, including The Huffington Post and Financial Wire, and financial journals such as the prestigious Capco Journal of Financial Transformation. In the fall of 2009, he will complete work on a major documentary about financial fraud, due to be released in December, 2009.
Check out Mark Faulk's articles at FinancialWire.net
and his new Investrend Weblog
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