In “Wall Street’s Naked Swindle” in Rolling Stone’s new issue, Matt Taibbi examines how a scheme to flood the market with counterfeit stocks helped kill Bears Stearns and Lehman Brothers — and the feds have yet to bust the culprits. The scheme that helped do in two of the five major investment banks in the U.S. is known as naked short-selling — the sale of shares you don’t have or won’t deliver. Normal short-selling, however, is legal and good for the market: it lets investors bet against companies that they believe will decrease in value.
To help explain his story, Taibbi heads to the white board and breaks down the differences between the two: click above to watch him explain short-selling (our buyer: Wilford Brimley, broker: Count Chocula, short-seller: Hervé Villechaize), and be low for a discussion of its evil twin, naked short-selling. — Rolling Stone

26 Responses to “Short-Selling Vs. Naked Short-Selling: An Explanation”

 
  1. color me not surprised | October 6, 2009 at 7:39 pm
    Gee. This problem of lending shares the stock ‘bank’ doesn’t have sounds EXACTLY like the problems with fractional reserve banking and all the other problems of the past.
    Who would have thought the same problem could apply to banks(which can use worthless paper as legal tender) as do stock ‘banks’ (which hold worthless paper that can be traded for worthless paper enforced as legal tender).
    Reply
  2. www.buzzflash.net | October 6, 2009 at 10:51 pm
    Short-Selling Vs. Naked Short-Selling: An Explanation by Matt Taibbi…
    In “Wall Street’s Naked Swindle” in Rolling Stone’s new issue, Matt Taibbi examines how a scheme to flood the market with counterfeit stocks helped kill Bears Stearns and Lehman Brothers — and the feds have yet to bust the culprits. The scheme that hel…
    Reply
  3. O’ Tim | October 6, 2009 at 11:01 pm
    Outstanding article, Matt – AGAIN. I can’t help thinking of the end of the film “Fight Club” when reading your scathing analysis of the current greed-centric economic system. I do not condone terrorism, but something’s gotta give and if this isn’t fixed through appropriate channels, how long will it be until some head case(s?) just c an’t take it anymore and begin physically assaulting these corrupt institutions? And how much of a Robin Hood syndrome would the American public tolerate? On that I think one could successfully short sell the very foundations of Wall Street.
    Reply
    • Russ | October 9, 2009 at 5:16 pm
      I’ve thought of the fight club ending many times when considering how to take care of Wall Street. These greedy fucks will keep taking until we’re all broke and homeless. Time to take it to the street.
      Reply
  4. Max | October 6, 2009 at 11:08 pm
    Great video!
    Reply
  5. bobj | October 7, 2009 at 6:58 pm
    As usual Matt has done what most journalists are either unwilling or incapable of doing: identifying a problem (crime), researching the details of the problem (crime) then exposing the problem (crime)in language that anyone can understand. He is the Woodward/Bernstein of the new millennium!
    The idea that a trader/broker can “borrow” stock from another trader/broker (who may or may not actually possess said stock in the first pl ace) and sell it, vote for board members with it, or generally manipulate the stock and/or the company for which the stock is issued is insane! But, when it’s your ball and you get to make the rules, well, anything is fair, isn’t it? Afraid not.
    The first thing we have to do even before changing the basic rules of the game is to separate our government from the corporations. As long as the direct connection exists between our elected representatives and this gigantic source of cash, ‘we the people’ stand not a chance. Right now I believe election reform may be more important than health reform. We have to get corporate America out of the pockets of the politicians or we’ll never fix the rest.
    And BTW, I really HATE that term “corporate America!” Wasn’t it corporate America that sent all the jobs to Mexico, China, and India? Yeah, I thought so.
    Reply
  6. Charles | October 8, 2009 at 1:03 am
    I learned about naked short selling in ‘06 and have written my congressmen several times emploring him to look into it. The SEC is YEARS behind the curve on this, which shows you who is in control.
    Reply
  7. Naomi Pinson | October 8, 2009 at 7:43 am
    So where was this boy wonder when we needed him? NYC’s Danny Schechter has been reporting this crime for several YEARS! It’s great to have 20/20 hindsight but WHY DON”T YOU CALL FOR SOME ACTION since the same thing is about to happen again! What’s to stpp it?
    Reply
  8. dick | October 8, 2009 at 7:45 am
    Matt, this whole mess can be laid at the feet of the likes of Newt Gingerich, the Gramms (TX Senator and wife, Windy), et al who in 1994 launched a political movement to “get government outa business’ business”. The systematic de-regulating of business and banking that followed is what’s placed this country and, indeed, even “capitalism” itself in peril. The lesson to be learned from this is that the “market” doen NOT know best and free market philosophy was a dangerous path to follow. BUT…..now…..as a result, we’ll get truly stupid regulation and that will lead to the next cry to “get government outa business’ business”! And so goes the circus: “Fools to the left of me, jokers to the right, here I am stuck here in the middle with you”. dick
    Reply
  9. Mike | October 8, 2009 at 9:16 am
    Thank you Matt and thank you Rolling Stone for publishing Mr. Taibbi’s very informative journalism. I have recommended Matt’s works as must read material for my family and friends. I have hope that enough people are waking up to the fact that our Government has been seized by a few very powerful executives in NYC and that these executives have committed generational theft through the TARP bailout and loose Fed policy.
    Please follow the developments of the next big swindle “Cap and Trade.” I am all for taking care of our planet but I don’t want to see Blankfein and Dimon make a cent off of the deal.

    This BS has to stop now!

    Reply
  10. Curtis | October 8, 2009 at 9:46 am
    I’ve been pleasantly surprised (and maddened) to see articles like this appear in print whether it’s RS or Conde Nast Portfolio. I’ve forwarded some of these things around along with others on The Federal Reserve and fractional reserve system (the master of counterfeiting). People have no idea how corrupt the system really is. There may be some attention from the MSM at CNN/FNC/CNBC but either it will be to shoot down the story or to pretend populist concern before moving on to the next big thing. Greg Palast wrote about the corruption of Cap-and-trade a few years ago.
    Reply
  11. Jack | October 8, 2009=2 0at 9:58 am
    Sensationalism and ignorance are a dangerous combination.
    A free market allows capital to flow indicative to investor sentiment. BSC and LEH were the two most overleveraged, aggressive, and horribly mortgage laden balance sheets on the Street. The market is never wrong, it intepreted and let the free flow of capital control their fate.
    When management fails, so does the corporation. When the corporate is publically owned and traded, the market will be the decider.
    Reply
    • Mike | October 8, 2009 at 11:13 am
      Agreed BSC and LEH dug their own grave. But as you know we no longer have free market capitalism, we have selective capitalism . AIG failed but was saved, why? Because they owed GS 13 billion bucks and Hanky Panky Paulson was once the man at GS. GS goes into a death spiral without the 13B. BAC, C, JPM all would be insolvent if it were not for the wizard behind the curtain at the Fed. At the same time 80 or more banks have been shut down in 2009 across the country. Why were the big boys bailed out and the others left to die??? That’s how corrupt our political system has become. You pay to play through hefty campaign donations, Guaranty bank, Colonial and the others had big problems with their balance sheets but they were no different than the “Too big to fail banks” like Shiti Bank and Skank of America. The smaller banks problem was that they didn’t contribute enough to BOTH PARTIES election coffers.
      Next time Jack spare us with your free market capitalism BS and call it what it is an Oligarchy whose dominant character resides at 85 Broad St.
      Reply
  12. nb | October 8, 2009 at 11:56 am
    When we speak of freedon in America–this is what we get. Freedom to rip people off. Obviously humanity needs regulations–but doesn’t that go against the American grain?

    It’s insane. How does one reconcile the two? Is it POSSIBLE to do business in a clean way here–or anywhere?

    Reply
  13. LightningRod | October 8, 2009 at 1:57 pm
    What still amazes me is that neither our past and present government leaders nor Wall St. really get nor understand the extent and depth of the anger, that exists outside the DC beltway and the financial district of NY. One only has to read the preceding comments and other similar blogs to clearly understand that. The fear t hat I saw in Bush’s, Paulson’s, and others eyes in 9/08 appeared real to me, as the financial system they believed in was then in full chaos, from theirs and others belief that the financial markets are somehow self-regulating. However that fear and chaos have declined, since then, as the efforts to stabilize things and return to the status quo have gained traction and delusional belief in and by most media, governmental officials, Congress, Wall St., etc.
    As human beings, we are imperfect; and any and all systems we develop are, therefore, in some manner and/or way flawed. The human tendency is to believe that we can, or can find a way to, control almost everything; and that has been and will continue to be one of humanity’s greatest self-deceptive flaws.
    Wall St., the big banks, almost all hedge funds, etc., backed by many renowned economists with their sue-do scientific theories and models, the ever increasing number of non-practicing physicists with their quasi-quantum mechanics mathematical investment hedge models, to many straight-faced probability mathematicians and their unshakable belief that their ever evolving equations can be used in economics to cover all of the behavior and actions of over 6 billion humans, continuous exponential increases in computing power, etc., etc., have all pushed and/or have been used as part of the basis, for the self-delusional ideas, that they(”we”) were, and still are, somehow in control, of their ever more complex, rapidly=2 0evolving, and hidden “trust us” strategies and models, for the increasingly inter-related world wide financial/economic systems. The actual fact is that economics is not a true science, as it’s a human creation; and, therefore, is basically flawed. Trying to equate it to and utilize it like a true science is not just plain irrational, it’s totally delusional.
    The weather, and the study of it, is a true science, as it’s a true natural system; but when is the last time the various yearly predictions of the total number of hurricanes/TS was right over the last 50 years, let alone believing you will actually need an umbrella or a heavy coat a week from next Monday, in 2 weeks or a month out? All of these smart weather scientists have similar computing power, models, etc., comparable to all of the Wall St. firms and big banks; but we all know it’s just a forecast, that may or may not happen, especially the further out in time the forecast goes. At least, these folks aren’t trying to sell you the Brooklyn Bridge.
    The financial/economic system now has evolved into a series of bets on these types of short and long-term strategies, probability hedges, models, and the like, as that is where the most money can be made. We are once again in an era, where it’s like going to Vegas, where sooner or later snake eyes has to come up, as the limited set of odds are in the house’s favor over time. However, in the curren t economic/financial system, the actual winning and losing odds are in fact never fully knowable, as the variables are unlimited, and can and do rapidly increase over time. As a result, the so-called “bubbles” invariably have to develop, as they are driven by an very imperfect system, along with human emotion and basic instincts that all go along with it.
    I believe, and apparently along with many others, that without meaningful change, understanding, and constant regulation/monitoring, of the economic/financial system and it’s players, we are doomed to, some say at likely ever increasingly rapid rates, these boom/bust “bubble” cycles. Much, of this underlying type of behavior, can be similarly seen in the cycle of the black rat in SE Asia, where every 48 yrs. the area’s vast bamboo forests flower and then die, after showering the floor of the jungle with uncountable numbers of seed pods. Several months ago, PBS broadcast a documentary on the last one, and that boom/bust was chilling to see in action.
    Reply
  14. Bill Davison | October 8, 2009 at 3:57 pm
    Like the court jester in a Shakespearean play, Matt Taibbi has been the only one willing to tell us naked the truth about our financial institutions. Where is CBS, NBC, ABC, CNN, FOX, and the rest of the media? Why don’t they name names and indict these thieves? I guess the rest of the media is bought and paid for just like Congress.
    By the way, whose money did brokerage houses steal? The stockholders!
    Reply
  15. Jive Dadson | October 8, 2009 at 5:16 pm
    Uh… not exactly right.
    There’s nothing wrong with naked short selling, as long as actual shares are delivered=2 0within the three-day settlement period. The problem is failure to deliver the shares. When that happens, it’s called a “fail.”
    It helps market liquidity if a broker is allowed to sell shares short without having borrowed them first (”naked”). But he MUST either borrow them or buy-in within a reasonable amount of time. In theory, if a broker cannot locate the shares to borrow within the standard three-day delivery window, he is supposed to “buy in.” In other words, he’s supposed to buy the shares on the open market.
    But there is a loophole that allows brokers to play hot-potato with the “fails” and never borrow the shares or buy in. In effect it’s counterfeiting shares. There’s no excuse for the feds to allow it, except for the fact that there are so many counterfeit shares circulating now that calling them in would crash the market – more thieves that are “too big to fail.”
    There’s a list of “fails” called the REG SHO list. After a certain number of days on the list, the shorts legally are required to buy in. But they flaut the law by buying from from a co-conspirator who sells the shares short, and then HE fails to deliver. Round and round they go. Stocks can stay on the REG SHO list with “buy-in imminent” for years. On top of that, real old fails were excluded from the regulation in a “grandfather” clause.
    0A
    Reply
  16. Kevin | October 9, 2009 at 5:01 am
    Wow, that’s the most rambling explanation of short selling I’ve ever heard. “Count Chocula” and “The Bushy Mustache Company”? Ha Ha! You’re so clever Matt!
    The 10-second summary at the end would have sufficed.
    Reply
  17. bryan | October 9, 2009 at 5:46 am
    The hedge funds are doing this stuff in many stocks. They even bankrupt biotech firms that are finding cancer cures etc. These people are the scum of the earth. These hedge funds hire paid bashers to come into stock chatrooms to bash stocks.
    Go check out the stock Cell Therapeutics (CTIC). Go check out the Yahoo stock chatroom. Nothing but paid bashers and the stock has HUGE volume everyday. It’s a cancer drug researcher and it is being targeted by hedgefunds. The news has been good yet the stock is bashed heavily.
    Just as Jim Cramer said on CNBC and admitted that hedge funds will “create a new truth about companies” and short the crap out of them. His online media company thestreet.com uses people like Adam Feuerstein to create a “new truth” about these companies while the naked short-selling is used. The Marketmakers are also involved and the SEC does absolutely NOTHING…BRIBES???
    It’s not gonna change. CORPORATISM is destroying America. We need CAPITALISM in this country. Corporations are destroying this country.
    Reply
  18. Paladin | October 9, 2009 at 11:10 am
    So good to see this coverage from RS and Matt on the issue of naked shorting. This is the exposure that can help focus more attention to this ongoing crime. Many others have been instrumental in shedding light on this, most notably Dave Patch (investigatethesec.com), Bob O’Brian (thesanitycheck.com) and the investigative team at Deep Capture. Thank you all!
    Reply
  19. orion | October 9, 2009 at 12:31 pm
    All these comments are all well and good. Until we as a country unite and say enough is enough this will continue.Get involved and vote,and spend or not spend your money with bringing down these fat cats in mind.money is all the powers that understand.
    Reply
  20. Ben Glassman | October 9, 2009 at 2:59 pm
    Cheers Matt once again.. shall we all just pray to our new Buddha Michael Moore or shall we get out and do something?
    get your Corporatocracy tee shirts and walkyourdogma
    Reply
  21. JayHawker | October 9, 2009 at 6:55 pm
    Another great job Matt!!! Thanks for your hard work!!!!
    I have read most all of the comments to this point and would like to ad my 2 cents.
    Naked Short selling is always illegal except when done by an athuorized Marked Maker to fill in for temporary shares not available. The Sec doesn’t enforce strictly these laws because most of the ranking employees of the SEC

    have goals of landing high paying postions on Wall Street after they have leave the SEC. If they can come down on the favoable side of situations that help Wall Street and make themselves known to the powerful, they can be rewarded with a nice high paying position at a big brokerage, hedge fund, law firm or research company.

    Naked Shorting has damaged by varing degrees such companies as TASR, RFLX, DNDN, NFI, OSTK just to name a few.
    Reply
  22. Dan | October 9, 2009 at 9:46 pm
    Matt’s article freaked the shit out of me. Who regulates the regulators?!? Thanks for not only having the balls to write the article, but also to RS for publishing it. The cronies must be exposed. Glad RS is not publicly traded.(right?!)
    Reply
  23. colin | October 9, 2009 at 11:18 pm
    How the F do you write an article describing how Goldman Sachs ruined the world, then write an article that says Bear Stearns and Lehman only crumbled into worthlessness because of some vicious trading sche me. Clearly the same things you are mad about Goldman doing were the same things Bear and Lehman were doing, only Bear and Lehman were either less skillful or less lucky–which is why they utterly ran out of capital.
    Reply
  24. bryan | October 10, 2009 at 10:27 am
    Voting will do nothing. Do research on Diebold Voting Machines which were researched by students at Princeton University. Needless to say voting can be rigged and both candidates are “bought and paid for”.
    We need to flush all government starting with the Federal Government on down. Get rid of every government employee and start over. Same with the courts etc. The corruption is to the core in every area. The FDA, SEC, FBI, CIA etc.etc.
    The derivative meltdown that started with Freddie Mac and Fannie Mae was done INTENTIONALLY by using derivati ve “insurance” such as CDS combined with a policy of mortgages to anyone and everyone. It was designed (and the subsequent bailout) to eventually collapse the $US and US economy to bring the USA and Americans to their knees. Obama was no coincidence either. He has been brought in to usher in the new communist system. We have nationalized corporations and now there is mandatory nationalized healthcare coming into the picture. Spending on anything and everything.
    Americans need to wake up! But unfortunately Americans (as the rest of the world population) are brainwashed.
    Reply
 

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