Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Sheared by the Shorts:
How Speculators Fleece
By Ellen Brown
Al-Jazeerah, CCUN, October 10, 2011
“Unrestrained financial exploitations have been one of the
great causes of our present tragic condition.” President Franklin D.
Why did gold and silver stocks just get hammered, at a time
when commodities are considered a safe haven against widespread global
uncertainty? The answer, according to Bill Murphy’s newsletter
LeMetropoleCafe.com, is that the sector has been the target of massive
short selling. For some popular precious metal stocks, close to half
the trades have been “phantom” sales by short sellers who did not actually
own the stock.
A bear raid is the
practice of targeting a stock or other asset for take-down, either for quick
profits or for corporate takeover. Today the target is commodities,
but tomorrow it could be something else. When Lehman Brothers went
bankrupt in September 2008, some analysts thought the investment firm’s
condition was no worse than its competitors’. What brought it down was
not undercapitalization but a massive bear raid on 9-11 of that year, when
its stock price dropped by 41% in a single day.
market has been plagued by these speculative attacks ever since the
four-year industry-wide bear raid called the Great Depression, when the Dow
Jones Industrial Average was reduced to 10 percent of its former value.
Whenever the market decline slowed, speculators would step in to sell
millions of dollars worth of stock they did not own but had ostensibly
borrowed just for purposes of sale, using the device known as the short
sale. When done on a large enough scale, xe "short selling" short
selling can force prices down, allowing assets to be picked up very cheaply.
Another Great Depression is the short seller’s dream, as a trader
admitted on a BBC interview. His candor was unusual, but his
attitude is characteristic of a business that is all about making money,
regardless of the damage done to real companies contributing real goods and
services to the economy.
How the Game Is Played
Here is how
the short selling scheme works: stock prices are set by traders called
“market makers,” whose job is to match buyers with sellers. Short
sellers willing to sell at the market price are matched with the highest buy
orders first, but if sales volume is large, they wind up matched with the
bargain-basement bidders, bringing the overall price down. Price is
set by supply and demand, and when the supply of stocks available for sale
is artificially high, the price drops. When the bear raiders are
successful, they are able to buy back the stock to cover their short sales
at a price that is artificially low.
Today they only have to trigger
the “stop loss” orders of investors to initiate a cascade of selling.
Many investors protect themselves from sudden drops in price by placing a
standing “stop loss” order, which is activated if the market price falls
below a certain price. These orders act like a pre-programmed panic
button, which can trigger further selling and more downward pressure on the
Another destabilizing factor is “margin
selling”: many speculative investors borrow against their holdings to
leverage their investment, and when the value of their holdings goes down,
the brokerage may force them to come up with additional cash on short notice
or else sell into the bear market. Again the result is something that
looks like a panic, causing the stock price to overreact and drop
Where do the short sellers get the shares to
sell into the market? As Jim Puplava
explained on FinancialSense.com on September 24, 2011, they “borrow”
shares from the unwitting true shareholders. When a brokerage firm
opens an account for a new customer, it is usually a “margin” account—one
that allows the investor to buy stock on margin, or by borrowing against the
investor’s stock. This is done although most investors never use the
margin feature and are unaware that they have that sort of account.
The brokers do it because they can “rent” the stock in a margin account for
a substantial fee—sometimes as much as 30% interest for a stock in short
supply. Needless to say, the real shareholders get none of this tidy
profit. Worse, they can be seriously harmed by the practice.
They bought the stock because they believed in the company and wanted to see
its business thrive, not dive. Their shares are being used to bet
against their own interests.
with xe "short selling"short selling: the short seller is allowed to vote
the shares at shareholder meetings. To avoid having to reveal what is
going on, stock brokers send proxies to the “real” owners as well; but that
means there are duplicate proxies floating around. Brokers know that
many shareholders won’t go to the trouble of voting their shares; and when
too many proxies do come in for a particular vote, the totals are just
reduced proportionately to “fit.” But that means the real votes of
real stock owners may be thrown out. Hedge funds may engage in xe
"short selling"short selling just to vote on particular issues in which they
are interested, such as hostile corporate takeovers. Since many
shareholders don’t send in their proxies, interested short sellers can swing
the vote in a direction that hurts the interests of those with a real stake
in the corporation.
Some of the damage caused by xe "short selling"short selling was
blunted by the xe "Securities Act of 1933"Securities Act of 1933, which
imposed an “uptick” rule and forbade “naked” xe "short selling"short
selling. But both of these regulations have been circumvented today.
The uptick rule
required a stock’s price to be higher than its previous sale price before a
short sale could be made, preventing a cascade of short sales when stocks
were going down. But in July 2007, the uptick rule was repealed.
The regulation against “naked” xe "short selling"short selling forbids
selling stocks short without either owning or borrowing them. But an
exception turned the rule into a sham, when a July 2005 SEC ruling allowed
the practice by “market makers,” those brokers agreeing to stand ready to
buy and sell a particular stock on a continuous basis at a publicly quoted
price. The catch is that market makers are the brokers who actually do
most of the buying and selling of stock today. Ninety-five percent of
short sales are done by broker-dealers and market makers. Market
making is one of those lucrative pursuits of the giant Wall Street banks
that now hold a major portion of the country’s total banking assets.
One of the more egregious
examples of naked
short selling was relayed in a story run on FinancialWire in 2005. A
man named Robert Simpson purchased all of the outstanding stock of a small
company called Global Links Corporation, totaling a little over one million
shares. He put all of this stock in his sock drawer, then watched as
60 million of the company’s shares traded hands over the next two days.
Every outstanding share changed hands nearly 60 times in those two days,
although they were safely tucked away in his sock drawer. The incident
substantiated allegations that a staggering number of “phantom” shares are
being traded around by brokers in naked short sales. Short sellers are
expected to cover by buying back the stock and returning it to the pool, but
Simpson’s 60 million shares were obviously never bought back to cover the
phantom sales, since they were never on the market in the first place.
Other cases are less easy to track, but the same thing is believed to be
going on throughout the market.
Why Is It Allowed?
of market makers is supposedly to provide liquidity in the markets, match
buyers with sellers, and ensure that there will always be someone to supply
stock to buyers or to take stock off sellers’ hands. The exception
allowing them to engage in naked xe "short selling"short selling is
justified as being necessary to allow buyers and sellers to execute their
orders without having to wait for real counterparties to show up. But
if you want potatoes or shoes and your local store runs out, you have to
wait for delivery. Why is stock investment different?
It has been argued that a highly liquid stock market is essential to ensure
corporate funding and growth. That might be a good argument if the
money actually went to the company, but that is not where it goes. The
issuing company gets the money only when the stock is sold at an initial
public offering (IPO). The stock exchange is a secondary market –
investors buying from other stockholders, hoping they can sell the stock for
more than they paid for it. In short, it is gambling.
Corporations have an easier time raising money through new IPOs if the
buyers know they can turn around and sell their stock quickly; but in
today’s computerized global markets, real buyers should show up quickly
enough without letting brokers sell stock they don’t actually have to sell.
xe "Short selling"Short selling is sometimes justified as being
necessary to keep a brake on the “irrational exuberance” that might
otherwise drive popular stocks into dangerous “bubbles.” But if that
were a necessary feature of functioning markets, xe "short selling"short
selling would also be rampant in the markets for cars, television sets and
computers, which it obviously isn’t. The reason it isn’t is that these
goods can’t be “hypothecated” or duplicated on a computer screen the way
stock shares can. Sxe "short selling"hort selling is made possible
because the brokers are not dealing with physical things but are simply
moving numbers around on a computer monitor.
advantages to a company or asset class from the liquidity afforded by xe
"short selling"short selling are offset by the serious harm this sleight of
hand can do to companies or assets targeted for take-down in bear raids.
With the power to engage in naked short sales, market makers have the market
wired for demolition at their whim.
Need for Collective Action
What can be done to halt this very
destructive practice? Ideally, federal regulators would step in with
some rules; but as Jim Puplava observes, the regulators seem to be in the
pockets of the brokers and are inclined to look the other way. Lawsuits can
have an effect, but they take money and time.
In the meantime,
Puplava advises investors to call their brokers and ask if their accounts
are margin accounts. If so, get the accounts changed, with
confirmation in writing. Like the “Move Your Money” campaign for
disciplining the Wall Street giants, this maneuver could be a non-violent
form of collective action with significant effects if enough investors
joined in. We need some grassroots action to rein in our runaway
financial system and the government it controls, and this could be a good
place to start.
Ellen Brown is an attorney
and president of the Public Banking Institute,
http://PublicBankingInstitute.org. In Web of Debt, her latest of
eleven books, she shows how a private cartel has usurped the power to create
money from the people themselves, and how we the people can get it back. Her
websites are http://webofdebt.com and http://ellenbrown.com.