Posted by: graemebird | June 7, 2008

“Naked Short Selling” A New Type Of Fractional Reserve.

Naked short-selling is a racket where you treat shares like the banks treat cash and subject them to fractional reserve. Like fractional reserve banking it tends to involve three or more parties with each party doing things which appear not to be a hanging offense. But that if you look at all the parties as if they were one, you can see that its a straight-out violation of property-rights and a racket.
Why its worth looking at is it can throw some light onto the history of ordinary fractional reserve. And allow people to see by comparison the essentially criminal nature of fractional reserve with fresh eyes.  What you would expect to happen is instead of a straight ban on obviously fraudulent behaviour , we might see regulations restricting this damaging activity to a priviledged few. We may see a sort of science of risk management with regards to this racket break out.

Andrew Reynolds is a so-called “risk management expert” in the field of banking. And yet the only reason that his alleged field of alleged expertise exists is because an activity, which is inherently fraudulent, has been hardwired into the system, protected, and subsidized.

Now we could imagine that if naked short-selling of shares became a legal, protected and subsidized activity, we could imagine the sprouting of so-called risk management experts for people to be able to cope with this other ponzi-scheme.

What happens with short-selling is that you borrow shares for a specific time period. And then you sell those shares to the market. You then have to replace the shares at the end of the time period. You are betting that the share price will have fallen and so that when you have to replace these shares at the end of the specific time period, you will make a profit. As far as the shares are concerned this is akin to a term loan. The loan is of the shares, and for a specific time period, with some sort of interest payment.

The above is a legitimate example of short-selling. And it represents clarity in property-rights. Since only one party has possession of the shares at any one time. And there is not two claims to any one share. No assumed ownership of shares is created out of thin air.

But naked short-selling is another matter. It is inherently fraudulent and it is exactly the same sort of fraud as fractional reserve banking. It also causes all sorts of harm. 

Actually its amazing that its even come about. You’d think they could tag each of the shares with an individual number or something. So that no one share could be allowed more than one claimant to them at any one time interval.

The Reserve Bank doesn’t offer any overnight loaning of shares in the same way that it backs up the other racket with an overnight cash rate, selling funds at special discount rates to the banking system at the expense of the rest of us. The reserve bank doesn’t print the shares of public companies on a printing press and use these shares to buyback debt whenever the naked short-selling ponzi scheme looks like it might unravel. The reserve bank offers no such subsidy to this other racket. Hence when this behaviour unravels its like a game of musical chairs. Where you have 30 people and only maybe 10 chairs when the music stops. And because there is no government agency to print up new shares with a printing press then someone has to miss out.

 

What will happen whenever the music stops is that millions of dollars will be wasted in court. And the court judgement won’t amount to any natural law, it will be arbitrary. Because if the court cannot, or will not, rule that the practice is inherently fraudulent then any subsequent decision must be arbitrary and so subject to endless disputation.

Things have reached a stage in the United States where when a party cannot make good with the shares they simply issue an IOU. The choice must be made now whether to make the practice legal or not. If they decide not to they are inviting mountains of regulation, periodic crisis, day to day inefficiency, and further impetus to the whole system being dominated by a few awesomely rich cronies.

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Responses

  1. graeme: what is wrong with naked short selling? you enter into a contract to deliver shares at a certain date. as long as you deliver the shares i don’t see what is wrong.

  2. “drscroogemcduck Says:
    June 8, 2008 at 6:14 am e
    graeme: what is wrong with naked short selling? you enter into a contract to deliver shares at a certain date. as long as you deliver the shares i don’t see what is wrong.”

    What you are talking about is covered short selling. Where you enter into a contract to replace the shares at a certain date.

    Naked short selling is something different. Covered short selling is a good thing. It can be a catalyst to knock bad overpriced shares from off their pedastal.

    Naked short-selling is fractional reserve. In that claims to more shares than what exist are created.

    You were right to stick up for normal short-selling.

    Good on you.

    First sensible post all day.

  3. naked short selling is similar. you enter into a contract with the buyer to deliver the shares by a certain date.

  4. Well look. Normal short-selling is like this. I borrow a parcel of shares of someone WHO ACTUALLY OWNS THEM.

    Hence the POSSESSION of those shares is unambiguously transferred to me for that time period. And so the amount of shares that everyone owns is unchanged.

    Naked short-selling is where you borrow shares from someone who doesn’t own them or you otherwise bullshit the market by selling shares that you don’t own. Hence the market will perceive that the supply of shares is higher than it really is. And all price signals are thrown out of whack.

    Then when you cannot deliver you just issue an IOU. About 9 billion a day in non-delivery IOU’s are kicking in in America is what I heard.

    Since short-selling is inherently risky these guys will pick on smaller companies. It will wreck the capital raising capacity of small companies and can be made to permanently underprice these stocks so therefore wrecking the efficient working of the market.

    But if you stick to covered short-selling thats a market enhancer.

  5. where is the fraud you nitwit? doesn’t failure to perform lead to contractual breach?

  6. graeme:

    normal selling. i have the shares. you give me the money and i agree to transfer X shares to you in Y days.

    naked short selling. i don’t have the shares right now. you give me the money and i agree to transfer X shares to you in Y days.

    you don’t need the shares at the point in time the contract is agreed on. you just need to deliver them.

  7. “where is the fraud you nitwit? doesn’t failure to perform lead to contractual breach?”

    Once the racket becomes general it no longer seems to. Instead what happens is that the contract non-performs. And an IOU is written. But thats at a high level of corruption of the market. Hence the operators have the clients over a barrel. If the client pressed the matter he would likely wind up with nothing.

    I was hoping that there would be some sort of natural balance to it. That were there a fractional reserve crash the stock market would crash, but the fact of all these ponzi shares might help boost the share price and the two rackets balancing out eachother. But that doesn’t seem to happen. Since the people producing ponzi shares are going to be hit up financially as well. So the opposite is the case. There will be more of these ANZ/Opes disputes as to who owns the shares. And since things must be resolved in court its a blow for capitalism and a win for cronytown.

  8. “Andrew Says:
    June 8, 2008 at 8:18 am e
    Graeme,
    My father in law sells computer equipment – but he carries no stock. He agrees to deliver a computer to certain specifications in a week. He does not yet own that computer – but he does believe he will be able to deliver it as he knows several possible suppliers of such computers.”

    What happens in this case is the height of property rights. Once the money has changed hands the computer is definitely the clients. There is no dispute who owns the computer at any time. There are no two claimants to the computer at any time. The computer is sourced overseas and put together on the spot out of parts already in existence in the warehouse. If the computer cannot be delivered the client will get a refund and not an IOU. If the client instead gets an IOU then this would probably be fraud.

  9. So REGULATOR REYNOLDS married into money hey?

    ANOTHER DUMBING DOWN OF ENTREPTENEUR-GENES.

    Pity the father in law

  10. “graeme:

    normal selling. i have the shares. you give me the money and i agree to transfer X shares to you in Y days.

    naked short selling. i don’t have the shares right now. you give me the money and i agree to transfer X shares to you in Y days.

    you don’t need the shares at the point in time the contract is agreed on. you just need to deliver them.”

    Thats not the racket we are talking about. This naked short selling involves more than two parties. And it involves selling shares you don’t have possession of. You just made it up that you had the shares. Or the person who had control of the shares put them in hock when he was supposed to be minding them. So the two parties have created make-believe shares out of thin air. And gypped the market and debauched the pricing and capital allocation system.

  11. Usually its the rich tycoon with the dumb bimbo wife.

    Here we see the tall banker-himbo snaring some rich guy’s daughter to produce a dumber next generation.

    Not a better world.

  12. The first situation you envisage Scrooge doesn’t involve the ability to PYRAMID a whole slew of ponzi-shares on top of the real ones.

    Say I sell the shares short. I have access to only 100 shares. But I sell 1000 shares short. Then the person who buys those shares lends them to someone else and he sells them short, then the next crowd lends them on and sells them short.

    Hence the possibility arises that we can have a pyramid of ponzi-shares repressing the ability of a growing company to issue more shares at anything like a decent price.

    Now some deep pocket gentleman can note the underpricing of these shares and buy so many of them that the whole ponzi-scheme unravels. We note here two things. The whole market operation is now the profitable province of only the bigshots. And until some bigshot When the bigshot unravels the market and destroys all the ponzi-shares a whole string of people get gypped and don’t have the shares they thought they had. And the startup has lost years of potential development.

    Since the people who lost the shares must try and get them back in court and cannot the whole market is the province only of bigshots who can deal with the court overhead.

  13. If at some later date everyone gets desensitized to this racket no-one will be able to perceive the fraudulent nature of the practice because of the desensitization. The market then will be a crony-controlled outfit and will be inefficient.

    The idea will be to have the company pay the fraudsters really high salaries for this racket. Then when the meltdown comes wind up the company. No problem. Limited liability.

  14. Limited liability is another gyp and should be banned. all current ltd liability companies should have their assets seized for profiting from this privllege

  15. Yeah good point Kiwi. Stupid people seem to be upwardly-mobile at the moment.

    Notice that its only regulations that correspond to clear property rights that Jason Soon and regulator-Reynolds find offensive. They’d rather have these things go through an elitist court system to block out the bigshots from competition from below.

    That way you get a consolidation and continuation of an aristocracy of bludgers whose blood is getting thinner and genes are getting dumber with each new generation.

    I don’t know about this banning of legal liability though. Still one wonders where natural law stands in all this with these seperate legal entitities. These are basically government creations in this day and age. I’m just supposing that when you get the rules right these seperate legal entities won’t be priviledged above your normal operator.

    At the moment you’ve got this dividend franking which helps out the bigshots unnaturally. And if it was the case that it was simply retained earnings that went untaxed then the little guy could more easily expand his capital in order to take these entrenched bigshots on.

  16. if naked shorts haven’t caused the stock market to collapse, and if naked shorts are like fractional reserve, and if the stock market doesn’t have a reserve bank to print stock doesn’t this imply that fractional reserve is stable and doesn’t need a reserve bank.

  17. No it doesn’t. Because the reserve bank has to keep bailing these guys out. They have been bailing them out bigtime since last August. But actually they are in a state of being within a month of total meltdown at any time.

    Had Bernanke not flushed money into the system since late last year the entire system would have collapsed. No question about that at all.

  18. Even when we are not talking about a total crash which people talk about for years afterwards we can see that there is constant damage to business from this fractional reserve racket. Since its business spending that is the first thing it causes to collapse or cause malinvestment.

    If we could pull up the data we would see many times between 1987 and now where productive expenditure has either soared…. causing malinvestment…. or crashed, causing business disruption and loss of momentum for the economy to progress.

    So its doing us damage all the time. Worst of all its drawing the banks away from making money by creating wealth. The loss of a functioning financial sector is a terrible loss for wealth production in this country.

  19. As a matter of fact I just wiped it this second. But if thats not the reason still we have to explain your extreme irrationality in the last few months.

    “I am able to short stocks if I choose because I deal with broker firms that have stock lending operations. So if i want to short a stock i simply borrow it. there is nothing illegal about that. So get to know the fucking difference.”

    This appears to be a lie and cannot be tolerated. Nowhere in the above can you find any implication that I didn’t know the difference.

    ” like Mark Hill because he is a very talented economist. If could be bothered to leave your fucking ego behind you could learn a lot from him and others.”

    Now you are just being a complete fucking idiot.

  20. You see that. Contrary to what the idiot Reynolds maintained there is no problem with making fractional reserve illegal in any of its forms.

    See the reaction when you make a form of fractional reserve illegal. The fear and anger that it entails if you just so much as SPECULATE that a fellow could be practicing fractional reserve comes on fast once the practice is made illegal.

    To even mention that someone might be practicing it becomes a grave slander in the eyes of the market participant.

    Hence we just had an object lesson in the idiocy of Reynolds months-long silly game.

    Once fractional reserve is illegal there is no mucking about. And every person is scandalized by the very suspicion that it may be being practiced.

    Thats a QED for me.

  21. Because he hasn’t promised the same computer to more than one party in any given time period.

  22. I cannot really think of any situation of fractional reserve that relates to only two parties. One thing about fractional reserve is that allows a PYRAMID. A ponzi-scheme. A mountain of make-believe-computers and only a few computers as the base from which all the pretend computers stand on top of.

  23. Limited liability is SOCIALISM cuz. Or crony capitalism. same thing really.
    Having these bigshots protected from being sued is not clarity in property rights.

    you have to agree it should be ended. there can be partnerships. there can be sole traders.

    But this corporations jive? Its like the East India company all over again.

    IBM, Microsoft, BHP, Apple – these should all be dissolved. These are products of THIEVERY

  24. someone please tell me Kiwi Fruit is taking the ‘puss’

  25. Yeah its a powerful argument that you make. But the thing is these companies have appeared to have lead to great wealth creation when first formed. Also they put a layer between oneself and governmental thieves.

  26. Yeah I’d be interested in what angle you are coming from with this Kiwi.

    Supposing Limited Liability companies were based on 100% equity and had to make reasonable provisions not to get into debt. Supposing they could only go into debt on account of being sued for some legitimate grievance and had to really move to get back out of debt if something out of the ordinary did happen.

    Well then perhaps we could judge them then to be on an equal footing with human beings and a legitimate case of freedom of association.

    What is your thoughts on the matter Kiwi? Would that not make things even, all-squares and according to Hoyles?

  27. “It all comes back to the Martians doesn’t it?”

    Explodians Tillman. You lie.

    See ya.

  28. Is their fake computers pyramided on real ones?

    Endless idiocy month after month isn’t tolerated here Reynolds. What exactly is your comprehension problem. This is not Catallaxy.

  29. Under normal circumstances a normal purchase narrows the window of ambiguity of ownership. You grab the coke. The coke is not yours. The money is. Still you hold the can of drink.

    You hand the coke and the money to the checkout chick. She scans the coke. The coke is yours but the money isn’t the shops until you get your change. The entire procedure is rigged to take the ambiguity of ownership and squeeze it down to a few seconds maximum.

    With the computer example there is a reason why the thing is drawn out. We want to take advantage of the great benefits of global production and also of JUST-IN-TIME manufacturing. Well something close to JUST-IN-TIME anyhow. We want the customisation and cost reduction that this brings. When does the father-in-law pay the foreigners? Its likely that he holds the money for the customer and doesn’t pay the suppliers until the computer has left the foreign wharf. You see when you buy from Dell for example you are tracking the computer all the way to Australia. So if I was dealing with these people as a middle man the money would kick in to their account just after, or just before the computer left the foreign wharf.

    What I’m saying is we tend to work in such a way as to minimize the ambiguity of ownership.

    Naked short-selling is doing the opposite of this just as any other type of fractional reserve is. Its inventing assets that aren’t there, shooting them through the computer, and getting the benefits from the make-believe assets fraudulently.

    Which is odd. You’d think these shares would be individually tagged.

  30. On another note I just noticed this:

    SOMEBODY SEZ:

    “No, John will not debate this.”

    DOVER BEACH SEZ:

    Interesting. Never thought I here a scientist utter these words. They sound Birdesque.

    THIS IS RIDICULOUS. THERE IS NOTHING I WON’T DEBATE. DOVER IS STILL SMARTING OVER BEING WHIPPED IN A WORLD WAR II ARGUMENT. This is where dover had been sold on the standard story of exalting the Soviets, who in sober fact had helped start the whole war as Hitlers allies.

  31. Everyone else will think you are nuts and arguing with yourself.

    Too late.

    Stupid people seem to be upwardly-mobile at the moment.

    Graeme Bird
    Translation Services
    Doc 12b-Xii

    It’s not my fault I live in a septic tank.

  32. No what I’m saying is that stupid people appear to be upwardly mobile these days. Thats a vast exaggeration of course. Hard-working, reasonably-smart, disciplined people do tend to get ahead. But there is a slant to it I think, where things are not working quite as effectively as it would do under a freer system which wasn’t so biased in favour of rich incumbents.

    There is all sorts of overhead to not getting things right. John D Rockerfeller came from a poor background and started off as a bookkeeper. The rules were far more open and free in those days. And it isn’t any surprise that a business genius like him would be free to rise to the top. Andrew Carnegie started off in poverty. Now it strikes me that there are still a lot of opportunities open. But in practice its likely that you are going to want to have a starting point in the upper-middle-class if you were starting from today. Whereas in the 1840’s you could probably do well starting from abject poverty so long as you could read.

    When I started out I had quite a lot of problems. Ill-discipline, undiagnosed ADD and so forth. But what made it all worse in those days was a rigged labour market that produced these high levels of unemployment. That side of things has been improved upon somewhat. Whereas other factors seem to have gotten worse. Because of my faults I’m not assuming that under a free society I’d be swimming in cash now. Its possible of course. But I wouldn’t see it as a cut and dried matter.

    When Arnold Scharzenegger wound up in California it was pretty clear that he would be a success. There was a motivated and smart kid who could get by on only 4 hours sleep a night. So he could be doing two things at once. For example he could be getting a degree in business at the same time as making a fortune in California real estate.

    I’m not at all sure now that someone starting off with his traits in 2008 Australia could necessarily guarantee such success. 1960’s Australia no question such a person would do well even from scratch.

    We don’t want to get things right just for our own sakes. If that were the case I might want the Reserve Bank to inflate my debts away and boost the price of my house at the expense of the country at large.

    Rather we want to get things right because thats the right thing to get.

  33. Well said Graeme.

  34. Mr Jason Soon. There’s been no pro-regulation stuff. On the other hand you couldn’t help saying that. On account of your confessed lack of free will.

    Claiming I’m pro-regulation when its you that are pro-regulation is a lie that has to go.

    Compare the amount of pages of regulation there would be if you had everything boiled down to natural law. You could probably get it down to the size of Harry Potter book, with nine tenths of that to do with the vexed question of infrastructure investment, ownership and charging. Banking might be about ten pages. With the summary about two paragraphs. Tax law might be 20 pages. Occupational health and safety might come in at 30 pages. Law to do with non-human, separate legal entities might be 20 pages with a three paragraph summary.

    Someone who wants to reduce regulation perhaps 100 or 1000 times is not pro-regulation. Leave the lying and leftist reversalism for Catallaxy.

  35. Yes Graeme
    I am programmed to ridicule you.
    But what I was actually saying was that that was a good comment that should be blogged. You might even get more productive discussion from that

  36. It contains tawdry details of my life. So not really appropriate for a threadstarter.

  37. Do tell, what ‘tawdry details’ specificly?

  38. Well its up their in the thread-starter Hopper. Any relation to Dennis?

  39. If this Kiwi Bird is indeed your cousin you should not only disown him, you should give him a good pounding, kind sir. His policy to abolish limited liability would spell an end to the glorious inheritance we call capitalism. If he is not joking he is not only a cur, a traitor and a rascal, but a Communist spoiler of promethean proportions and a mass murderer to boot. Please Mr Bird disown this Kiwi Bird if you wish to keep an unblemished record in my eyes.

  40. Right. But no I think he was laying out the hyperbole to get the ball rolling on a new topic. Because while, as you say. limited liability is a great wealth creator, still it priviledges the fictional entity over the human one. There is some sort of imbalance there. And its hard to know how natural law ought view the matter. When I get time I’ll do a thread on this topic. But it won’t be the sort of thread where I can take a considered opinion. Only toss a few ideas around.

    You need a sort of safe enclosure to start a business. If you put “Business incubators” in the search field it will come up with some preliminary thoughts on this matter on another thread.

    You need a sort of wrap-around deal going on, to cope with the free market. But you also want this enclosure somewhat divorced from the family or other social institutions. Thats where this company with its own contractual arrangements and statement of purpose, separate from the purposes of any one individual, comes into it.

    If we had a massive ubiquity of high-rise living and working space then the enclosure, from which a fellow might start a part-time business and expand from there, might be a workshop and two spare bedrooms for offices. The ability to build this sort of cosmic and physical “enclosure” ought also be helped along by some sort of very high tax free thresholds, and no tax on retained earnings.

    But the limited liability concept might be part of that enclosure idea.

    Australian mainstream economists think about markets in a way that seems divorced from a bloke and his property. The man and his gear and the place where he lives. The man and his cave and he’s hoarding gear like Smorg.

    There are certain things that a bloke needs to be able to acquire, before he can even think of starting a new business. And a limited liability company may well fit into this scenario or perhaps somewhere down the line, perhaps after the business has expanded.

  41. So far the only idea I’ve come up with to make limited liability and unlimited liability equal, is to take away from the ltd the ability to borrow money except in extremis.

    The thing might be to try and think through what problems this might cause. What possible problems this might solve.

  42. “And Bird you idiot, shorting is not illegal. That’s only the case on Mars.
    Analysts! They’re like the far left of the finance world.”

    So sayeth JC. The newly softheaded JC. Once the lying starts JC its hard to be quits with it.

    He may as well be getting his stuff from the tooth fairy because he’s clearly not reading anything I’ve written. Unless he’s turned into a fellow who lies all the time.

  43. This JC is a Mediterranean is he not Mr Bird? Well look, sir, at the state in which these countries are run. And then admire the glorious British Empire before its fall at the hands of socialists. Therein you shall see played out on a macro scale the deficiencies of a ‘JC’ and the superiority of British stock such as yourself. Backbone, truthtelling, integrity, need I say more? These can never be bested by a low cunning at wheeling and dealing.

  44. Yeah I can see what you are saying. But he wasn’t like that before. He was a real straight-shooter. I guess you have that compromise with the fractional reserve and a couple of sacred cows and the bullshitartistry starts spiralling outward from there.

    Hopefully he’ll come round. He’s got to ask himself whether he wants to be in Australia-City or Shylock-Town. The saviour said that the Kingdom is within you. Being righteous and living in Australia-City is a state of mind.

    I have some confidence in him in the longer run.

  45. No Andrew Reynolds came up with no such example. You are lying AGAIN Mark Hill. Fuck you are a maniac. You cannot even write a single post without lying.
    .
    So far you haven’t managed a single comment without lying.

    What did these teachers do you people at school. I was lucky I was older and wasn’t subject to it.

  46. Fucking hell. That silly waste-of-white Andrew Reynolds.

    Trying to make the case that its fraud to hand someone some money and say “go and build me a computer” What would be wrong with that? Its pretty straightforward isn’t it?


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