Naked Short Sales Hint Fraud in Bringing Down Lehman

Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.
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If Dick Fuld said it, then it is true. He's a respectable guy and God bless him, I hope he takes up the righteuos cause. lmao.
 
Strange that Bloomie didn't interview/credit/mention Byrne and deep capture...or our very own flytiger. Dose guyz have been beatin' the SEC on the head for YEARS about this. :confused:
 
Failed trades correlate with drops in share value -- enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said.

While the correlation doesn’t prove that naked shorting caused the lower prices, it’s “a good first indicator of a statistical relationship between two variables,” she said.

Failing to deliver is like “issuing new stock in a company without its permission,” Trimbath said. “You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it.”

Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales.
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That article is a great example of how statistics can be twisted to support whatever position the author wants to take. Lets look at a couple of the examples the author quotes. First they posit that fail to deliver stock values increased almost tenfold from 1995 to the end of 2007. That sounds like an impressive number until you consider how much the overall value of the market increased during that period and average daily trading volume increased. As a percentage of those two numbers the increase is really very small. Not to mention that despite this supposed increase the markets rose quite nicely during this period.

Secondly look at the example of Lehman. While the increase in fail to delivers seems dramatic you have to consider average daily volume in the stock during this period was exploding. A much more accurate measure of a bear raid in a stock would be the number of days it takes to cover fail to delivers as a percentage of daily trading volume. That ratio was actually fairly steady during the initial decline in the stock. Of course it changed at the end when bankruptcy was declared but that is an unfair time to measure something like this. The company had admitted they were done.

Finally they point to short sales still being executed during the short ban the SEC imposed as if that is somehow surprising. If you understand how markets work you realize that to provide liquidity market makers need to short stock to keep spreads from widening to untradable levels. Market makers did not need to borrow this stock and did not do so due to the ever increasing negative rebates which would have prevented them from keeping markets as tight as they were.

While I am not conclusively saying the shorting of stock cannot cause short term volatility and a decrease in stock prices I fail to see how this article demonstrates that "one of Wall Streets darkest arts" caused Lehman to fail.
 
Bagley on the topic. You crunch your own numbers. LEHMAN was shorted/nakedshorted/manipulated to an untimely demise. Slow it down, maybe it wouldn't have failed. Mayber there could have been an orderly liquidation. Maybe we wouldn't have suffered. But definitely, laws were broken. And it doesn't matter. You will Congressional legislation, similar to what I predicted last year, when Congress reconvenes in April. Get over it.

There's no doubt that some of those fails were not the result of strategic naked shorting. Some were probably the result of failed delivery of long trades (probably because those shares had been lent out to shorts). However I'm satisfied that the vast majority of those fails were strategic short-side fails.

To understand why, look at the data:

date fails
9/18/2008 28,070,996
9/19/2008 29,851,884
9/22/2008 49,664,845
9/23/2008 41,863,300
9/24/2008 21,672,405
9/25/2008 15,848,613
9/26/2008 12,664,914
9/29/2008 6,381,250
9/30/2008 5,975,265

Now, because a fail does not become a fail until T+3, we adjust the chart as follows:

9/17/2008 49,664,845
9/18/2008 41,863,300
9/19/2008 21,672,405
9/22/2008 15,848,613
9/23/2008 12,664,914
9/24/2008 6,381,250
9/25/2008 5,975,265

9/18 was the date of the emergency order, which only applied to short fails generated after that date. As you can see, from their peak on 9/17, fails immediately began to drop steeply.

Coincidence?

I don't think so.

Summing up, the fails chart looks like the Matterhorn, with the SEC's emergency order at the peak. Because the order only applied to short side fails, I conclude that these are what the mountain itself is primarily composed of.

As for the Division of Enforcement's incredulity on this front, I can put that into context with a single word: Madoff.
 
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