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For The Record  

FTR #650 Analyzing the Causes of the Crash –
Interview with Lucy Komisar

UBS, Swiss Meltdown (Photo Krzysztof Makara)MP3: Side 1 | Side 2

Introduction: Exploring reasons underlying the crash of 2008, investigative journalist Lucy Komisar reveals that the relevant question is not so much “What went wrong?” but “What didn’t go wrong?” An investment industry corrupt to its foundations, and colluding actively and routinely with the officials and institutions charged with its regulation, engaged in fraudulent commerce massive in scale and brazen in character. Lucy explores the use of devices and instruments such as short selling, naked short selling and credit default swaps in order to manufacture vast amounts of wealth in the markets.

“Short selling takes place when investors sell a stock they don’t own, in hopes it will fall and they will buy it more cheaply when they have to deliver it to the buyer. Under SEC rules they have to buy them and deliver them to their purchasers within three days. Except, they often don’t. They sell shares they don’t own and don’t intend to buy. That is called naked short selling. And since these days investors don’t get share documents on official paper, but simply trust their brokerages that their shares are on file, they generally don’t know that they’ve paid out money for nothing.”

Lucy defined credit default swaps:

” . . . the next crisis that will be provoked by short selling. Mortgage securities were bundled into large packages which were then transferred to large Wall Street firms. These firms created derivative contracts from them which were resold. The contracts could be traded in the credit swap market. Its prospective collapse dwarfs the problem of mortgage-backed securities. . . .”

Another major element of discussion concerned the necessity of the U.S. government using its stewardship of AIG to investigate the offshore operations through which it conducted business in the past. (Interested listeners can pursue the role of short-selling–probably executed by financial entities associated with the Underground Reich and its Bormann capital network–in operations associated with the assassination of JFK, the 9/11 attacks, and the collapse of investment bank Bear Stearns.

Program Highlights Include: AIG’s use of “captive” insurance companies; review of AIG’s Coral Reinsurance subsidiary; the manner in which naked short-selling and other investment practices corrupt corporate representation and governance; the manner in which naked short-selling and related practices destroy the value of companies that are targeted by the shorts; an overview of the corruption of the equities of the Taser company—in charge of manufacturing Taser devices for law enforcement; the roles of the DTC and DTSCC in assisting the shady stock operations that undermined the financial industry; RICO suits filed against SEC chairman Christopher Cox; collusion of the SEC with the nefarious stock operations.

1. Introducing one of the major focal points of discussion, Lucy explains “short selling” and “naked short selling,” as well as the roles of the Depository Trust Corporation in the gambit. Note the restrictions placed on short selling in the wake of the stock market crash of 1929, ascribed by some analysts to a “massive conspiracy” involving short selling.

“‘Naked short selling,’ the trade in counterfeit or non-existent shares, is a massive fraud run by the country’s big brokerages and the stock clearinghouse, the Depository Trust Corporation, with the collusion of the SEC.

Short selling takes place when investors sell a stock they don’t own, in hopes it will fall and they will buy it more cheaply when they have to deliver it to the buyer. Under SEC rules they have to buy them and deliver them to their purchasers within three days. Except, they often don’t. They sell shares they don’t own and don’t intend to buy. That is called naked short selling.And since these days investors don’t get share documents on official paper, but simply trust their brokerages that their shares are on file, they generally don’t know that they’ve paid out money for nothing.

Naked short selling works is done through a device called stock lending organized by the Depository Trust Corporation (DTC) in New York. It is a subsidiary of the DTCC (Depository Trust & Clearing Corporation) a holding company charged with clearance and settlement of securities. It is owned by its members, the major broker dealers. The Depository Trust Corporation (DTC) is the institution that transfers shares between buyers and sellers. When a DTC broker member sells shares and cannot deliver them to the purchaser, the depository makes arrangements to loan securities to the firm

It works like this. After the share trade occurs, it goes into the clearing system, if the seller does not have the securities available, the depository steps in with an automatic program that goes through all the available shares on deposit where account holders have said these shares can be loaned out if you need them. The DTC and the lender get commissions.

The DTC borrows the shares from its members -brokerages — to ‘deliver’ them to the buyer. But that’s just on paper; they are not really delivered. Shares used to be represented by paper certificates. Now that the DTC turned them into electronic files and kept the custody, it has made billions of dollars lending them out, over and over, getting a fee each time they ‘lend’ a share. The investor with an account at the lender has an account that says he owns those shares, and the buyer that has received shares also ‘owns’ the shares.

Through this stock lending, you can multiply the number of shares in circulation so the number is greater than the number of shares authorized and outstanding. The illegal system affects stocks, bonds, currencies, and strategic metals.

Restrictions on short selling were put into the Securities Acts of 1933 and 1934 because evidence that the ‘sheer scale of the crashes was a direct result of intentional manipulation of US markets through abusive short selling by a massive conspiracy.'”

2. Lessons from the Great Depression went unlearned and the past has been repeated. The evolution of electronic records keeping exacerbated the problem. Former Director of Transfer Agent Services for Depository Trust Company Susanne Trimbath provides much of the information utilized by Lucy. Offshore accounts are used in these transactions, and one of the results of this is the corruption of corporate securities—more shares are counted in proxy fights than are in existence overall!

“But the problem surfaced again in 1971, when the DTC was set up to handle clearing electronically, instead of have runners exchange checks and certificates between buyers and sellers. Ten years later the SEC approved a stock borrowing program that set up a pool of shares from brokers margin accounts (where the broker had lent cash to the customer to buy the securities). Then gave an opening to those who wanted to manipulate shares by borrowing them and never returning them to the pool. There was a sale but no delivery of real shares to the buyer.

Susanne Trimbath, Director of Transfer Agent Services for Depository Trust Company (1987 to 1993) first heard about the problem from the people organizing proxy voting. Then in 2003 in New York, she had coffee with two lawyers at a mid town Manhattan. She said, ‘They described scenarios of short selling, stock lending and offshore accounts and how some small firms were being driven out of business. They said what ten years earlier was a minor problem which occasionally created difficulties for corporate voting had expanded tremendously and become an enormous problem.

‘It occurred to me that someone outside the system had realized this loophole existed and began to exploit it.’ She said the scenario they laid out was that DTC was being used for or was engaged in fraudulent behavior. They said accounts in offshore Bermuda were being used.’

She explains, ‘Let’s say there are shares that have been borrowed by the DTC from one broker and loaned and delivered to the investor customer of another broker. That customer leaves the shares with the broker. The buyer’s broker can also say these shares are lendable and they are lent again to cover settlement for another buyer.’ Then three investors think they own the shares – the original owner/lender, the first buyer, and the second buyer. Through this stock lending, the number of shares in circulations can multiply so it can be greater than the number of shares authorized and outstanding. That means that the same shares can be shorted repeatedly and never delivered, making it possible to sell multiples of the shares that really exist. She said, ‘I don’t think there’s a limit to how many shares you can duplicate this way. There’s nothing in the system that would prevent you from turning ten shares into ten million.’

3. Like current Secretary of the Treasury Henry Paulson, former Treasury Secretary Robert Rubin worked for Goldman Sachs, itself deeply implicated in many of these activities. A 1996 change in regulation permitted the lending of shares from pension funds to short sellers.

“In fact, 1993 was the year that Clinton’s Treasury Secretary Robert Rubin, former managing partner of Goldman Sachs where he was head of arbitrage and trading, issued an exemption to the short-sale borrow rule: if you were a market maker, arbitrage or hedge fund, you didn’t have to locate stocks or bonds for shorting. You could just sell them without having them or even knowing where you could get them. SEC Chairman Arthur Levitt, and FED Chairman Alan Greenspan agreed. The rules would apply to those with the power to do the most damage.

Then, in 1996 there was a change in the margin rules. From 1934 to 1996, it was illegal to lend anything except securities held in margin accounts. Now for the first time securities in pension funds could be loaned to short sellers. Under criticism, the SEC in 2004 adopted Regulation SHO which required short sellers to locate securities to borrow before selling, and also imposes delivery requirements on broker-dealers for securities that were suffering substantial naked shorts. But it exempted market makers, and there were no penalties for violations.

Trimbath says sellers’ failure to deliver stocks to buyers went from $1.4 billion in 1995 to $13 billion in 2007. ‘The DTCC [the parent of the DTC) could throw out of system anyone who doesn’t deliver securities for settlement. But they are owned and controlled by people who fail to deliver securities for settlement.’

The winners are the short sellers and the DTC and brokerages. They all make a lot of money selling shares that don’t exist. This corrupt system has destroyed dozens, maybe hundreds of companies before it helped bring down Fannie Mae, Freddie Mac, and probably Bear Stearns and Lehman Brothers. The SEC has known this for years and, siding with the brokerages, has chosen not to protect companies or investors. The result is that companies are beaten into the ground, their share prices falling because of massive sells. That hurts not only the companies, that can’t borrow because of bets against their future earnings and stability, but victimizes shareholders, including pension funds that hold the retirement money of American workers, and employees of the companies who lose their jobs.”

4. More about the massive irregularities caused by some of these devices, relating the misadventures of Zann Corporation, a Michigan firm. Note the deep complicity in this activity by the SEC and other agencies and institutions designed to attenuate this sort of behavior.

“In 2005, Robert Simpson, CEO of Zann Corp, a Michigan technology company, saw its shares drop 98% in two years. To test the system, he paid about $5,000 for more than one million shares of a property-development company called Global Links. He got delivery of the shares, which turned out to be 126,986 more shares than the company had issued. So he owned 100% plus. A day later, more than 37 million shares of the company were traded. The day after that, over 22 million traded. None of them were his. All of them were counterfeit.

Both the US government and municipalities who issue bonds also suffer. Trimbath says that because more investors claim that their dividends are from tax-free municipal bonds than there are bonds that exist, they are failing to pay $1.54 billion a year in federal taxes. The investors are simply getting cash from their brokers who tell them it is dividends, but in fact it is not. And since there is a greater market for municipal bonds than the bonds that exist, the municipalities could be selling more bonds and obtaining the cash. Instead, the brokers get their clients’ cash and use it for their own purposes, paying out ‘dividends’ at a lower percentage than the interest they would have to pay if their borrowed that money legitimately.

Trimbath, highlighting the short selling problem on supposedly safe, conservative securities: Federal Reserve of NY data from the 22 primary dealers who have to report trades and failures to deliver show fails to deliver of $680 billion a day over the last 3 weeks. The most recent report, for October 8, 2008, show $2.5 trillion Treasury bill fails to deliver. It is the highest it’s ever been. Since 2001, 15% of mortgage backed securities trades failed to settle. There were no mortgages under these bonds because they were phantom bonds. There was excess demand for these investments. Rather than allow this to push prices up, the regulators allowed failures to deliver to depress prices. If the 13% of extra outstanding shares of Fannie and Freddie had been translated into buyers getting real shares, that would have driven up the price.

The failure of regulation by the SEC and the clearing agencies on naked short selling is a matter of record. The SEC has the information showing more shares owned than issued, but has constantly allowed loopholes in the system and carries out no real enforcement. Civil penalties are minimal. One of the loopholes allows traders to avoid the normal settlement process of the National Securities Clearing Corporation (NSCC) and thereby to avoid public and regulatory scrutiny and to evade US securities laws.

The SEC ruling as a result of the financial crisis temporarily banned short-selling for shares of some 900 companies for a few weeks, But when the bailout was approved, it allowed short selling to resume. But the problem is not so much short selling, as naked short selling.

Harvey Pitt, who was Bush’s first SEC chairman 2001 to 03, said in November, ‘Phantom shares created by naked shorting are analogous to counterfeit money.’ Pitt, however, ignored efforts by outside critics to get him to do something about naked short selling while he had the power to do so. C. Austin Burrell, a former options trader for Shearson Lehman and longtime critic of short selling, has pointed out to Pitt and other SEC officials over years that selling counterfeit and therefore unregistered securities was a violation of the Securities Act. But the SEC under Bush chairs Pitt, William Donaldson and Christopher Cox ignored him and other critics, and did nothing to stop it. In fact, the rules of the SEC and other market institutions facilitate it.

A DTCC (Depository Trust & Clearing Corporation) subsidiary, the National Securities Clearing Corporation (NSCC) is charged with clearing each trade. At the end of the day, the NSCC instructs the Depository Trust Company, also a DTCC subsidiary, to move shares between participants. The DTCC writes the rules. And it panders to the industry. One of its loopholes allows traders to avoid the normal settlement process of the NSCC and thereby avoid public and regulatory scrutiny and evade US securities laws. The rule allows them to settle shares between members outside the normal system. They use the clearing system for money transfers but agree to settle trades off market. This is called ex-clearing, ie an agreement between market participants to clear trades with each other rather than at the NSCC. The National Association of Securities Dealers has the same rule.

The SEC decided that provisions regarding naked short selling do not apply to shares that don’t settle at NSCC. The SEC does not regulate fails to deliver outside of the National Securities Clearing Corporation NSCC system, supposedly because they’re rare. But they are not rare. Do they know how frequent they are? They haven’t a clue. Furthermore, SEC’s July emergency order, requiring pre-borrowing shares of 19 other financial stocks to short them, exempted market makers. The primary market makers are Goldman Sachs (Fannie Mae) and LaBranche & Co. (Freddie Mac). (A market maker is a bank or brokerage company that will purchase the stock from a seller, even if it doesn’t have a buyer lined up. In doing so, it is ‘making a market’ for the stock. The market maker makes money on the ‘spread’ (profit margin) on the stock that it sells after it buys it.) Most market participants were not allowed to short sell without pre-borrowing shares for settlement and in a 12 day period, this amount only accumulated to 5.5 million increased shorted shares. The majority of the 3.5 billion shares sold were not sold by legitimate investors who owned the shares. They must thus be shares counterfeited by the market makers, Goldman Sachs and LaBranche & Co. who could avoid the normal settlement process of the NSCC. The numbers were known by the regulatory and clearing institutions.

New York Stock Exchange (NYSE) collects trade-by-trade information. It would know that shares were all owned by registered institutions and that millions or even hundreds of millions of shares should not be trading. The National Securities Clearing Corporation (NSCC) also has records that show billions of shares could not have been legally settled through their settlement system. Why don’t the institutional investors themselves notice that more shares are traded than owned? Private investment advisors to institutions don’t care as long as the money keeps flowing, they buy stock, and get their fees.”

5. One of the most devastating devices affecting the global financial landscape are credit default swaps.

“Credit Default Swaps: the next crisis that will be provoked by short selling. Mortgage securities were bundled into large packages which were then transferred to large Wall Street firms. These firms created derivative contracts from them which were resold. The contracts could be traded in the credit swap market. Its prospective collapse dwarfs the problem of mortgage-backed securities. On September 23, 2008, in testimony before the Senate Banking Committee, SEC Chair Cox asked Congress to regulate the market for credit default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities. He said, ‘I will conclude, Mr. Chairman, by warning of another similar regulatory hole in statute that must immediately be addressed or we will have similar consequences. The $58 trillion notional market in credit default swaps to which several of you have referred in your opening comments that is double the amount that was outstanding in 2006, is regulated by absolutely no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimum disclosure to the market. This market is ripe for fraud and manipulation and indeed we are using the full extent of our anti-fraud authority, our law enforcement authority right now to investigate this market.’

Credit default swaps are contracts between dealers on stocks, bonds, mortgage backed securities or other financial instruments (‘securities’) that can be hedged by selling the securities at the current market value. Speculators may trade a swapped contract for a future delivery of a security several years in the future. Then they hedge the contract by selling the securities into the public markets or to investment funds, such as pension funds, even though they don’t own them.

It works like this. You are Merrill Lynch and I am Lehman. You and I decide we’re going to short-sell a stock. I agree to write a contract to you that says in five years I will deliver to you 10 million shares of ‘xyz’ on Jan 1. You agree to write a contract to deliver to me 10 million shares on Jan 2. You and I never exchanged a dime, we just wrote a contract. We’re allowed to hedge that. I can sell 10 million shares of ‘xyz.’ So can you. Even though we don’t own them. 20 million counterfeit shares just got sold. At the end, the contracts are shredded. The money is made from naked short selling, from the price decline of the asset. The most profit is obtained if the security declines to zero.

Once they do their hedge, the brokers then can sell the contract to another party – to their favorite hedge fund client. Then that client is allowed tohedge again the risk of the ten million shares. It is legalized fraud.”

6. More about the SEC’s complicity in these gambit:

“They don’t settle. Cox said we have no statutory authority, the SEC doesn’t regulate contracts. But when they sell the equity into the market as a hedge, the SEC has control. It has turned a blind eye. Neither the SEC nor any regulator accepts authority over credit default swap market even to require minimum disclosure. Now they’re saying we have antifraud provisions to go after these people. But they never used them.

US traders have issued credit default swap contracts far greater than housing issues. The value of these contracts has been estimated to be $58 to 62 trillion. Compare that to the fact that the entire U.S. public retirement accounts amounted to $17.6 trillion at the end of 2007. Sixty trillion dollars is equal to the value of all publicly traded stocks listed on all major global stock exchanges. Cox said, ‘Because CDS buyers don’t have to own the bond or the debt instrument upon which the contract is based, they can effectively naked short [ie, sell and never deliver] the debt of companies without any restriction, potentially causing market disruption and destabilizing the companies themselves.’ Because the companies’ shares will plummet.

He said, ‘This is a problem we have been dealing with, with our international regulatory counterparts around the world with straight equities and it’s a big problem in a market that has no transparency and people don’t know where the risk lies.’ In fact, the SEC has not dealt with this. Cox asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities. Days later the SEC issued a new order indicating it now realizes that voluntary submission of information by the major broker dealers does not work. So expect regulation.

The analyst said, ‘Money in Wall Street does not vaporize in a financial crisis; it is only transferred from investors to those Wall Street participants who benefit from market crashes. There have been very large credit default swap contracts and other methods of naked short selling used against U.S. securities. There is an incentive for the small number of profiteers in these large naked short positions to crash the value of the underlying securities, but this will, as it already has begun to, crash the U.S. economy. These profiteers can then conceal the fact that they have previously stolen the money from the financial system by selling securities they created from sham contracts. There are vast pools of money gained from this activity by a small number of identifiable participants and if the U.S. cannot counteract these pools, financial devastation is assured.

‘It’s collusion; it violates fraud and anti-manipulation rules, but the SEC has never enforced the rules against these types of contract. As soon as they get to the large broker dealers, they don’t deliver on promise to investigate. Now they say they’re going to.”

7. When in Congress current SEC chairman Christopher Cox helped to facilitate the implementation of these scams.

“In fact, Cox as a congressman in 1995 sponsored the private securities litigation reform act to knock civil securities cases out of the RICO law. A number of companies had brought RICO actions in federal court against prime brokers and hedge funds. Cox himself was sued in a RICO case in 1992. So he protected himself, the brokers and the funds. The law gave the SEC sole authority to bring RICO actions related to stock fraud. Awards under the law can be significant – three times the amounts stolen. The SEC has never used it.

The analyst said, ‘The exchanges, the clearing firms, the settlement firms have the data. It’s completely illegal to sell something long that you don’t own. The contracts are illegal because they mark the shares ‘long’ [meaning they own the shares they are selling] so they never show up as ‘short.’ It’s the dealers’ responsibility. If they didn’t mark them as short, it’s fraud. And if they developed very large sums of these, it’s market manipulation by the fact of the number of shares they developed. This is theft on a major scale. They should do disgorgement of ill gotten gains. Should people go to jail? Absolutely?

He said, ‘I would completely revamp. They’ve taken a concept designed to be a risk hedge. It wasn’t a bad concept. But they changed it to hedge securities they don’t own. There’s no hedge. There’s no economic risk. That type of contract should be eliminated. Any credit default swap based on no underlying assets should not be allowed to trade. He said, ‘The only answer I see is to go after the very large amount of money that has been stolen from the economy. It’s not hard to track. Credit default swaps are ‘off balance sheet transactions’ in broker-dealers’ books, But they report them in footnotes in 10K filings and auditors are aware of them. Regulators don’t see them. It’s a non-reporting report. They use special accounts, trusts, special purpose enterprises — that is the likely home for the money that was stolen through manipulation of shares through fraudulent methods.

It’s sitting offshore, in the Cayman Islands or the British Virgin Islands. Or it flowed through there. We know who executed the trades. Henry Paulson as a Goldman Sachs executive and senior partner is very versed at how these types of markets work and understands the complexities of credit default swaps and that the prime broker dealers are carrying these transactions off the books. But they always back off of the large prime brokers.”

8. Lucy discussed the necessity of examining AIG’s use of offshore tax havens.

“The U.S. takeover of the world’s largest insurance conglomerate, AIG, puts it in a unique position to look into the inner dealings of a company that is a profligate user of tax havens. AIG has employed offshore shell companies to cook its books and dodge taxes. The new U.S. managers should investigate how they do it. AIG’s favorite offshore jurisdictions are Bermuda, Barbados, Switzerland, and Luxembourg, places immune from even the lax enforcement of America’s state insurance regulators and the Securities and Exchange Commission (SEC). AIG’s offshore subsidiaries include American International Assurance Company Limited, Bermuda; American International Reinsurance Company, Ltd., Bermuda; AIG Life Insurance Company Ltd., Switzerland; and AIG Financial Advisor Services, S.A., Luxembourg. AIG in the past has used tax havens to evade regulations and hide insider connections in supposedly “arms-length” deals. This is especially significant as the company has moved into financial services and asset management. It has also used the offshore system to evade U.S. taxes.

Here are two examples, the first reported exclusively by this writer. AIG helped Victor Posner, a notoriously crooked investor, set up an offshore reinsurance company so that Posner could evade U.S. taxes. The policy scam was discovered in the early 1990s, after the SEC prosecuted Posner for a fraudulent takeover scheme concocted with Wall Street thieves Michael Milken and Ivan Boesky, ordered him to pay $4 million to fraud victims and banned him from serving as officer or director of any publicly-held company. New managers took over Posner’s NVF Corp., which ran a Delaware vulcanized rubber plant. An insurance agent charged with examining company policies discovered that NVF was paying AIG’s National Union Fire of Pittsburgh substantially over market for workmen’s compensation insurance. AIG reinsured the policy through Chesapeake Insurance, an offshore reinsurance company Posner owned in Bermuda. In essence, NVF, owned by Posner, was buying insurance from an AIG company which was buying reinsurance for the policy from an offshore company owned by Posner. Bermuda provided tax and corporate secrecy, so Chesapeake’s books were safe from the eyes of American regulators and tax authorities. AIG and Posner made out like bandits. AIG got a higher commission from the inflated NVF premium before sending the rest to Chesapeake. Posner wrote off the entire amount as a business expense and enjoyed the extra cash in Bermuda, tax free, stiffing the U.S. government. Reduced profits also meant smaller dividends and share prices for investors. The insurance agent cancelled the NVF policy with AIG, but the Delaware Insurance Department did not make the scam public or take any action against AIG. A former insurance department regulator told me, “This was not an isolated case with Vulcan [NVF]. AIG did that a lot. AIG helped companies set up offshore captive reinsurance companies.” A “captive” is owned by the company it insures. AIG, he alleged, “would then overcharge on insurance and pay reinsurance premiums to the captives, giving the captive owners tax-free offshore income.”

AIG says that it “pioneered the formation of captives” and offers management facilities to run them in offshore Barbados, Bermuda, Cayman Islands, Gibraltar, Guernsey, Isle of Man, and Luxembourg – all places where corporate and accounting records are secret and taxes minimal or nonexistent. Another scam helped AIG dodge taxes and U.S. regulations. Insurance companies normally insure themselves by laying off part of their risk to reinsurance companies, so if a claim comes in above a certain amount, the reinsurance company will pay it. State laws also require them to keep a certain amount of capital available to pay out claims. If they have reinsurance, that amount can drop. Companies have to show losses – amounts they have paid out – on their books. If they have enough good reinsurance, they get a credit for that against their losses. The reinsurer, of course, has to be an independent company; the risk isn’t reduced if it’s just moved to another division of the same company. In the mid-1980s, two of AIG’s reinsurers failed. AIG would have had to curtail writing new business, since rules require a certain ratio of assets to risk. Finding new reinsurers was going to be difficult and expensive. CEO Maurice “Hank” Greenberg persuaded several of his business friends to set up a company into which he could “cede” AIG insurance. The company was launched with a private sale of shares organized by Goldman Sachs, then headed by Robert Rubin. Greenberg’s front men were loaned the money to “buy” risk-free shares in the new Coral Re, an allegedly independent offshore reinsurance company, to allow it to illegally move debt off AIG’s books and violate rules about maintaining minimum levels of reserves required to pay off claims. The company was registered in Barbados, where capital requirements and regulation are minimal, where American regulators couldn’t readily discover AIG’s involvement and where, as an added incentive, it could evade U.S. taxes. If Coral Re was an AIG affiliate, it would have to pay taxes on its income. . . .”

(“U.S. Should Examine AIG’s Use of Tax Havens” by Lucy Komisar; 10/26/08.)


13 comments for “FTR #650 Analyzing the Causes of the Crash –
Interview with Lucy Komisar”

  1. I’m impressed with the clearest analysis read to date on this subject. This level of knowing and deliberate theft by deception deserves the most direct application of the law of fraud.
    Of course Boobus Americanus just elected a new overseer, but the fox will keep the henhouse security contract in perpetuity, or so it seems.

    It needs to be produced as a “Scrooge McDuck” cartoon with the bad guys in burglar’s masks, or black hats to make the point where in the transaction the conflict of interest arises. That’s if we want to penetrate the government trained minds of our fellows. And we must. There is power in numbers. Those without power cannot defend liberty, read honest courts.
    Please keep on writing. Solid, clear style. Lucid.

    Posted by Jim Lorenz | November 27, 2008, 10:09 pm
  2. I’m impressed that you broke Lucy’s story about 5 months ago and only now people and the mainstream press are starting to get outraged at AIG, and not even at the outrages that matter about AIG…

    Posted by rk | March 19, 2009, 8:30 am
  3. I only heard about short selling and naked short selling a short while ago. It astounds and mystifies me. This seems to be a completely dishonest practice and I wonder why there aren’t law prohibiting it. All these investors are going to be broke because of the dishonesty of a few and there isn’t enough surface protection in the world to counteract it.

    Posted by Ginny Crandall | January 6, 2011, 1:28 pm
  4. […] FTR #650 […]

    Posted by Lucy Komisar on Naked Short Selling and other Wall Steet gambits | lys-dor.com | April 19, 2011, 10:12 pm
  5. With the Eurozone crisis still going strong, it’s worth keeping in mind that the EU only banned naked shorting of EU sovereign bonds a couple of weeks ago:

    Asset managers decry ‘purely political’ short-selling ban

    William Hutchings
    19 Oct 2011

    Asset managers and brokers have reacted against the “purely political” imposition of a ban on naked shorting of European Union sovereign government bonds and stocks, which is expected to come into law following a late-night agreement between the European Parliament and representatives of EU member states.

    Naked short-selling is carried out when an investor uses a credit default swap to make a bet against a financial product, such as sovereign bond, without holding the underlying asset itself.

    Andrew Baker, chief executive of Alternative Investment Management Association, which represents the global hedge fund industry, said: “We have previously expressed our concerns about the impact of a ban on uncovered sovereign CDS.

    “It could not only reduce liquidity and increase volatility in debt markets, but also increase government borrowing costs and reduce real economy investments in EU member states.”

    Proxy hedging and market-makers are exempted from ban, the observer said.

    Andrew Shrimpton, a partner of financial advisory firm Kinetic Partners and a former executive of the Financial Services Authority, also said the proposed ban will reduce liquidity in the CDS market, “leading to increased volatility of CDS prices, undermine confidence in member state sovereign bonds and make it more expensive for member states to finance budgets”.

    He said: “This has been demonstrated by similarly ill-timed regulatory tightening such as the banning by France, Italy, Belgium and Spain of the short selling of financial stocks earlier this year, which undermined confidence in bank stocks, reduced liquidity in the banking system and eventually led to a taxpayer-funded bailout of Dexia.

    I love this rational: Banning naked short selling undermines confidence in stock, sending them plunging. Given how often market’s “confidence” is used to justify insane policies, I’m starting to think that it isn’t just regulatory reform we need. The “market” clearly needs a life coach to deal with this scary scary world. Fear not Mr. Market, there is hope!

    Posted by Pterrafractyl | November 4, 2011, 10:12 am
  6. Another priceless gem, this time by SEC chief enforcer Robert Khuzami:

    Promises Made, and Remade, by Firms in S.E.C. Fraud Cases
    Published: November 7, 2011

    WASHINGTON — When Citigroup agreed last month to pay $285 million to settle civil charges that it had defrauded customers during the housing bubble, the Securities and Exchange Commission wrested a typical pledge from the company: Citigroup would never violate one of the main antifraud provisions of the nation’s securities laws.

    To an outsider, the vow may seem unusual. Citigroup, after all, was merely promising not to do something that the law already forbids. But that is the way the commission usually does business. It also was not the first time the firm was making that promise.

    Barbara Roper, director of investor protection for the Consumer Federation of America, said, “You can look at the record and see that it clearly suggests this is not deterring repeat offenses. You have to at least raise the question if other alternatives might be more effective.

    S.E.C. officials say they allow these kinds of settlements because it is far less costly than taking deep-pocketed Wall Street firms to court and risking losing the case. By law, the commission can bring only civil cases. It has to turn to the Justice Department for criminal prosecutions.

    Robert Khuzami, the S.E.C.’s enforcement director, said never-do-it again promises were a deterrent especially when there were repeated problems. In their private discussions, commissioners weigh a firm’s history with the S.E.C. before they settle on the amount of fines and penalties. “It’s a thumb on the scale,” Mr. Khuzami said. “No one here is disregarding the fact that there were prior violations or prior misconduct,” he said.

    So precious: “never-do-it again promises were a deterrent especially when there were repeated problems”

    I guess Mr. Khuzami would be in a position to know how these things work…

    Circle Jerk 101: The SEC’s Robert Khuzami Oversaw Deutsche Bank’s CDO, Has Recused Himself Of DB-Related Matters

    Submitted by Tyler Durden on 04/24/2010 13:08 -0400

    The incest continues: the WSJ has informed that the SEC’s chief investigator, Robert Khuzami, used to be general counsel for Deutsche Bank, and presumably reviewed numerous CDO-related transaction, while on the “other side” of the wall. “As part of that job, he worked with lawyers who advised on the CDOs
    issued by the German bank and how details about them should be disclosed to investors. The group included more than 100 lawyers who also defended the bank against lawsuits and vetted other financial products, these people said.” The good: he probably knows more about CDOs than any other person in government administration history, and thus would not have brought on the Goldman case without being aware of all the potential tripwire nuances (and yes, if the Goldman case gets to the discovery stage, which it will, it is game over for Goldman’s defense strategy, which means settlement and/or much worse). The bad: who knows how many Deustche Bank CDO’s of comparable or worse nature he allowed to see the light of day. The most interesting: “Because of Mr. Khuzami’s old job and his financial interest in the
    company, he has recused himself from any matters related to Deutsche Bank, according to an SEC spokesman.”
    With Greg Lippmann’s (legendary head of CDO trading at the German firm whose assets are greater than all of Germany’s GDP) recent sudden departure, and the SEC being prevented from bringing CDO-related charges against the bank (for the time being), is DB currently actively cleaning up its tracks? After all the firm was one of the top 3 CDO issuers in the period under consideration.

    Posted by Pterrafractyl | November 8, 2011, 8:18 am
  7. More precious nuggets from the SEC:

    On Wednesday, the judge homed in on the issue of banks who settle with the S.E.C. and pledge to not violate the securities laws, yet repeatedly do so. Why then, Judge Rakoff asked, had the commission not brought any contempt charges against large financial firms in the past 10 years?

    Mr. Martens, the S.E.C. lawyer, said that the agency felt that there were better and more appropriate ways to deal with chronic misconduct. The S.E.C. has said that striking settlements is often preferable to a costly and protracted lawsuit that it might lose.

    Judge Rakoff called the contempt power — a judge’s ability to punish a party for disobeying a court order — “the backbone of the judiciary.” He questioned whether the S.E.C. was really serious about ever seeking an injunction against repeat offenders.

    “It’s just for show,” Judge Rakoff said.

    “We’re not saying that we will never use injunctive relief,” said the S.E.C. lawyer.

    “Hope springs eternal,” the judge replied.

    Aha, I see, this must all part of some sort of “dumb cop/dumber cop” routine designed to lull Wall Street into a false sense of security. Like they said…

    “We’re not saying that we will never use injunctive relief”

    Springeth Hope! Springeth!

    Posted by Pterrafractyl | November 10, 2011, 8:12 am
  8. […] I recommend that you listen to the one-hour interview that she gave to radio host Dave Emory in For The Record #650. Freeman also touches on some complementary elements to try to sum up the question of financial […]

    Posted by Kevin Freeman on economic and financial terrorism: The Chinese threat and Unrestricted Warfare | Lys-d'Or | January 27, 2012, 6:31 pm
  9. […] FTR #650 […]

    Posted by Lucy Komisar on Naked Short Selling and other Wall Steet gambits | Lys-d'Or | April 27, 2012, 11:41 am
  10. Well isn’t that nice….new EU regulations are in place to ban naked short selling. But fear not intrepid investors that still desire the ability to engage in the naked shorting of government bonds! While the new regulations do indeed clamp down of the direct naked shorting of sovereign debt it appears that derivatives and exchange traded funds (ETFs) will still do the trick:

    Europe’s naked short selling ban leaves investors with skin in the game
    By Guest Contributor
    December 4, 2012

    By Christopher Elias

    LONDON/NEW YORK, Dec. 4 (Business Law Currents) – New European short selling regulations are dressing naked short sellers in a regulatory straightjacket, but ill-fitting provisions may leave investors with skin in the game.

    In force since 1 November 2012, the regulations were supposed to curb naked short selling and to provide transparency on those trading against European sovereign debt. However, with gaps between short selling methods and alternatives popping up in exchange traded futures and synthetic forms, the holes are already becoming apparent.

    Part disclosure regime, part (naked) sovereign shorting ban, the European regulations impact a wide variety of trades and there are signs that the markets are already adjusting.

    Broadly speaking, the rules ban the shorting of European sovereign debt other than as a hedge, and require the disclosure of substantial short positions in listed European companies.

    Uncovered “naked” shorts

    Perhaps most controversial are the new rules on uncovered and naked short positions. “Naked” shorts are positions whereby a firm sells shares that they do not own or have not borrowed.

    Unlike a “normal” short selling scenario, a naked short seller will not buy or borrow the shares before selling them on. Instead the seller will hope to purchase the shares prior to delivering on its sale or in some cases will just fail to deliver those shares.

    By way of illustration, suppose a naked short seller sells shares in Company A at $50 each for delivery in three days time. The seller will then hope that the value of Company A’s shares fall in the interim period so that he or she can purchase those shares at less than $50 before delivering them to the buyer whilst pocketing the difference.

    The process of naked short selling can lead to what are known as “failed to deliver” notices – instances whereby the short seller is unable to obtain the securities and therefore fails to deliver them to the buyer. Although far from conclusive, such fail to delivers have been charged with creating market volatility and potentially sharp decreases in a company’s share value.

    The new regulations seek to largely do away with naked short selling by requiring firms to have either borrowed or be able to borrow shares to cover their short positions or in the case of sovereign borrowing to have some corresponding hedge.

    Naked sovereigns

    Curiously, the regulations are rather more relaxed in relation to naked sovereign or credit default swap (CDS) positions than in relation to company shares. Even more perplexing are that the rules are subtly different for CDS positions and for uncovered short positions- a difference that may have ramifications for market participants.

    Both CDS and uncovered short positions do not require a firm to have borrowed or be able to borrow securities, provided that the position is being used for the purposes of a permitted hedge.

    Perplexingly, what constitutes a permitted hedge, however, differs between credit default swap positions and more straight forward shorting. For uncovered short positions, a sovereign debt short will be permitted if it is being used to hedge a long position in the debt instruments of an issuer, the pricing of which has a “high correlation” (80 percent according to ESMA FAQs) with the pricing of the sovereign debt.

    By contrast a naked CDS is required to hedge against the risk of default of the issuer where the short seller has a long position in the sovereign debt or other financial contract that is correlated (but not “highly”) with the risk of decline of the sovereign debt.

    The correlation between CDS and sovereign debt may be judged quantitatively (with a co-efficient of at least 70 percent) or qualitatively using historical information from the previous 12 months and includes indirect exposures obtained through funds, indices or special purpose vehicles.

    The distinction seems to suggest that CDSs may offer more flexibility to short sellers than short sovereign bond positions. The CDS 70 percent correlation is lower than the sovereign bond 80 percent correlation and includes more types of financial instruments. Whereas bond short sellers must have a correlating debt instrument, a CDS could match sovereign debt to a more diverse universe of financial contracts.

    Despite the fact that the regulations are barely in force, there are signs, however, that some investors have already found a way around the regulations.

    Back to the future(s)?

    As Europe clamps down on CDSs and sovereign shorting, there has been a sharp uptick in the number of investors using exchange traded futures. Capable of performing in an economically similar way to CDSs or short positions, investors may be plowing into these more lightly regulated instruments.

    IFR, a Thomson Reuters publication, noted recently that on the eve of the short selling rules coming into force, flows into futures had increased dramatically. Not included within Europe’s short selling regulations, exchange-traded government bond futures may be being used by some to evade the ESMA restrictions.

    Open interest in Eurex-listed Italian BTP futures has almost doubled since the announcement of the ban back in March, from 32,271 to a new peak of 62,489 according to IFR.

    Volumes in OAT futures have rocketed even more sharply with open interest reaching a high of 146,923 on October 24 despite the contracts only launching in April.

    The futures provide similar economic exposures to CDSs or short selling of European sovereign debt but without the restrictions imposed by the regulations. The impact of which may be to move naked or other short selling from over-the-counter world to exchange traded futures.

    As well as futures, exchange traded funds (ETFs) have begun offering investors a synthetic alternative to buying or selling sovereign debt. Shortly after the regulations were announced, Deutsche Bank launched DB X-trackers that offer daily leveraged exposure to U.S. and UK sovereign debt.

    Funds of this type allow investors to go long or short against the sovereign bond market without having to buy bond futures contracts, which in some cases can prove costly.

    Posted by Pterrafractyl | December 5, 2012, 8:12 pm
  11. Huh:

    SEC enforcement chief Khuzami is leaving

    By Sarah N. Lynch

    WASHINGTON | Wed Jan 9, 2013 5:46pm EST

    (Reuters) – Robert Khuzami, the enforcement director at the U.S. Securities and Exchange Commission who worked to rebuild its tarnished image after the Bernard Madoff scandal and the financial crisis, said on Wednesday he is leaving the agency.

    Khuzami follows SEC chairman Mary Schapiro and several other high-profile SEC officials who have stepped down since President Barack Obama’s re-election in November.

    The SEC did not name a replacement for Khuzami, who is expected to leave at the end of the month.

    Agency insiders say candidates for the job could include the SEC’s deputy enforcement director, George Canellos, and the regional director of the SEC’s Boston office, David Bergers.

    The new enforcement chief will have to address a still-large pipeline of cases stemming from the 2007-2009 financial crisis.

    While the SEC brought a record 735 enforcement actions in fiscal 2011 and a near-record in fiscal 2012, that ended September 30, the agency also faces criticism that it has not been tough enough in holding top executives accountable for their roles in the crisis.

    Some critics of the agency have questioned why the SEC has not brought any cases against Deutsche Bank, where Khuzami worked as the top lawyer for the U.S. unit during a period when it was heavily involved in packaging subprime mortgages into securities, a practice that has been linked to investor lawsuits and regulatory scrutiny at other banks.

    In response, Khuzami said he had already spent 12 years as a prosecutor before ever working on Wall Street.

    “If I had some inappropriate sympathy for my former employer, I wouldn’t have come in and in six weeks torn the place up and created specialized units to focus on exactly the kinds of things that they and other banks were doing,” he said.

    Posted by Pterrafractyl | January 9, 2013, 3:33 pm
  12. It could have been worse, although not much worse:

    Flaws Seen in ‘Almost Every’ Mortgage-Bond as Crash Began
    By Jody Shenn May 21, 2014 11:50 AM CT

    Investigators probing mortgage-bond sales in the run-up to the financial crisis are finding improper actions occurred “not only occasionally, but in the end, with almost every” deal examined, a U.S. official said.

    Authorities have uncovered evidence of lenders and bond issuers obscuring risk even more as the market began to crash to limit their own losses, with employees “laughing” about the environment, Michael P. Stephens, the Federal Housing Finance Agency’s acting inspector general, said.

    “They were more concerned about their bonuses than what was going in these pools,” Stephens said today at a Mortgage Bankers Association conference in New York. “At the core of it is greed.”

    A task force of state and federal authorities set up in 2012 to probe the practices still has “more than a dozen ongoing investigations,” including some that may be pursued criminally, according to Stephens. While the government “locking everybody up” is not “the long-term answer for the taxpayer being put in the target zone for all these bailouts,” enforcement is needed to address issues that “destroyed investor trust,” he said.

    Stephens leads the Office of Inspector General section of the Residential Mortgage-Backed Securities Working Group, whose other members include the Department of Justice and state attorneys general. The group coordinated a $13 billion settlement between JPMorgan Chase & Co. and the government last year, among other actions. His own agency is the watchdog for the overseer of taxpayer-backed Fannie Mae and Freddie Mac.

    ‘Fifth Inning’

    Banks are probably in the “fifth inning” of mortgage investigations, he said in response to a question, based on the regulation nine innings of a baseball game. That’s partly because the companies have been slow in negotiations and seeking broad settlements, he said.

    “They may be anxious to get it behind them, but obviously not too anxious to write a check,” he said. “I don’t see anything in the near future that’s going to wipe the slate clean with all of the investigations.”

    Americans should be aware that “hundreds and hundreds of people have been indicted and convicted of some form of mortgage fraud,” such as bankers and foreclosure firms, he said. His organization has indicted about 82 people in the past six months, including three who committed suicide, he said.

    Huh. So were all the low-income home buyers the right wing routinely blames for the housing crisis also employees at the banks selling those mortgage backed securities? Because that might explain how the financial crisis was all the fault of poor people, although it still wouldn’t explain why further deregulations are the answer.

    Posted by Pterrafractyl | May 22, 2014, 1:42 pm
  13. I don’t know, but perhaps the recent Initial Public Offering of the Alibaba Goup, could be shady. I don’t quite get why regulators allowed the odd corporate structure.


    “5. What’s really for sale: When investors buy Alibaba, they are actually purchasing shares in a Cayman Islands entity called Alibaba Group Holding Limited.

    But that company — surprise! — doesn’t actually own Alibaba. Instead, Ma and another co-founder, Simon Xie, own most of Alibaba’s biggest businesses according to Chinese law. Ma and Xie are then under contract to turn profits over to the Cayman entity.

    The arrangement is called a variable interest entity (VIE), and is necessary to get around China’s strict foreign investment rules. But investors should be aware of the structure — especially since Chinese courts have not clarified the legality of the arrangement.

    A recent research report by the U.S.-China Economic and Security Review Commission took a dim view, arguing that “risks could mount for unsuspecting U.S. investors who buy into … precarious VIE structures.” ”
    When the biggest IPO in U.S. history could be a undemocratic, shady offshore Cayman Islands
    Trans-national deal where, most investors and regulators are ignoring risks that seem pretty apparent, this whole deal might not bode well for the future.


    Posted by GK | October 5, 2014, 8:50 am

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