Naked Short Sales Hint Fraud in Bringing Down Lehman
“The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.
As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30. The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.”
This is one of those things that is easy to allege, hard to disprove, has coincidental supporting data, and provides just enough plausability to make people forget (albeit temporarily) the cold hard facts of the day.
If I were at Bloomberg, here is how I would have written this article:
Over-Leverage, Under-Capitalization Brings Down Lehman (Update)
“The biggest bankruptcy in history might have been avoided if Wall Street had been sufficiently capitalized, used only moderate leverage, and avoided making false assumptions in their econometric models.
As Lehman Brothers Holdings struggled to survive last year, it was using as much as 40 to 1 leverage to purchase AAA securities that turned out to be no where near as safe as the triple A ratings assigned to it by Moody’s and S&P made them appear. Lehman, the second largest securitizer and trader of mortgage backed securities behind the also defunct Bear Stearns.
Wall Street continued practicing one of its darkest arts — the over rating of securities, bonds and derivatives — by self-interested parties in exchange for fees. In the 1999-2000 tech boom, the analyst community vastly over rated stocks with “Buy” and “Strong Buy” ratings. Sell wa hardly in their vocabulary. These were mostly profitless “dot com” companies built on the merest of concepts. The underwriting fees were substantial, however, and the analysts firms were well paid via large syndicate and IPO banking fees.
The same conflict of interests remained on the Wall Street, even after the dot com collapse. This time around, it was the ratings agencies — Moody’s, S&P, and Fitch — that slapped triple A grades on paper that turned out to be junk in exchange for huge fees from the underwriters.
The SEC has yet to seriously investigate how and why so many triple A rated issuances have collapsed and failed. These highly rated papers are linked to “payola” ratings, a practice that involved Ratings Agencies selling their highest seal of approval in exchange for large fees.”
When we were short Lehman at the time, from $30 and higher — it was an easy borrow, and there was no need for anyone to short naked. That was not why they went bankrupt.
My biggest regret about Lehman Brothers — aside from all the unfortunate souls who lost their jobs when the company imploded — was that I lacked the cojones to buy a big slug of Puts when we went short . . . They seemed kinda pricey at the time.
Previously: Financial Sector: Beware LEH, CIT (June 3rd, 2008) http://www.ritholtz.com/blog/2008/06/financial-sector-beware-leh-cit/
Gasparino vs Einhorn, Kohn & Ritholtz (June 5th, 2008) http://www.ritholtz.com/blog/2008/06/gasparino-vs-einhorn-kohn-ritholtz/
Source: Naked Short Sales Hint Fraud in Bringing Down Lehman Gary Matsumoto Bloomberg, March 19 2009 http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&
Naked Short Sales Provoke Complaints but No Cases KARA SCANNELL WSJ, March 19 2009 http://online.wsj.com/article/SB123742141942278703.html
Originally published at The Big Picture blog and reproduced here with the author’s permission.