If Naked Short Selling had anything to do with Lehman brothers, why are Lehman Brother's bonds near worthless? I mean, you're arguing that it's a good company that went bankrupt because it's stock went to zero? Puhleze. It was a bad company that everyone saw failing, so they shorted the stock. Then, because everyone shorted the stock, they couldn't get a borrow.
And when people short a stock without "getting a borrow", that's called - all together now...
Judd, in your column you say, "All the while, Wikipedia remains the first option offered those searching the web for information about naked shorting, and its role in the current financial crisis." I just looked at the NSS article in Wikipedia, and as it currently reads it is extremely critical of NSS. It mentions the Lehman brothers, as well as a ton of other criticism. If anything, I would propose that the article's current POV has swung to the other extreme than it was a year ago.
I see on the article's talk page that some editors don't think the article is sufficiently critical of NSS, but it does seem a whole lot more critical than it was before.
There's no doubt the article is much better than it was. Infinitely better. But the legacy of Weiss is the article's probationary status, which means it currently looks the way it should have about one year ago.
What's the ultimate cause of death of every human ever born? Lack of oxygen to the brain.
What's the ultimate cause of death of every company ever founded? Lack of cash.
In humans, the process can take place slowly and naturally, as with illness, or quickly, as with a bullet.
Lehman was sick and it might have proved terminal, but we'll never know, because naked short sellers put a bullet in Lehman's head.
I do believe that had Lehman's demise been allowed to progress naturally, the shock to the system would have been much less severe. Lehman might have been acquired or even bailed out. More importantly, AIG would almost certainly not be in its current bind, caused mainly by having to pay out on the Lehman credit default swaps (life insurance policies) the naked short sellers apparently wrote before pulling the trigger.
But then again, now we taxpayers own 80% of an insurance company, so maybe it wasn't such a bad deal after all.
I recently created this video, which addresses the larger issue.
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QUOTE(Hipocrite @ Tue 31st March 2009, 6:03am)
It's all the fault of people who were using bad models to price the risk of collateralized instruments. Slicing something into 5 parts doesn't change the risk characteristic of the recombined thing, so the expected loss of the 5 parts has to equal the whole. ABS CDO models failed this sanity check.
I'd certainly agree that this was a major factor - in fact, I remember Unrepentant Vandal saying the main problem was "quants," which actually amounts to the same thing you're saying here. But to say it's "all" the fault of such people is simply wrong. In effect, you'd be exonerating all sorts of guilty parties, in the banking and housing industries, the consumer-lending industry, the media, the Bush Administration... all sorts of stock swindlers (yes, including NSS proponents), and I'm sure countless others that one could name.
But again, you're right about the fact that those responsible for the obfuscation and overvaluation of collateral (and thus the underestimation of risk) were right up there, at or near the top. Of course, if I were a real conspiracy theorist, I might go so far as to suggest that all of this was hidden, synchronized, and media-manipulated so as to increase the likelihood of a "crash" - rather than a gradual backing off from investor over-reliance on consumer and mortgage debt, which presumably would have been far less damaging to the overall economy. And who really benefits most from a crash...?
Luckily, I'm not much of a conspiracy theorist. Most days, anyway!
I recently created this video, which addresses the larger issue.
I'm impressed with this video. I was actually unaware that traders purchased deeply underwater puts just before the collapse of Bear Sterns. I'm still a bit agnostic of some of your message, but this is a good video for its purpose.
Thanks also for specifically stating that short selling is beneficial.
I also think it's clever that you made the first part the shortest. Would hook people into watching the whole thing as a typical 10-minute YouTube chunk might not.
Someone asked you before, but what publisher do you think produces the most skeptical and independent financial news? Your site, OK, but of the major periodicals, what journalistic institution most often impresses you (as rarely as that might be)?
This post has been edited by One: Tue 31st March 2009, 7:03pm
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QUOTE(One @ Tue 31st March 2009, 1:43pm)
I'm impressed with this video. I was actually unaware that traders purchased deeply underwater puts just before the collapse of Bear Sterns. I'm still a bit agnostic of some of your message, but this is a good video for its purpose.
I think that stuff was in the guest-lecture Powerpoint posted a couple of weeks ago, but it wasn't presented quite so clearly as it is here.
The pounding drums in the background are a nice touch!
What's the ultimate cause of death of every human ever born? Lack of oxygen to the brain.
What's the ultimate cause of death of every company ever founded? Lack of cash.
To be pedantic for a moment, it's dangerous to say "all" in biology. Due to the fact that the brain requires more than oxygen (and some of the other stuff is not fungible for oxygen) you can't say that for every last person. Some people wind up brain-dead on ventilators from lack of glucose (diabetic shock) or thermal overload damage to the brain (heat stroke) without ever being short of oxygen at any point. But you're more or less right for everybody else, if the modern defintion of death is used.
For companies, it's hard to imagine any problem that can't be fixed with enough money, although if all your good people leave and you have hire all new ones, is it the same company just because you kept the name? This happens for rock groups, too, you know. :)You get into identify problems at some point, just as you would with full power over repair of the brain. If a company is totally outlawed and confiscated by a government which refuses to be bought off, and it's recreated from the ground up, someplace offshore with enough cash, is that "the same" company, or just a duplicate/clone?
I think that stuff was in the guest-lecture Powerpoint posted a couple of weeks ago, but it wasn't presented quite so clearly as it is here.
The pounding drums in the background are a nice touch!
The powerpoint from last month was received so positively, I decided decided video is the format in which to educate others about these issues.
Because what resonated most with the viewers of the first one were the Bear Stearns put options, I figured that was a good place to start.
So far, across the various places where it's posted, this as been viewed about 30,000 times, by the way.
Unfortunately, folks still seem to find 24 minutes too long, which might be keeping it from going truly viral. So I'm working on a new one, shooting for the sub-five range, which will then point folks to the longer ones.
To be pedantic for a moment, it's dangerous to say "all" in biology. Due to the fact that the brain requires more than oxygen (and some of the other stuff is not fungible for oxygen) you can't say that for every last person. Some people wind up brain-dead on ventilators from lack of glucose (diabetic shock) or thermal overload damage to the brain (heat stroke) without ever being short of oxygen at any point. But you're more or less right for everybody else, if the modern defintion of death is used.
For companies, it's hard to imagine any problem that can't be fixed with enough money, although if all your good people leave and you have hire all new ones, is it the same company just because you kept the name? This happens for rock groups, too, you know. :)You get into identify problems at some point, just as you would with full power over repair of the brain. If a company is totally outlawed and confiscated by a government which refuses to be bought off, and it's recreated from the ground up, someplace offshore with enough cash, is that "the same" company, or just a duplicate/clone?
If you want to take that concept to a whole new level, watch the film The Prestige.
Reading analysis about this, I see that some commentators dismissed the out-of-the-money puts as insider information of Bear Stearns (presumably real) liquidity problems. I really doubt that. Demanding that the options board open a new series is a terrible way to reap insider profit; might as well personally demand that the SEC investigate you. Much better for insiders to use the most commonly-traded contracts in order to blend in; they'd still make a killing on that drop, and much less likely that they would get subpoenas.
It's a great way to help spread rumors though. *whisper whisper...* "liquidity problems, you say? Why, yes, those $30 puts did make me suspicious."
This post has been edited by One: Tue 31st March 2009, 7:55pm
Reading analysis about this, I see that some commentators dismissed the out-of-the-money puts as insider information of Bear Stearns (presumably real) liquidity problems. I really doubt that. Demanding that the options board open a new series is a terrible way to reap insider profit; might as well personally demand that the SEC investigate you. Much better for insiders to use the most commonly-traded contracts in order to blend in; they'd still make a killing on that drop, and much less likely that they would get subpoenas.
It's a great way to help spread rumors though. *whisper whisper...* "liquidity problems, you say? Why, yes, those $30 puts did make me suspicious."
The only problem with that, in the case of Bear, is that the first reporting on the puts didn't happen until three days later, on 3/14/08. Although it's true that's not to say that others didn't notice it on their terminals beforehand.
One interesting counter-theory I've heard, which seeks to explain the relationship between the puts and the fails, is that the puts somehow triggered wild programmed short selling.
I don't know nearly enough about computerized trading (other than I thought it was severely limited after the crash of 1987) to opine on that one way or another.
Reading analysis about this, I see that some commentators dismissed the out-of-the-money puts as insider information of Bear Stearns (presumably real) liquidity problems. I really doubt that. Demanding that the options board open a new series is a terrible way to reap insider profit; might as well personally demand that the SEC investigate you. Much better for insiders to use the most commonly-traded contracts in order to blend in; they'd still make a killing on that drop, and much less likely that they would get subpoenas.
It's a great way to help spread rumors though. *whisper whisper...* "liquidity problems, you say? Why, yes, those $30 puts did make me suspicious."
The only problem with that, in the case of Bear, is that the first reporting on the puts didn't happen until three days later, on 3/14/08. Although it's true that's not to say that others didn't notice it on their terminals beforehand.
The traders would know, and that's probably the most important thing. Even in a pre-electronic era, I can't imagine that Bear's market maker would watch them open a $30 out-of-the-money series with heavy volume without telling several of his buddies about it; it's a damned weird thing to see. I imagine that most people involved in trading that stock knew almost immediately, including analysts at the other investment banks, which would later deal the death blow by refusing to be Bear Stearns' counterparty.
Also, this 3-12-08 story mentioned it, but understated the open interest on that contract.
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QUOTE(WordBomb @ Tue 31st March 2009, 3:17pm)
One interesting counter-theory I've heard, which seeks to explain the relationship between the puts and the fails, is that the puts somehow triggered wild programmed short selling.
They always get around to blaming the programmer-geeks sooner or later...
One interesting counter-theory I've heard, which seeks to explain the relationship between the puts and the fails, is that the puts somehow triggered wild programmed short selling.
They always get around to blaming the programmer-geeks sooner or later...
There's a poem about that. It's because, over-literal genies that you are, you always give your customers what they ask for, but quite often not what they really need.
Akahele - Judd Bagley, Weighing the options 
Tue 31st March 2009, 1:20pm
