Below is a speech on banking reform given last night by Mervyn King, head of the Bank of England. As you may have noticed, the banks that were deemed “too big to fail” a year ago are now, well, bigger. And despite much talk about reform, little has actually been done. King is intent on shifting the debate to the elephant in the room – breaking up the largest banks – and rightly so.
A nugget from his speech:
Never in the field of financial endeavor has so much money been owed by so few to so many. And, one might add, so far with little real reform.
And this:
The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.
Most notably:
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.
This is an issue that should be bigger than politics but, alas, appears mired in them. In fact, King now joins former Fed chiefs Paul Volcker and Alan Greenspan in publicly supporting the idea of breaking up the big banks, though each for different reasons. I think what they all have in common, though, is this:
You can’t have a free market if the government continues to favor big firms over small ones.
If there is a rational benefit to anyone – banks, long-term stockholders, customers or society in general – by letting these “too important to fail” banks grow even larger, I’m all for hearing it. We’re well past the benefits of economies of scale, no? Don’t we now have more systematic risk than we did 18 months ago?
And while the benefits are spurious, the costs of continuing to let the big banks control our financial system now seem fairly obvious. More specifically, the increase in government debt as a direct result of the credit crisis is approaching 40% of GDP.
So, Mr. King, here is to helping make sure your ideas get a little more consideration.
H/t to Baseline Scenario.
That was the name given to this recent presentation by Contango Oil & Gas CEO Ken Peak. Big Lebowski quotes are sprinkled throughout. Why? No idea, but I will abide.
Coen Brothers fans, rejoice.
The rest of you…well, even if Lebowski wasn’t your thing, and stealing diapers like this doesn’t make you smile, you’ve got to concede that at least No Country was memorable, no?
Lebowski fans may also find the names of several new lease blocks Contango bought pretty interesting: Dude, His Dudeness, and El Duderino. I am not making that up.
Oh, yes. Mr. Peak will fit in just fine at our investor meeting in the Keys next January. Or my name ain’t Nathan Arizona.
Q. What is “naked shorting”?
A. As I explained last week, shorting is a way to profit from a decline in the price of a stock. Shortsellers, though often vilified, play an important role in the stock market and were the first to spot the frauds at Enron and WorldCom.
It is important to distinguish naked shorting from regular shorting. In its simplest terms, naked shorting involves selling shares of stock that don’t exist. While not always forbidden, naked shorting done to manipulate a company’s stock price is unequivocally illegal.
Illegal naked shorting is typically done by hedge funds, or so it is theorized, with indirect support from those funds’ brokerages and an institution called DTCC, a critical player in the administrative world of stock certificates.
How do hedge funds short shares of stock that don’t exist? Depending on your point of view, naked shortsellers can create those shares out of thin air due to either glaring inefficiencies in the back-office world of certificate transfers…or institutionalized fraud on a massive scale.
The heart of the naked shorting issue revolves around locating shares to short. Last week I mentioned how in the process of shorting a stock a brokerage must first locate those shares for its shortselling client, typically borrowing them for a fee from another customer. The brokerages don’t always find those shares quickly, though. Brokerages often allow hedge funds to short shares before they have actually been located.
Can you see where this is going? The potential exists for aggressive hedge funds to keep asking for more and more shares to short, and as long as the brokerage keeps assuming it will be able to find those shares…and the DTCC keeps looking the other way…the pressure exerted by that naked shorting can continue to drive a stock’s price lower. By effectively shorting counterfeit shares, hedge funds can drive a company’s stock price significantly lower.
Wall Street denies naked shorting is a problem. Others, including the CEOs of companies that claim to be victims of naked shorting, believe otherwise. I’ll leave it to you to form your own opinion.
@PhilipEtienne Roger that. Will track it down. Thank you. in reply to PhilipEtienne 14 hrs ago
