Digital Counterfeiting

What compels me to pose this question and express the complaint is that I've been participating in a very interesting blog on a new theory on the demolition of Building 7 on September 11, 2001.  Building 7 is the building that housed government offices that were destroyed in an obvious controlled demolition sometime after 5:00 pm on the 11th.  If it has ever received mainstream media coverage, I don't know about it.  What I do know is that the average American citizen who gets most of their information from the mainstream media is not even aware that a third building "collapsed" on 9-11. 

The name of the blog is "American Everyman" and the article, "9/11 Shock Opera..." by Scott Creighton was posted by blogger  WillyLoman.   

Since Building 7 housed the SEC and with consideration for the massive amounts of Wall Street fraud that occurred in the 1990's and that continues to this day, the subject in the comments inevitably turned to the idea that Building 7 may have been destroyed because of the investigation and evidence of fraud committed by Enron which went down just before 9/11.  This would seem to be a viable theory if one believed that the SEC was actually "on the job" of being the watchdog of Wall Street.  At this point we know for a fact, that they are not as was proven by their failure to investigate and stop the Bernie Madoff scam even when handed their case by Henry Markopolous.   Strike One against the SEC.

Hedge Funds and Put Options

Towards the bottom of the blog, WillyLoman posted a link to three excellent, short videos that explain in simple terms that even a financials industry illiterate such as myself could understand, how the hedge funds are stealing equity value  from the market.  Basically they are Kiting securities.   For those who are too young to remember a time before financial transactions moved at the speed of light,  Kiting is one of the very oldest of scams against a bank. It used to be you could write a check and if you paid attention, you would know that it took several days to clear. So you could write a check with a zero balance in your bank account - in essence betting that you could make a deposit before the check cleared thereby getting a free loan from the bank.  Of course if you didn't make it with the deposit, it turns into a crime of theft - insufficient funds. 

Then WillyLoman posted the link to the Deep Capture website where a long expose written by Mark Mitchell is posted.  The expose is a story about naked short selling, mob involvement in Wall Street and the theft of billions of dollars from shareholders by hedge fund operators using a strategy media "News" coverage, fraudulent stock analysis, naked short selling, SEC passive complicity and the destruction of hundreds if not thousands of companies. 

The Story of Deep Capture - exposing naked short-selling

Excerpts:

The crimes are the work of Wall Street hedge fund managers and brokers who engage in a common trading strategy known as short-selling. A short sale is a way of making money when the price of a stock goes down. You borrow shares from someone else and immediately sell them off. If the price drops, you buy the shares back and return them to the original owner, pocketing the difference. If a company goes out of business, short-sellers hit the jackpot.

This is perfectly legal and unobjectionable. But some short-sellers do not play by the rules. A small group of powerful hedge fund managers stop at nothing to annihilate the companies they sell short. Their tactics include: blackmail, smear campaigns, espionage, fraud, harassment, extortion, bribery, rumor-mongering, sabotage, off-shore money laundering, political cronyism, frivolous lawsuits, witness tampering, biased financial research, false identities, bogus credit ratings, bribery, libelous blogs, bad science, forgery, wiretapping, counterfeiting, collusion, lying, cheating, threats and theft.

Their most egregious trick is to sell “phantom stock.” By exploiting a glitch in Wall Street’s computerized trading system, and a loophole in federal regulations, some hedge funds sell virtually unlimited amounts of stock that they have not yet borrowed or purchased. This is often referred to as “naked short selling.” Hedge funds use this tactic to flood the market with supply and drive down prices - which is blatantly illegal.

....the Securities and Exchange Commission has published a list of more than 300 companies whose stock has been sold but never delivered in excessive quantities. In other words, a significant fraction of the stock sold in more than 300 companies is phantom stock. If you think you own shares in one of these companies, the chances are that a broker has sold you air to satisfy a crooked hedge fund client. The computer might say that you own stock, but in reality, you do not.  [Strike Two against the SEC]

.... 

...But we also know it because Leslie Boni, a resident economist at the SEC has published a seminal report, “Strategic Failures to Deliver,” which identifies phantom stock as a major problem. We know it because former Undersecretary of Commerce Robert Shapiro has done his own study, concluding that naked short sellers have vaporized as many as 1,000 companies.

And we know it because in January 2005, the SEC begins publishing a list of more than 300 companies whose stock has been sold, but never delivered, in excessive quantities. There is some initial muttering about the phantom stock being the result of “clerical errors,” - maybe the real stock is sitting under a mattress somewhere, or the dog ate it - but this is so much gobbledygook, as evidenced by the huge amount of undelivered stock and the SEC’s later admissions that phantom stock is a “serious problem.”

...Peter Chepucavage, the SEC attorney who drafted the so-called Reg SHO rule requiring the SEC to begin listing victimized companies, has told us that its enactment was preceded by an unprecedented lobbying effort spearheaded by Wall Street. The result, he says, is watered down enforcement. While the SEC listed the victim companies, for example, it stipulated no way of helping them - which is like publishing the names of rape victims while refusing to prosecute rapists. (Indeed, the stock prices of many of the companies on the list dropped significantly in the days after the list first appeared.)   [Strike Three and the SEC is out].

But, anyway, there it is: a list, supplied by the SEC — unequivocal evidence that hundreds of companies are victimized by a stark financial crime. 

...It is also important to recognize the role of The Depository Trust and Clearing Corporation (DTCC), an organization headquartered in New York City. DTCC is where stock trades are processed — more than $1.5 quadrillion worth of them every year. That’s 30 times larger than the entire gross product of the entire planet...

Indeed, the DTCC is one of the world’s most important financial institutions. But what the Wikipedia entry does not mention is that the DTCC is also among the least transparent organizations on earth. No joke: America’s founding fathers would take up arms if they knew that anything like the DTCC could exist in this country. There are funds exceeding 30 times global output flowing through a sealed black box that is not understood even by the SEC officials who are supposed to regulate it.

One former SEC official describes his colleagues visiting the DTCC and asking, “So, what is it you guys do here, again?” A former DTCC employee confirms that the SEC would occasionally send junior people, and summarizes their oversight as follows: “The SEC staffers would say, ‘What do you do?’ and ‘How do you do it?’ After we would explain to the SEC folks what the DTCC did, the SEC people would say, ‘OK, are you doing it?’” These meetings would occur about once per year, and take no more than two or three hours. That was the oversight provided by regulators to the sealed black box corporation through which 30 times the economic output of the entire world flows.

Because the DTCC processes every short sale, it knows which brokers have hedge fund clients that are selling stock and not delivering it. The organization also knows precisely how much phantom stock is circulating in at least one part of the system. Yet, perhaps because it is “user owned” - that is, it is owned and operated by the very Wall Street brokerages that sell the phantom stock - the DTCC refuses to release any information.

History of the Depository Trust and Clearing Corporation from the DTCC website:

The depository, DTC, and the oldest of our clearing subsidiaries, NSCC, were both created in response to the paperwork crisis that developed in the securities industry in the late 1960s and early 1970s. At that time, brokers still exchanged paper certificates and checks for each trade, sending hundreds of messengers scurrying throughout Wall Street clutching bags of checks and securities.

Wall Street's "Paperwork Crisis"

With the New York Stock Exchange (NYSE) handling 10 to 12 million shares daily, brokers were literally buried in paperwork, and concern about risk was growing in Congress, the Securities and Exchange Commission, and elsewhere.

The crisis became so severe that, in order to help reduce the backlog, the exchanges closed every Wednesday, shortened trading hours on the other days, and extended settlement to T+5 from T+4. Eventually the industry developed two separate and distinct approaches to solve the paperwork problem.

One Solution: Immobilization

The first solution was to immobilize physical stock certificates by maintaining them in a central location or depository, and to record changes of ownership using "book-entry" accounting methods where no certificates actually change hands. Initially, this was done by the NYSE and its Central Certificate Service. That led to the creation of DTCC's depository subsidiary in 1973.

Another Solution: Netting

The second approach to solving the paperwork crisis involved a concept called multilateral netting. If one broker does 100 trades in IBM, both buying and selling at different prices with a variety of different brokers, there are few opportunities for netting. By interposing a central organization as the counterparty to all trades, all that broker's trades in IBM can settle to one net position, and all money for trades in all securities can settle to a single dollar figure owed to or from the central counterparty.

Today, with net money settlement, only a single money transfer is required, reducing the dollar amount of financial obligations by as much as 98%.

Current overview of DTCC:

DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.

DTCC's depository provides custody and asset servicing for 3.5 million securities issues from the United States and 110 other countries and territories, valued at $28 trillion. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions.

DTCC operates through six subsidiaries - each of which serves a specific segment and risk profile within the securities industry:

• National Securities Clearing Corporation (NSCC)
• The Depository Trust Company (DTC)
• Fixed Income Clearing Corporation (FICC)
• DTCC Deriv/SERV LLC
• DTCC Solutions LLC
• EuroCCP Ltd.

DTCC's joint venture company, Omgeo, has over 6,000 customers in 45 countries and plays a critical role in institutional post-trade processing, acting as a central information management and processing hub for brokers, investment managers and custodian banks.

If there wasn't a centralized information system and stock certificate depository, there might be some dubious but plausible explanation for the scheme of Kiting securities to occur without anybody being aware - although that still wouldn't explain the SEC's failure. 

Federal Reserve

[Previous research] 

Flashback to 1987 Black Monday, Stock Market Crash -- 

“Following the 1987 stock market crash, President Reagan called on Mr. [Nicholas] Brady to serve as chairman of the Presidential Task Force on Market Mechanisms. The Brady Commission recommended reforms that were subsequently adopted.

The commission recommended the Federal Reserve Board become a ''supercop" overseeing financial market regulation and coordinating ''circuit breakers" such as trading halts on stock and price limits on futures."

[Cato]  After the Crash:  Linkages Between Stocks and Futures

...So allow me to introduce you to the elephant. The Brady commission report states that 60 percent of publicly outstanding common shares are owned by householders. But roughly 80 percent of daily big-board volume is accounted for by institutions such as mutual funds, insurance companies, pension plans, and broker-dealer proprietary accounts. On average, about half of the daily volume on the New York Stock Exchange consists of block trades, that is, transactions of at least 10,000 shares each. The retail investor, in other words, may own the train, but its operation is firmly in other people's hands. That message was underscored during the October unpleasantness.

What all this means is that the securities markets have become highly institutionalized and control of financial assets has become concentrated in a very few hands. A small group of money managers is capable of dictating both the direction and the velocity of equity prices. An important brake on market volatility in past decades, namely, the need for a broad public consensus to develop before a significant change in market trend could occur, has disappeared.

....PROF. MILLER: The call for a unified clearing system is reminiscent of the grand-sounding but impractical proposals offered 15 years ago for a national market system. It strikes me as an overreaction to the rumors of clearing defaults that were floating, particularly in New York, during this chaotic period. The first we heard about them was when we read about them in the Brady report. They were not a major factor on the floor of the Chicago Mercantile Exchange.

 

Since Christopher Cox was on the original Brady Commission, it means that he had to have been aware of the problem of clearing defaults - which are what I called Kiting Securities.     

A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response

Abstract:

The 1987 stock market crash was a major systemic shock. Not only did the prices of many financial assets tumble, but market functioning was severely impaired. This paper reviews the events surrounding the crash and discusses the response of the Federal Reserve, which responded in a number of ways to support the operation of financial markets, including the provision of liquidity, in a highly visible fashion.

And it means that the Federal Reserve knew about it so when the decision was made for the Federal Reserve to provide liquidity to the market when they knew there were clearing defaults because what was being traded were phantom securities, in effect, what the Federal Reserve was doing was what I consider to be counterfeiting U.S. currency in the form of digits in a computer using the mechanism of the Depository Trust and Clearing Corporation and the hedge fund operators to launder the digits.  The effect of what they were doing was to extract real wealth and equity from real companies.  By inflating the number of shares on the market, they devalued the shares to the point of making the debts of the corporation greater than the assets of the corporation - forcing into bankruptcy where the assets of the corporation could be picked up for pennies on the dollar. 

By expanding the money supply no doubt to correspond to the amount of the phantom stock value which the DTCC would have known the precise amount, Alan Greenspan, as the Chairman of the Federal Reserve was complicit and in fact, was integral to the fraud. 

Greenspan Legacy

The reason I say that what they did was counterfeiting was because the money in the form of digits in the computer were not created as a function of economic activity in the United States; and it was not created by government spending, it was purely a digital creation of the Federal Reserve participating in a digital laundering scheme for the purpose of theft at a magnitude that qualifies as Grand Theft Country. 

The U.S. Treasury which is responsible for the U.S. monetary system - and they are charged with tracking down and they are charged with tracking down and stopping counterfeiters also failed in their obligation to the American people.  And it can't be said that they didn't know about it either.  In 2004, Treasury Secretary John Snow told the audience at the National Press Club that $7 trillion had been taken out of the U.S. economy.  Who was stood up and shot for treason for the theft?  Nobody.  Who even went to jail?  Nobody. 

One more thing -  if you walk up to a bank teller and you have a counterfeit bill - regardless of the denomination, the teller confiscates it and you get nothing.   The same thing should happen to those people who have counterfeit digits on the books of the banks no matter where those counterfeit digits are hiding.  

 

Vicky Davis
May 29, 2009