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A guy on another board said I didn't know much about investingSaid
he could loan me some books so I could learn about options MMs and what
they do. He then went into a tirade about how the options MM's ability
to naked short was necessary to maintain an orderly liquid options
market and how the long shareholders would suffer if the MM's exemption
went away. Then he dismissed me completely by saying he didn't want to
debate it. Here was my reply: While I too do not wish to debate, hell it's Saturday and why not? You guys seem to think I have no knowledge or experience in this arena. I have a degree in marketing with a minor in finance and I owned a mortgage brokerage business until I sold it and retired at the ripe old age of 52. I was very good at the mortgage business. My research into the naked shorting scourge on Wall Street has been extensive. I could probably teach an adequate graduate level class in it. That being said, please allow me to shed some light on your perception of what is happening in the market. I can sum it all up in a single sentence. You can stop reading after the next paragraph if you like. Hedge funds have $4 Trillion dollars with which to bet against the US economy. That is a lot of money and it makes a real impact when they trade. They used to keep their nefarious activities confined to the OTC but, simply, they are too large now to keep messing with the little guys. That being said, lets look at Novastar. I too researched mortgage companies. Warren Buffett says to buy what you know. With my career background in the business, I knew who was making crappy loans and who was filling their portfolios with time bombs. I determined that Novastar was truly the best of breed. That decision has proven out by the fact that they are the only pure subprime lender who is still in business and not a single investor who held their mortgage securities has ever lost a dime on their investment through default. Their portfolios have always performed at or better than the original model standards. I did, however, recognize the futility of battling the shorts and got out of Novastar when it became clear that the market was not going to be allowed to recognize Novastar's intrinsic value. Yes I lost a bundle, but I did not ride it all the way down. So I am OK. You speak of hedge funds trying to squeeze out an additional $3 or $4 below fair value and being slammed with a takeover bid at a higher price. In a fair marketplace, that would most likely be the result. But this is not a fair marketplace. It is a marketplace where the regulators and the media have been captured by the hedge funds and the little guy like you and me have no chance. These funds can literally dump an unlimited number of fake shares into the float of any company they desire and continue to do so until the share price collapses under the load. Here's an example. http://www1.investorvillage.com/smbd.asp?pt=m&SearchBy=MessageText&SearchFor=2000000&clear=1&mb=4148&Search=Go I was already long since out of the stock when that happened but, at that time, Novastar only had 9 million shares issued. When the shorts can do that anytime they like and as often as they like, they have no worries about some pesky outsider coming in and making a higher offer. The offer comes in and their response is to naked short 200% or 300% of the issue driving the share price down to pennies. Add negative comments from a few well placed journalists like Herb Greenburg and Joe Nociera. Get the regulators to eliminate the uptick rule and look the other way and Bingo! The offer disappears. A company with a billion dollar market cap doesn't stand a chance against a cabal like that with Trillion$ to manipulate them. But, this is not about me. It is not about Novastar, and it is not about OSTK. It is about systemic risk. When Goldman Sachs conjured up something called the ABX index by bundling up mortgages into billion dollar batches and selling them into the market, the industry responded as it should have. The market rocked. Novastar kept to their conservative underwriting and contributed like the rest of the industry by funding those indexes. But then something strange began happening. Massive short interest and even more massive naked short interest built in the Novastar market. Millberg Weiss sued (and lost). Novastar dropped from a high of near $70 to around the mid $30s. Novastar was still making $$. Their portfolio was performing within the model. The dividend was huge. But that was just because those pesky shorts had overdone it with the share price. They would pay. It was certain........ Then Goldman Sachs started massively shorting the very same ABX indexes they had just invented and sold to their investors. The shorting was merciless. The ABX index was small. It was a piece of cake to dominate the market with short sales. The prices on the indexes dropped clear out of sight. Perfectly fine indexes fully filled with Novastar, 70% average LTV and PMI down to 52%, mortgages, which were fully performing according to the model, were selling for 22 cents on the dollar. That effectively stopped any new money supply. Every subprime was under the naked shorting gun. That eliminated any chance of selling stock to fund new loans. The industry crashed. Thank God I was out but I was still watching closely. So here we have a company which is performing to model. Making money and paying double digit dividends and waiting for the market to realize the true value. Then comes GAAP. GAAP required Novastar to mark to market its entire portfolio, including the almost $20 billion in mortgages not held for sale. The "market" was considered by GAAP to be that very tiny, heavily shorted ABX index. Oh My Gawd!!!!! Hundreds of millions of dollars in write downs. Paper losses. But the company is still making money. Right? Sooner or later the market is going to regain its perspective and Novastar will prosper again. Peers were dropping like flies. Then it really got nuts. Every time Novastar had good news, it was hammered with millions of naked shares dumped into the market moving the supply curve further to the right and killing any chance of a share price advance. Investors watched, in real time, their share value being decimated. Tens of thousands of puts were being sold out of Chicago. Within minutes these options transactions were being followed immediately by the corresponding number of naked shares dumped out of the Phila Exchange into the float by the options MMs as a hedge. There were times when the trades were so blatant that, one time, 20% of the entire issue was dumped naked into the float in a single transaction by these MMs. See the link above. There were times when the shares issued naked by the market makers were more than 3 naked for every 1 real share issued by the company. What's wrong with this picture? Everybody else was gone. Out of business completely with a very few exceptions. A very few companies got taken over. Novastar stood alone. The only player left on the field of battle. Using every trick in the book, Novastar protected their multi-billion dollar in-house portfolio and exists today on the millions of dollars per month in income it represents. The hedge funds had won the war and eliminated the entire industry and made huge profits along the way. Billion dollar bonuses were passed around to fund managers like cocktails at 21. Only Novastar remained. A thorn in their side. It took billions and billions of dollars worth of bogus shares to get Novastar to where it is today. But the hedge funds are still on the hook for all those shares and the game ain't over yet. But then, this is not about Novastar. It is about systemic risk. Flush with mega sums of cash. Living in new mansions in the Hamptons. Buying diamond studded skulls and rotting sharks which they though were art. Tons of money safely tucked away offshore, these hedge fund managers turned back to the market. What to do next? Well, the market is severely damaged. We still have no uptick rule. Regulators are still biding their time before they get cushy jobs in the hedge fund industry. The captured journalists are waiting for new instructions. They lost Milburg Weiss, but hell, they can do it without a buncha pesky small time lawyers. They got lotsa cash. Fannie and Freddie are ripe for the picking. "Let's go for it". Before we do, there are a few loose ends we need to clean up. It is a matter of the billions of naked shares out there that may still come back to haunt us. Let's start with Bear Stearns.................... http://www.sec.gov/rules/other/2008/34-58166.pdf Then we are free to go after Fannie and Freddie.............http://www.mediafire.com/?nov34hjnbrr Next, we get rid of LEH, Merrill, Goldman. Yup that will cover some more tracks and loose ends. Yup. This naked short gig "been "veddy veddy gud to me". Where to next................. How about the entire US Government and the Federal Reserve????? $$$$ Trillions $$$$ Like i said, it is about systemic risk. BT |
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Msg # | Subject | Author | Recs | Date Posted |
106365 | Re: A guy on another board said I didn't know much about investing | ContraIndicator | 0 | 9/22/2008 3:13:23 AM |