Re: Morgan Stanley in NSS Crosshairs - Do not underestimate this on Monday
Your comment "There is also a theory that the problem is so bad that it can't be cleaned up without system failure." is the truth I believe.
There are so many naked short FTD's that it would be devastating to the hedge funds to be forced to cover. Remember when the SEC said they would require short funds to disclose short positions but later reversed that requirement? I believe it quickly became apparent that the collective total of short shares disclosed on some stocks would be so high it would expose the extent of the criminal activity and force action by the SEC which would begin the unravelling of our equity markets. It's also likely that multiple hedge funds have shorted millions of shares that they "located" from the same source and have yet to be delivered. In other words, a lender of the short shares is making a lending comittment of the same block of shares to multiple hedge funds - collecting the fees from each of them, and allowing a huge phantom share pool to be sold into the market by the hedge funds.
It's important to note that only a fraction of naked short shares appear on the Reg SHO Fail to Deliver threshold list. The mechanics of "laundering" naked shares by exchanging blocks of actual shares between hedge funds and broker-dealers has become an art and probably preserves hundreds of millions of naked short positions by keeping them just under the radar of the SEC.
Imagine a group of 5 hedge funds, or 5 funds under the same hedge fund management are collaborating on a naked short selling scheme. On each of 5 consecutive trading days, 1 establishes a 100,000 share naked position in CELG. The following day, the second does the same, and so on. Each collects real income from the short sale (approx. $6M each at current prices). The fund that established the position on day 1 has T+13 before it appears on the Reg SHO naked short threshold list. As long as there are 100,000 shares availavble that the 5 funds can swap between each other, the effectively reset the Reg SHO clock and fly under the SEC radar. In total, they only need 100,000 shares available but have sold 500,000 shares for $30,000,000. They continue to exchange the located shares as often as needed, restarting the locate clock - and until such time as share price is so low real locating/covering is justified - or never if the share price remains high. It's a no lose scenario where they will never have to locate (or pay for) 400,000 of the 500,000 shares so long as they launder their short position, reset the Reg SHO clock and remain under the SEC radar. Of course, it's also important to note that no firm has EVER been prosecuted to my knowledge for causing a stock to appear on the Reg SHO threshold list anyway so for now, there are no penalties or criminal charges being meted out for this type of abuse. For all intents and purposes, the SEC has demonstrated ZERO interest in curbing this problem until just recently.
Imagine a hedge fund with 2 million naked shares spread accross 12 equities with an average price of $54. That's $108,000,000 in pure profit - that may never have to be covered as long as they can keep the shares of the Reg SHO threshold list through a complex laundering scheme. Would it be worth it? You bet, and it's happening to an extent far greater than people understand.
You can see where the disclosure of short positions could quickly expose the extent of the problem. What if the disclosure of all short positions (legit, naked, located/delivered, not located or delivered, etc.) showed the short count to exceed the float? This would be very likely in many stocks. The problem is that hedge funds hold the investment money of "ordinary" Americans. They have made $billions by gaming the system and the SEC has turnred a blind eye. Full disclosure of the short positions would expose a problem so pervasive that action would be required and the SEC's incompetence, complicity, and/or criminal negligence would be there for all to see. Is the SEC likely to open their kimona?
Hedge fund investors, many of whom are wealthy people with influence, including I suspect some politicians, would lose their investments. The world would see the U.S. equity markets as fatally flawed through overlooked and/or ignored naked shorting abuse. Immediate action would be required and the damage could be irreversible.
Clearly, it's very, very complicated.