Winter Patriot Community Blog

(Foreword - In the following, the words “stocks” and “shares” mean the same thing and are interchangeable. Similarly, “share scrip” and “share certificates” are interchangeable. I have assumed, too, that you, the reader, are familiar with Credit Creation or the way money comes into existence through banking practice. If you are not familiar with this foundational piece of corruption in Western society, you can read about it here – Warring Worlds pt4b )

If I were to tell you that you had been 'shorted' in a deal you made, most people would ordinarily take that to mean you had been cheated. Being shorted is being dudded. So 'shorting the market' or 'short selling' is a very aptly named practice because basically it is cheating the market, i.e. it's fraud. Too many years ago, I worked for the Melbourne Stock Exchange in Australia and 'short selling' was banned there then for this reason because it involves selling something you don't have and that's illegal most places I know. It's really, really simple. (What the situation is now at the MSE I don't know). Back then when delivery of scrip was a lengthy process it was my understanding, and also of everyone I knew, that the short sellers simply took advantage of this lengthy delay. I heard no one talking about 'borrowing' share scrip (certificates) to deliver and replacing them at a later date. The 'borrowing scrip' idea is a relatively new explanation to my ears, at least, and this explanation is, no doubt, necessary now because of the much faster electronic settlement times. But, it still leaves many questions.

So how and why does it operate and how is it all explained away by the industry? The explanation goes like this: a trader considers a stock to be overvalued and expects the price to fall in the near future. So to profit from the situation, the trader borrows shares from someone to sell into the market. When the stock falls in price, the trader buys back the shares to give back to the compliant lender and everybody is happy. That's the story and I don't believe it. I have never believed it because it never made sense; and it still doesn't! Who's going to lend the trader his shares to do this especially when it is perfectly obvious that selling the 'borrowed' shares on the market is going to help depress the price? Why would anyone lend a trader their shares so this 'borrower' could devalue them? It's nuts, of course.

So how do they actually pull it off? Until fairly recently, I didn't know. But then I came across the following articles on the net and all was revealed. The conclusions that I will state presently are not stated in the articles but their reality is undeniable once they are highlighted.

Here are the articles in question and to save my fingers from Repetitive Strain Injury, would you, gentle reader, go have a Bo Peep at them before reading on?

Links-
You don't really own the shares you think you own

The unknown 20 trillion dollar company

WSJ: Blame the 'Stock Vault'?

Okay, so now you know that most stockholders never get their name on their stock certificates. Indeed, they never even sight their share certificates. They instead have an account with their broker that says they are the 'beneficial owners' of the stock. It's remarkably like the situation of having money in the bank; you have an account in their computer and that's all. The name that is actually on the stock certificates is “Cede & Co” (or similar) as in you cede ownership to Cede & Co. Ironic, no? Cynical, more likely. The similarity with a bank doesn't end there. It seems from all the preceding information that it is reasonable, even unavoidable, to conclude that the short sellers 'borrow' shares in exactly the same way a person 'borrows' money from a bank and both come from the same source; thin air. These borrowed shares are invented and exist temporarily in a double entry type bookeeping system until the short sellers buy back shares to cancel these 'virtual' shares. It is essentially the same method whereby banks lend money that doesn't exist and this extra money has a life until the loan is paid back and the extra virtual money disappears again. This seemingly fraudulent practice has been legitimised through the passing of laws allowing this banking practice. It is called 'Fractional Reserve Banking' overseen in the US by the Federal Reserve Board. The same practice involving shares, stock brokers, the New York Stock Exchange in particular and the Depository Trust Company, is not likewise legal as far as I know.

Cede and Co (the registered name on almost all stock) is the nominee company used and owned by the Depository Trust Company (DTC) otherwise known as the Depository Trust and Clearing Corporation (DTCC).
Who owns DTC?
Answer, the New York Stock Exchange.
Who owns the New York Stock Exchange?
Answer, the same Federal Reserve Board mentioned above.
Who owns the Federal Reserve Board?
Answer, American and European banks.
Who owns these banks?
Answer, a very good question!

What is known for sure, though, is that they are not your friends.

So the shares remain in the name of Cede & Co no matter who buys and who sells thus making it impossible to trace particular share certificates through transactions and which shares in the total are pre-existing shares and which ones are the extra 'virtual' ones and which shares disappeared when the short sellers bought back shares to cover those they sold and even the fact that there were extra 'virtual' shares at all. Facilitating this further is the fact that there are no certificates for the shares thus held. They are merely book entries or, more accurately, computer entries.

The only thing that changes are the broker's accounts and brokers, as you would have read at the links, are allowed to fudge things in the name of prompt settlement i.e. behave as if they have them in one of their accounts when they don't at all – fraud, in other words; shares created out of thin air. If this were not the case, then shareholders would notice that shares would disappear from their accounts and be replaced at a later date. This doesn't happen, of course, just as money doesn't disappear from your (or anyone else's) banking account when the bank lends someone money. The banks create new 'virtual' money whenever they lend and stock brokers and the DTC must, by all appearances, do exactly the same thing with shares to cover short positions.

Getting back to our 'borrowed' stocks and their accommodating owners, we can now see that they can not be borrowed at all but must be newly created. Who can do this? Who are they. They have to be none other the stock brokers who are allowed to do so to a limited degree under the NYSE rules but also the DTC and Cede & Co which is its nominee company that owns most of the real shares on behalf of the 'beneficial' or real owners, the ones that put up the money to buy them. The stocks are sort of held in trust, if you like. Except the trustee is acting against the interests of the rightful owners and without their knowledge whenever they conspire with large short sellers by creating fictitious shares and selling them to deliberately drive down the value of that stock. They can go on creating and selling these fictitious shares until they achieve their desired result; a low share price and driving legitimate owners of stocks that find themselves in financial straits to sell their shares on to a falling market and lose money. These shares are then purchased by the short sellers to cover their sale of fictitious shares at the previous higher prices and the loss suffered by the legitimate owners forced to sell becomes the profit of the short sellers. How is this not theft on a grand scale?

As I noted previously, an individual broker can cover for an individual short seller but this individual trader is unlikely to have the clout to crash the market under a wave of selling all by himself. To do that you need numbers and volume and co-ordination. And to cover the stock and share certificates for that necessarily involves the DTC itself because they are the ones that can 'supply' (actually, invent) that amount of scrip to cover the accounts that allows it all to happen. So the owners of DTC, the NYSE and the Fed have to be involved in, if not directly directing, any crash involving substantial short selling into the market. And they can do it any time they like and there's no one to blow the whistle on them. There's no one to say, “Oi, you pinched my share certificates to sell into the market without my permission!” More to the point, there's no one to say, “Oi, there seems to be a whole lot more “Ajax Hot Air Balloons” shares on issue today than there was yesterday!” If anyone on Wall Street wants to maintain that share scrip is really borrowed from existing shareholders, let them name them and show documentation to prove it.

Yes, folks, shares are created out of thin air when they are 'lent' just like money is created out of thin air when it is lent into existence. Because no shareholder's account at his brokers is suddenly missing shares to cover the short selling before they are bought back, extra shares have to come into existence for the bridging period. When the shorted shares are bought back (at lower prices), the extra ones, the virtual ones, the thin air ones, disappear into the ether from whence they came leaving no trace for investigators to find (assuming they would ever be appointed and also assuming they would be granted access to the DTC's or Cede & Co's books). Neat, huh? It's just like the banks and your money which they issue and control.

So next time there is a major stock market crash, you will know what is going on, who is doing it, how they're doing it and why they're doing it. This leaves the question of what to do about it? Given that these 'wise and honourable men' are the experts followed by the regulators, not much can be expected in the way of reform of these institutions and certainly not of their owners. Public education is the only recourse really, that I can see.

So spread the word and tell anyone who will listen that 'short selling' is fraud and why. And if you have shares (and/or have friends who have), insist on receiving your stock certificates in your hand and registered in your name or the name of your own nominee company. If this is not possible, consider selling those shares and buying others where you can be the 'registered owner' and hold actual share certificates instead of being the 'beneficial owner' as suggested in one of the above links.
The sooner the practice of short selling is eliminated the sooner the economy, which means everybody including non share holders, will be better off.