RE: Ramjet
Monday, October 17, 2005
Ah Have Always Depended On Tha Kindness of Strangers
A Streetcar Named REFCO
REFCO continues to melt down, and our regulators are simultaneously sending the
signal that all of this is nothing to worry about, while carefully guarding the true
nature of the $430 million of liability, for which REFCO used special purpose entities
in order to conceal that debt from investors.
Of note is that the loan made to Bennet to cover the payback of the funds to REFCO
was made by an Austrian bank, for which the collateral was REFCO shares, which are
now worthless. Is the bank calling in the loan to Bennet? If not, why not? Starting to
get the feeling that the intersection between international entities of questionable
motives and character and the US financial system isn't as far-fetched as one might
have believed a week ago?
There is some media speculation that the commodities side of the business may be
sold off (although O'Quinn, the attorney suing Rocker and Gradient in OSTK, has a
multi-billion dollar claim against REFCO, and is unlikely to allow the sale of the only
asset that has value following proof of fraud), but the real story is that the SEC
allowed the company to do an IPO even though their books were in disarray, and their
management was facing serious sanctions for participating in past stock
manipulations - and the SEC now continues to treat the details of the debt that
caused the implosion as top secret. That raises some interesting questions:
1) Why is the nature of the contingent liability a secret? Who benefits by that secrecy?
Don’t the investors who have lost billions of market cap in the last week deserve to
know what caused the meltdown of their investment? Why can’t we get a straight
answer as to what the debt consists of? Is it because the SEC doesn't want us to know
that it is naked short positions that they grandfathered, facilitating this fraud?
2) Why does the SEC continue to protect lawbreakers and felons at the expense of
the investing public? In their Q&A at the online SEC site, they admit that the reason
they keep the FTD info secret is to protect the trading secrets of the participants who
are using FTD’s as part of their trading strategy. Newsflash, folks: If you allow larceny
to be conducted in secret, and are more interested in protecting the bad guys than
the investors, you wind up with REFCO fiascoes. Lots of REFCO fiascoes. Can we
afford any further secrecy and opacity? Haven't they learned anything? Hint: If you
can't tell people simple info, there is probably something bad going on.
3) Why was REFCO allowed to go public in the first place, given what we know about
their past, their books, and their history of stock manipulation related charges - was
this really that tough a call?
4) Who at the SEC greenlit this brilliant decision, and more importantly, who is going
to take the blame for allowing known stock fraudsters to do an IPO, when by their
own admission they couldn’t get their financials to add up, and were being run by
known manipulators and cheats?
5) REFCO is only one company. There are many more that do the same thing as
REFCO – naked shorting is big business, and if the speculations are correct, most or
all of the contingent liability that blew up REFCO are naked short shares which have
remained open for as many as 7 year. How many more REFCO’s are waiting to blow
up, and how many more shocks to the system can the financial markets stand before
there is a systemic collapse?
If the speculations are correct, and REFCO’s debt is in reality naked short shares that
were never covered, then the mark to market value of $430 million is way off.
Wayyyyy off. Which probably explains why the loan from the Austrians hasn't been
called in - that $430 million is starting to look increasingly like an investment in
keeping the debt from exploding to its true, obscene level. The first shares that will
be covered may go for ten cents, but the second shares will go for a quarter, and the
third for a buck, and the fiftieth for ten dollars. That $430 million was likely never
covered because to do so would exceed the total NAV of the company – many tens of
billions of dollars. Because it is a one for one exchange – tens of billions of market
cap were lost due to naked shorting by REFCO, per my sources, thus in order to cover
the shares used to cause that loss, it would require the tens of billions be re-
patriated into the stocks.
That’s the problem with allowing illegal naked shorting, and grandfathering in past
fails – it creates a scenario wherein a systemic collapse becomes likely once the
dominoes start to fall, as it allows a bad problem to get to the point where it is a
catastrophic problem. Kind of like melanoma - if you don't deal with it early, and
aggressively, it can kill you.
6) Now that we are starting to see the systemic risk posed by this series of fatally
flawed decisions by our regulators, is it going to be business as usual, or are our
elected officials finally going to act, and force the SEC to do its job?
Rule 17A clearly states that, in order for us to have safe and fair markets, there has
to be, “The prompt and accurate clearance and settlement of securities transactions.”
Grandfathering past fails violates that Congressional mandate, and is likely illegal,
and would collapse under any legal challenge. So why is the SEC passing rules which
violate its own Congressional mandate? Some believe it was done by compromised
factions within the Commission to protect the participants who'd so badly abused the
system that they created a situation where they were “too important” and “too big” to
be allowed to collapse – hence the grandfathering clause.
And now for my stint on the soapbox:
Folks, when you start breaking the law in order to protect lawbreakers, because they
are “too important,” you wind up with REFCO, which is likely the tip of a very, very
large and scary iceberg, IMO. This has to stop. The guard has to be changed, without
delay -it's gone on long enough. The Senate Banking Committee has to hold hearings
on this, now, and there needs to be a sea change in the policy of allowing investors to
be fleeced by a lawless clique on Wall Street.
My next Sanity Check will address what I believe is this systemic risk in the market,
and will have more questions, uncomfortable questions for the entrenched power
base on Wall Street. But the questions need to be asked, and they need to be asked in
a loud voice, so that the answers can be heard by one and all.
So far we have gotten no answers, but rather secrecy and doubletalk. The time for
that is over.
We've all seen what happens when the questions are stonewalled. Hiding the ball so
that the crooks can rob the general public cannot continue to be the SEC’s modus
operandi – it is shocking that our securities regulator, chartered with protecting
investors, seems to facilitate more fraud than it catches.
That is unacceptable.
The 1934 Act is direct at its core, and requires no contortions to comprehend. I'm
quite sure that there are many at the SEC who would love to be allowed to do their
job.
It's about time they did so.
Settle the trades, put the crooks in jail, and stop the participants from ripping us off.
Simple.
Now do it. Or get someone that will.
Is that too much to ask?