A narrative tossed about lately calls for public-union employees — namely teachers — to do their part. That the private sector is hurting, that jobs are being lost, that benefits are disappearing, that it is only fair for the hurt of the worst economic collapse since The Great Depression to now be shared by employees of the state by way of reduced benefits.
Purely and wholly on a basic level, this narrative makes sense. Perhaps it even qualifies as fair, given the unions agreeing to the monetary demands of Walker's budget repair bill. But beyond the level of discourse found at a kindergarten playground, the argument is specious at best and Ostrichian at worst.
It is 2008. The 11th of March. A Tuesday. On CNBC's Mad Money, host Jim Cramer is asked, "Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?" Cramer answers, "No! No! No! Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear."
The same day on Wall Street, an unknown person makes a bet at odds of one-hundred-fifty-nine to one. The amount wagered: $1.7 million. The proposition: Bear Stearns will lose greater than half its value within nine days. Bear Stearns price per share: $62.97. Other than probably not being Jim Cramer, nothing is known about the mystery person.
On the 16th that month, a Sunday, after a catastrophic week, Bear Stearns sells itself to JP Morgan Chase for $2 a share. On Monday, the unknown person — having wagered $1.7 million this would happen not one week earlier at 159:1 odds — makes $270 million.
No bet exists at a craps table or a roulette table or a blackjack table or a baccarat table that has a 159:1 shot of paying off, yet this mystery man hits betting one of the world's largest financial institutions is going to crumble.
Back to that Tuesday, the 11th. Ben Bernake and Timothy Geitner call a meeting at the Federal Reserve Bank of New York. In attendance: Jamie Dimon, JPMorgan Chase; Lloyd Blankfein, Goldman Sachs; James Gorman, Morgan Stanley; Richard Fuld, Lehman Brothers; John Thain, Merrill Lynch; Robert Rubin, Citigroup; Stephen Schwarzman, Blackstone Group; several hedge-fund chiefs, like Kenneth Griffin from Citadel Investment Group.
As the obscenely-talented and always-incredible Rolling Stone journalist Matt Taibbi notes and thoroughly examines in an exceptional read, the meeting "included virtually everyone who was anyone on Wall Street — except for Bear Stearns." But whatever did they talk about?
In these unencumbered times, short selling — a bet against a stock, like the "Don't Pass" bet on a Craps table against the shooter — became the equivalent of vampire fiction written in terrible prose aimed at teenage girls. Which is to say: popular. An entirely legal practice, short selling entails borrowing and then immediately selling an amount of stock, and within or at the end of an agreed period of time, the borrower must then buy back the number of shares he sold to return to the loaning party.
So if you short 10 shares of 'Bluth Real Estate' for $10, and 'Bluth Real Estate' drops to $7, you clear 30 bucks: the $70 from your purchase of the $7 a share stock subtracted from the $100 from your selling of the borrowed stock. If the stock goes up instead of down, you're buying back for more than your original sell, and you lose money.
Naked short selling, however, is a bag of just awful awfulness: the short seller only must make an attempt in good-faith to "locate" the stock. In this era of lax regulations — "lol, regulation kills business lol" — a good faith attempt to locate a stock can result in being given not stock but an IOU for the stock if, among other things, the broker has already dispatched the stock elsewhere. And even if the shares of the IOU are never delivered — resulting in a "fail to deliver" — the short sell is allowed to go through "naked" of the stock.
That's right: the legal selling of shares of stock that don't actually exist. And each counterfeit share depresses the value of the actual real shares.
And — as Taibbi explains — far, far worse:
And then they did the same thing to Lehman Brothers. But don't worry, everything is all okay now:
400 Americans hold more money and assets — wealth — than the entire combined lower half of the country. The subprime mortgage crisis that tanked the world’s economy has fueled and grown the divide. The subprime mortgage crisis: where cutting regulation — “lol, regulation hurts business lol” — led to banks giving out high risk mortgages where 80% were of the adjustable-rate variety that eventually reset to higher interest rates that couldn't be paid, resulting in soaring delinquencies, all the while Wall Street, wise to what was going to happen, got these mortgages wrapped into securities and had the purely toxic securities highly rated so they could pawn off the securities leaving the buyers of those securities — states, pension funds, just trivial bodies, really — to be tits-up on the ground while they — those on Wall Street — were left standing and rich.
And the funny thing is, the pension funds for Wisconsin state employees dodged this mess. They dodged those toxic securities. The pension funds are some of the few healthy assets the state has left. "Has" used loosely because, as Forbes points out, the pension fund gets its money from deferred payments to the employees, not directly from tax dollars:
lose some benefits take a pay cut. That it's only fair for Wisconsin public-employee unions to suffer like the rest of the country.
But it is total fucking bullshit to ask this of them and not of the Sons-of-Bitches who robbed this country blind. Did previous governor administrations, legislatures, local governments and municipalities perhaps give public employees too generous of deals? Sure. Did previous governor administrations and legislatures use gimmicks and one-time federal money to push back debt into the upcoming $3.6 billion shortfall? Undoubtedly. Is Scott Walker right to want to shrink the government to help fix this shortfall? Absolutely. Is he going about it the complete wrong way? As sure as tomorrow is to come, yes. Is asking public-employee unions to make sacrifices in any way, shape or form reasonable? Hell no.
Is doing so akin to a "Favre fan" eschewing logic and not supporting Ted Thompson? Is doing so akin to using the hollow-of-fact, full-of-frothing-at-the-mouth-rhetoric those Favre fans used that Walker has now co-opted? Is doing so akin to putting one's head in the sand about the Sons-of-Bitches who ran this country into the fucking ground? The Sons-of-Bitches who bankrupted so much of the private sector? Who ruined pension funds, both public and private? Who decimated states? Who threw the entire world into a near-collapse in the name of greed?
Yes.
The same day on Wall Street, an unknown person makes a bet at odds of one-hundred-fifty-nine to one. The amount wagered: $1.7 million. The proposition: Bear Stearns will lose greater than half its value within nine days. Bear Stearns price per share: $62.97. Other than probably not being Jim Cramer, nothing is known about the mystery person.
On the 16th that month, a Sunday, after a catastrophic week, Bear Stearns sells itself to JP Morgan Chase for $2 a share. On Monday, the unknown person — having wagered $1.7 million this would happen not one week earlier at 159:1 odds — makes $270 million.
No bet exists at a craps table or a roulette table or a blackjack table or a baccarat table that has a 159:1 shot of paying off, yet this mystery man hits betting one of the world's largest financial institutions is going to crumble.
Back to that Tuesday, the 11th. Ben Bernake and Timothy Geitner call a meeting at the Federal Reserve Bank of New York. In attendance: Jamie Dimon, JPMorgan Chase; Lloyd Blankfein, Goldman Sachs; James Gorman, Morgan Stanley; Richard Fuld, Lehman Brothers; John Thain, Merrill Lynch; Robert Rubin, Citigroup; Stephen Schwarzman, Blackstone Group; several hedge-fund chiefs, like Kenneth Griffin from Citadel Investment Group.
As the obscenely-talented and always-incredible Rolling Stone journalist Matt Taibbi notes and thoroughly examines in an exceptional read, the meeting "included virtually everyone who was anyone on Wall Street — except for Bear Stearns." But whatever did they talk about?
What's impossible to believe is the bullshit version that Geithner and Bernanke later told Congress. The month after Bear's collapse, both men testified before the Senate that they only learned how dire the firm's liquidity problems were on Thursday, March 13th — despite the fact that rumors of Bear's troubles had begun as early as that Monday and both men had met in person with every key player on Wall Street that Tuesday. This is a little like saying you spent the afternoon of September 12th, 2001, in the Oval Office, but didn't hear about the Twin Towers falling until September 14th.
[...]
Given the Fed's cloak of confidentiality, we simply don't know what happened at the meeting. But what we do know is that from the moment it ended, the run on Bear was on, and every major player on Wall Street with ties to Bear started pulling IV tubes out of the patient's arm.
[...]
All of these tactics were elements that had often been seen in a kind of scam known as a "bear raid" that small-scale stock manipulators had been using against smaller companies for years. But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room.Before 1973, if you wanted to trade stock, the actual stock certificate had to physically be moved from buyer to seller as part of the transaction. This, of course, was a cumbersome requirement, leading to the creation of the Depository Trust Company, an actual "holding" company that houses, for all intents and purposes, each physical stock certificate. With the DTC now a central hub to manage and record all sales — removing the chaotic and cumbersome practice of ferrying around the certificate from firm to firm — market activity took off something fierce.
In these unencumbered times, short selling — a bet against a stock, like the "Don't Pass" bet on a Craps table against the shooter — became the equivalent of vampire fiction written in terrible prose aimed at teenage girls. Which is to say: popular. An entirely legal practice, short selling entails borrowing and then immediately selling an amount of stock, and within or at the end of an agreed period of time, the borrower must then buy back the number of shares he sold to return to the loaning party.
So if you short 10 shares of 'Bluth Real Estate' for $10, and 'Bluth Real Estate' drops to $7, you clear 30 bucks: the $70 from your purchase of the $7 a share stock subtracted from the $100 from your selling of the borrowed stock. If the stock goes up instead of down, you're buying back for more than your original sell, and you lose money.
Naked short selling, however, is a bag of just awful awfulness: the short seller only must make an attempt in good-faith to "locate" the stock. In this era of lax regulations — "lol, regulation kills business lol" — a good faith attempt to locate a stock can result in being given not stock but an IOU for the stock if, among other things, the broker has already dispatched the stock elsewhere. And even if the shares of the IOU are never delivered — resulting in a "fail to deliver" — the short sell is allowed to go through "naked" of the stock.
That's right: the legal selling of shares of stock that don't actually exist. And each counterfeit share depresses the value of the actual real shares.
And — as Taibbi explains — far, far worse:
Here's how naked short selling works: Imagine you travel to a small foreign island on vacation. Instead of going to an exchange office in your hotel to turn your dollars into Island Rubles, the country instead gives you a small printing press and makes you a deal: Print as many Island Rubles as you like, then on the way out of the country you can settle your account. So you take your printing press, print out gigantic quantities of Rubles and start buying goods and services. Before long, the cash you’ve churned out floods the market, and the currency's value plummets. Do this long enough and you'll crack the currency entirely; the loaf of bread that cost the equivalent of one American dollar the day you arrived now costs less than a cent.
With prices completely depressed, you keep printing money and buy everything of value — homes, cars, priceless works of art. You then load it all into a cargo ship and head home. On the way out of the country, you have to settle your account with the currency office. But the Island Rubles you printed are now worthless, so it takes just a handful of U.S. dollars to settle your debt. Arriving home with your cargo ship, you sell all the island riches you bought at a discount and make a fortune.
This is the basic outline for how to seize the assets of a publicly traded company using counterfeit stock. What naked short-sellers do is sell large quantities of stock they don't actually have, flooding the market with “phantom" shares that, just like those Island Rubles, depress a company’s share price by making the shares less scarce and therefore less valuable.Back to Tuesday, the 11th of March. 201,768 shares of Bear Stearns had failed to deliver. Through the 12th, 1.2 million. By the close on Friday, over 2 million. After the market opened the following Monday, 13.7 million. On that Friday:
[Then-Treasury secretary Hank] Paulson wouldn't stay up another night worrying about Bear Stearns, he reportedly told [Bear CEO, Alan] Schwartz. Bear had until Sunday night to find a buyer or it could go fuck itself.
Bear was out of options. Over the course of that weekend, the firm opened its books to JPMorgan, the only realistic potential buyer. But upon seeing all the "shit" on Bear's books, as one source privy to the negotiations put it — including great gobs of toxic investments in the sub-prime markets — JPMorgan hedged. It wouldn't do the deal, it announced, unless it got two things: a huge bargain on the sale price, and a lot of public money to wipe out the "shit."
So the Fed — on whose New York board sits JPMorgan chief Jamie Dimon— immediately agreed to accommodate the new buyers, forking over $29billion in public funds to buy up the yucky parts of Bear. Paulson, meanwhile, took care of the bargain issue, putting the government's gun to Schwartz’s head and telling him he had to sell low. Really low.That really low number becomes the aforementioned $2 a share. $2 a share after closing on Friday at $30. $29 billion in public funds to cover toxic investments and finish off what the naked shorting started.
And then they did the same thing to Lehman Brothers. But don't worry, everything is all okay now:
The commission did repeal the preposterous "market maker" loophole on September 18th, 2008, forbidding market makers from selling phantom shares. But that same day, the SEC also introduced a comical agreement called "Rule 10b-21," which makes it illegal for an Evil Hedge Fund to lie to a Prime Broker about where he borrowed his stock. Basically, this new rule formally exempted Wall Street's biggest players from any blame for naked short-selling, putting it all on the backs of their short-seller clients. Which was good news for firms like Goldman Sachs, which only a year earlier had been fined $2 million for repeatedly turning a blind eye to clients engaged in illegal short-selling. Instead of tracking down the murderers of Bear and Lehman, the SEC simply eliminated the law against aiding and abetting murder. "The new rule just exempted the Prime Brokers from legal responsibility," says a financial player who attended closed-door discussions about the regulation. "It's a joke."This problem isn't limited to stocks. The commodities market, where you've "got 12 paper barrels [of oil] trading for every physical barrel." The mortgages market, "just like in the stock market, where short-sellers delivered IOUs instead of real shares, traders of mortgage-backed securities sometimes conclude deals by transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note — instead of the actual mortgage." The bond market where "practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. [...] In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered."
400 Americans hold more money and assets — wealth — than the entire combined lower half of the country. The subprime mortgage crisis that tanked the world’s economy has fueled and grown the divide. The subprime mortgage crisis: where cutting regulation — “lol, regulation hurts business lol” — led to banks giving out high risk mortgages where 80% were of the adjustable-rate variety that eventually reset to higher interest rates that couldn't be paid, resulting in soaring delinquencies, all the while Wall Street, wise to what was going to happen, got these mortgages wrapped into securities and had the purely toxic securities highly rated so they could pawn off the securities leaving the buyers of those securities — states, pension funds, just trivial bodies, really — to be tits-up on the ground while they — those on Wall Street — were left standing and rich.
And the funny thing is, the pension funds for Wisconsin state employees dodged this mess. They dodged those toxic securities. The pension funds are some of the few healthy assets the state has left. "Has" used loosely because, as Forbes points out, the pension fund gets its money from deferred payments to the employees, not directly from tax dollars:
If the Wisconsin governor and state legislature were to be honest, they would correctly frame this issue. They are not, in fact, asking state employees to make a larger contribution to their pension and benefits programs as that would not be possible- the employees are already paying 100% of the contributions.
What they are actually asking is that the employees take a pay cut.All of this is why this whole "asking the public-union employees to make a sacrifice" is such total and complete fucking bullshit, and to call it anything other than total and complete fucking bullshit would be diminishing just how fucking bullshit it is. On the surface, using the kindergarten playground logic, yes, maybe they should
But it is total fucking bullshit to ask this of them and not of the Sons-of-Bitches who robbed this country blind. Did previous governor administrations, legislatures, local governments and municipalities perhaps give public employees too generous of deals? Sure. Did previous governor administrations and legislatures use gimmicks and one-time federal money to push back debt into the upcoming $3.6 billion shortfall? Undoubtedly. Is Scott Walker right to want to shrink the government to help fix this shortfall? Absolutely. Is he going about it the complete wrong way? As sure as tomorrow is to come, yes. Is asking public-employee unions to make sacrifices in any way, shape or form reasonable? Hell no.
Is doing so akin to a "Favre fan" eschewing logic and not supporting Ted Thompson? Is doing so akin to using the hollow-of-fact, full-of-frothing-at-the-mouth-rhetoric those Favre fans used that Walker has now co-opted? Is doing so akin to putting one's head in the sand about the Sons-of-Bitches who ran this country into the fucking ground? The Sons-of-Bitches who bankrupted so much of the private sector? Who ruined pension funds, both public and private? Who decimated states? Who threw the entire world into a near-collapse in the name of greed?
Yes.
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