Matt Taibbi on economic death by short-selling

October 5, 2009 | By | 4 Replies More

In this month’s Rolling Stone, Matt Taibbi once again takes on Wall Street with an article entitled “Wall Street’s Naked Swindle.” This article is not yet available online. Taibbi’s focus this time is naked short selling. Taibbi has proven to be an excellent teacher of abstruse financial concepts, including the concept of short selling, and also including the insidious practice of naked short selling. With this technique (and others) Wall Street has turned the economy into “a giant asset-stripping scheme, one whose purpose is to suck up the last bits of meat from the carcass of the middle class.”

Taibbi’s article is an excellent read, which is not at all surprising given Taibbi’s track record. The bottom line is that naked short selling is a “flat-out counterfeiting scheme.” How bad is the widespread use of this technique?

That this particular scam played such a prominent role in the demise of [Bear and Lehman] was supremely ironic. After all, the boom that had ballooned both companies to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs.

As Taibbi then reminds us, there is more than one way to counterfeit. Consider credit default swaps:

If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse-credit default swaps and the collateralized debt obligations-were employed for the primary purpose of synthesizing out of thin air those revenue flows that are dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case with the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff.

In this related piece, Taibbi further discusses “naked short selling”:

Again, a lot of this stuff is complicated and not only hard for people outside the finance world to follow, but kind of, well, boring as well. But it’s through these tiny regulatory loopholes, these little nooks and crannies, that the economy gets manipulated. The effect of all of these regulatory gaps has been to transform Wall Street from a means of connecting capital to good business ideas into a giant casino, where the object of the game is shaving little slices off the great flows of money as you push them back and forth using a great big toolbox of manipulative techniques. This is one of the tools.

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Category: Economy, Fraud, snake oil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (4)

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  1. Tim Hogan says:

    Sorry guys, I won't believe the "crisis" is over until Obama puts many people in jail, for a REALLY long time. Until then, its all smoke and mirrors and its happening again!

    • Erich Vieth says:

      Tim: I assume that this would be Tabbi's position too. It's certainly my position that many people currently in high positions need to go to prison. And they need to audited. And the Federal Reserve needs to be audited. And the stock market needs to be tightly regulated so that investors are buying and selling ownership interest in companies and/or valuable securities, rather than engaging in gambling and flim-flamming. Compare to the traditional insurance industry, where there had to be an "insurable risk," (a life, a car, someone's health); otherwise, insurance would be gambling. We need to rein in Wall Street with this same sort of requirement, just as Tabbi suggests.

      I'm all-too-close to assuming that reform will never happen and that the fraud-ridden market will drag us all down, because A) the banks own Congress and B) the People are too busy watching TV to care.

  2. Niklaus Pfirsig says:

    I realized long ago that debt derivatives were essentially legalized counterfeit money. What else can you call it when someone in the private sector generates large amounts of paper representing money they don't have (but hope to have in the future) ?

    Counterfeiting has been a common technique used to destabilize the economy and to help bring about revolt in many countries.

  3. Dan Klarmann says:

    Does anyone remember the "S&L Crisis" brought on when W's dad and his predecessor loosened regulations in the 1980's? Back then, a few folks did time (about a week per megabuck received, if I recall).

    Maybe we need to ensure that Senators and Presidents can pass history tests. Else we're doomed to repeat.

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