I put “Fraud” in quotation marks because, legally, it’s not – even though it should be:
By acquiring about a quarter of home-loan bonds with government-backed guarantees to bolster housing prices and the U.S. economy, the Fed helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades. Failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009, according to Fed data.
Note that the total amount of Fannie and Freddie paper outstanding is about $5 trillion – so we’ve got what – about a quarter of it that’s currently subject to a fail-to-deliver?
Gee, that’s nice. Isn’t that kinda like a naked short? Selling that which you don’t own, eh?
Now the bond dealers will tell you that this sort of thing is “normal’ and “happens all the time.” And they’re right, after a fashion – kinda.
When traders don’t deliver bonds to their counterparties, they don’t receive cash they could be earning interest on. With the federal funds target rate in a range of zero to 0.25 percent since December 2008, the amount of foregone earnings is almost nothing.
Yeah, the bigger issue isn’t there. The bigger issue is this:
“What they’re doing is after-the-fact saying, ‘We bought more than existed, so we’re going to try to alleviate those problems,’” said Scott Buchta, head of investment strategy at New York-based Braver Stern Securities LLC.
Let me restate that in English: Someone sold us more than existed – that is, they naked shorted the bonds to us.
Now naked shorting is supposed to be illegal. Especially when it’s intentional naked shorting – not an “accident.”
One can hardly argue that 25% of the float being sold naked short is an “accident.” Rather, it sure looks like an intentional act of selling that which you do not own and cannot (reasonably) acquire, fueled by the fact that failing to deliver is, at present, “reasonably cheap.”
But it’s only reasonably cheap because we have this special class of people in NY that can sell things they don’t have, with no reasonable expectation of being able to deliver within the agreed terms. In the “real world” of commerce such an act is called “fraud” when practiced intentionally and on a grand scale.
Oh sure, occasionally every businessman sells something he is unable to deliver on the original agreed terms. We accept this, and while there is occasionally some sort of penalty or sanction, it’s part of business. You say you’re going to deliver 10,000 Widgets on June 1st, and come June 1st you only have 9,500, because you were a bit too optimistic in terms of how quickly you could manufacture them. Perhaps you pay a penalty for that, perhaps not, but it’s not an intentional act.
That argument – that it’s all an “accident” – is darn hard to sustain when the amount of product that is sold short without the ability to deliver is some twenty five percent of the total float outstanding.
Where are the cops?