Thursday, July 13, 2006
What Makes the Hottentot So Hot?
What makes a king out of a slave? Courage! What makes the flag on the mast to wave? Courage!
What makes the elephant charge his tusk in the misty mist, or the dusky dusk?
—The Cowardly Lion
So Bert Lahr, in the guise of the Cowardly Lion, begins his famous self-motivational speech from the Wizard of Oz—the laugh-out-loud portion of a movie that otherwise scares the daylights out of kids and provides enough bizarre imagery to make adults wonder what kind of potent substances the director might have been using.
Which is probably why that scene came to mind yesterday while reading the latest press release from Patrick Byrne, the CEO of internet-based, negative operating margin-achieving Overstock.com, also known as an Anti-Naked Short Jihadist whose public obsession with a back-office administrative problem turned into a full-blown conspiracy theory involving hedge funds, journalists, and the so-called Israeli mafia, among others.
Byrne’s movement culminated recently in a highly publicized Senate committee hearing targeting all manner of supposed naked shorting manipulation, not to mention dire warnings of purported unchecked hedge fund “power” and “abuse.”
About the only thing the Senators and their star witnesses didn’t blame on hedge funds, to borrow a line from Peter Falk’s character in “The In-Laws,” was atonal music.
But the SEC knows where its bread is buttered, so to speak, and this week its Chairman, Christopher Cox, announced new rules designed to further curb so-called naked short-selling. According to Cox:
"There are still persistent failures to deliver in the marketplace, and some of that is undoubtedly attributable to loopholes in our rules. Today, what we're moving to do is to close those loopholes."
Now I am all for eliminating those loopholes. But, as far as I can tell, it won’t change a thing about the way every hedge fund I know handles its short sales.
That's because, as I have written here before, every hedge fund I have ever known borrows stock before they short it.
The procedure is this: the hedge fund asks their prime broker whether a stock can be borrowed; if the broker locates a borrow somewhere on Wall Street, the hedge fund gives a trader the order to short the stock along with the name of the broker from whom stock has been borrowed. At the end of the day, when the hedge fund reports that short sale to their prime broker, the prime broker won’t book the trade if the stock hasn’t actually been borrowed.
No borrow, no short sale.
Thus, as anybody in this business knows and as the world’s most famous short-seller, Jim Chanos, will tell anyone who bothers to listen, there is no paper trail on Wall Street so clearly marked and so easily documented as the short-sale of a publicly traded U.S. stock.
Which means that the failures to deliver—gall and wormwood to the Anti-Naked-Short-Conspiracy-Theorists, who take them as a sign of hedge fund power, abuse, and market manipulation—must reside somewhere within the brokers themselves, not at the hedge funds who correctly borrow stocks before shorting them.
Nevertheless, the SEC’s belated efforts to tighten its rules generated headline news, including the press release in question, whose heading reads as follows:
Overstock.com Applauds SEC's Courage in Addressing Naked Short Selling Issue
The body of the release contains the following words of wisdom and encouragement from Mr. Byrne:
"I congratulate the SEC for the courage they showed today, and I am grateful for the leadership of Chairman Cox. It is clear he understands the severity of the problem, and the Commissioners can be proud of the steps they are taking to end the blight of abusive naked short selling upon our capital markets."
Exactly what sort of “courage” was required for Mr. Cox to tighten up the rules is beyond me. I suspect it is an allusion to the dark forces Mr. Byrne has, in the past, accused of arraying against him and his company.
Those dark forces include—in addition to the aforementioned Israeli mafia—the supposed Russian and Italian mobs, as well as unidentified “miscreants” who are “trying to get the FCC (Federal Communications Commission) to launch an investigation” and “trying to get the DoJ (Department of Justice) to investigate me” as he told Bloomberg television last year.
I am not making this up. "Some of the officials are monsters," he also declared. "You'll probably read a headline that I was stopped with drugs or a dead body."
So I suppose Mr. Byrne thinks the SEC Chairman is taking his life into his hands by suggesting a few new regulations to tamp down naked short-selling, thus "courage."
Given that the body count of past SEC Chairmen who likewise proposed previous anti-naked short-selling rules is fairly low—zero, by my count—I rank Mr. Byrne’s motivational speech right up there with Bert Lahr in his lion costume:
Courage! What makes a king out of a slave? Courage! What makes the flag on the mast to wave? Courage! What makes the elephant charge his tusk in the misty mist, or the dusky dusk? What makes the muskrat guard his musk? Courage!
What makes the sphinx the seventh wonder? Courage! What makes the dawn come up like thunder? Courage! What makes the Hottentot so hot? What puts the "ape" in apricot? What have they got that I ain't got?
Whatever it is, it’s not courage.
I Am Not Making This Up
© 2006 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 12:54 PM