Proving the SEC is under-brained, not under-staffed

Naked Short Sales Provoke Complaints but No Cases

Wall Street Journal By KARA SCANNELL -- http://online.wsj.com/article/SB123742141942278703.html

Back when the SEC was banning short-selling and making a list of nearly 1,000 'unshortable' bank stocks -- "banks" like U-Haul, Moody's, CVS (drugstores), and GM -- I suggested they instead require shorts be executed via a three-way (short, broker, lender) order matching system on an exchange or at a clearinghouse -- e.g., NYSE or DTC. On 9/28/08 I even sent a letter (email) to the editor of the WSJ -- alas, unpublished (in its entirety, below).

Among other benefits, it would have made stock-lending more efficient for everyone, including for lenders like pension funds and insurance companies. (It would be a simple matter to include collateral monitoring in the matching system, too, to enable real-time counterparty risk surveillance -- i.e., counterparties & regulators could have seen both sides of AIG's sec' lending balance sheet. Oh well!) It would have given the SEC perfect and real-time transparency, and allowed them to use computers (!!!) to perform surveillance.

Instead, the SEC "...noted understaffing, saying four people ... review[ed] 1.38 million emails" over 18 months. That works out to reading 2 emails every minute of every working day. I'd say that proves the SEC is far more under-brained than under-staffed.

JRB

3/19/09

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To: wsj.ltrs@wsj.com

Subject: "Short on Common Sense" (9/25/08) -- a far better solution

Date: Sun, 28 Sep 2008 17:38:05 -0400

A simpler, more effective, and market-friendly solution to 'naked' shorting would be for the SEC require that all short sales (beyond "retail") be done through a clearinghouse, like DTC. The short-seller, securities lender, and prime broker input their instructions, DTC matches & settles them. Fewer fails, nobody's 'naked', there's an audit trail, and no more biweekly short interest surveys as the SEC would have real-time surveillance.

Take it a step further and create "dark pools" or crossing networks as alreadyexist for block-trading. Now you have all of the above, plus more efficient price & size discovery for the benefit of both securities borrowers (including shorts) and lenders (institutional investors). Granted, maybe it isn't the best time for that step.

GM and Ford aren't the most ludicrous names on the list. Moody's is there, but it's their opinions not their balance sheet that are the "systemic"risk concern. Is the SEC opposed to 'poetic justice'? The good folks at U-Haul (Amerco) are also on the SEC's list. That seems an even more unlikely short, what with all the capitalists packing-up in search of free markets and lower taxes.

JRB

Jack R. Buchmiller

Stamford, CT

9/28/08