Regulation and the Depository Trust Clearing Corporation
Thursday, May 21, 2009 at 04:43PM No Associated Press content was harmed in the writing of this post
On Wednesday lambert pointed me to a Bloomberg article by Robert Schmidt and Jesse Westbrook claiming the Obama administration will call for moving some of the powers of the Securities and Exchange Commission (SEC) to the Federal Reserve. While the SEC has come under fire for its reluctance to aggressively monitor Wall Street, the solution (as lambert points out) is to give the agency the resources, incentive and mission to do so, not to transfer authority elsewhere. Schmidt and Westbrook note that it “still has powerful supporters, including a number of Democrats on the Senate Banking Committee who aren’t likely to support having an agency they oversee cut back,” so maybe this is just a trial balloon. Either way it doesn’t deserve to make it past the rumor phase.
Whenever the news turns to the world of financial services, though, it seems like the path grows dark very quickly. (If so, that probably is by design.) I read stories like this and think, Congress oversees the SEC which is as it should be - and the SEC should be regulating…what? One of the most interesting reports I have read this year is The Story of Deep Capture by Mark Mitchell (pdf). First published last year, it is a 69 page report alleging corruption and collusion among hedge funds, regulators and financial reporters. It is tempting to dismiss it as tin foil hat conspiracy paranoia, but Mitchell is a former editor of the Columbia School of Journalism. Maybe he went off the rails after working there or maybe he was a bad hire in the first place, but that is something that should be backed up with evidence. All I have seen so far are ad hominem attacks from targets of his investigation.
The problem with establishing anything with confidence is wrapped up in one of Mitchell’s main contentions: That the world of financial journalism is relatively small; limited - at the time of his reporting, anyway - to one network (CNBC), a couple of newspapers (New York Times, Wall Street Journal) and a handful of magazines (Forbes, Barron’s, Fortune). If the economic news cycle is almost entirely determined by such a tiny group then it is possible to court and capture the prime movers. Even more importantly, the scope of respectable topics and people can be so strictly defined and narrowed that those marked for ostracism can be almost entirely silenced.
This puts the ordinary reader who encounters Deep Capture in a bit of a bind. Anyone coming to it from the world of politics will probably not need to be persuaded that an insular and self-reinforcing elite can decide what is and is not within the bounds of acceptable discourse. It is entirely possible to see a subject like the naked short selling of phantom stock marked as verboten and simply ignored by the most influential outlets. Anyone looking for independent confirmation of Mitchell’s allegations will necessarily be pushed to the fringes of financial journalism, and going there with no prior experience makes it impossible to weigh the credibility of what one finds. You have to go based almost entirely on your intuition and what seems reasonable.
Which is a real shame, because there are some fascinating elements to the story. Sometimes the web he weaves seems a little too sprawling, but other parts ring true. The idea of having a company like Gradient Analytics appear on the scene and almost instantly be hailed as an unimpeachable source of sound research looks a little fishy. So too is the role of an institution I had not heard of before (emphasis in original):
It is also important to recognize the role of The Depository Trust and Clearing Corporation (DTCC), an organization headquartered in New York City. DTCC is where stock trades are processed - more than $1.5 quadrillion worth of them every year. That’s 30 times larger than the entire gross product of the entire planet.
Which brings us back to the SEC. It ostensibly regulates the DTCC, but according to Mitchell that amounts to little more than walking in a couple times per year, kicking the tires and asking, “so how’s everything going?” When I read about moving SEC oversight to the Fed I immediately thought, would they do a better job? Would we know more about how the DTCC operates, and what role it might have played in the meltdown of the financial services industry? What would it take to get some light shining in there? With all due respect to the president, spending time and energy trying to yank pieces of authority out of Congress’ orbit and closer to his helps prevent discussions like that from even starting.
Reader Comments (7)
Tremendous post. And it would be interesting to compare the current CJR reporting on The Big Shitstorm with Mitchell's.
On page 62 he writes:
Leads me to believe the reporting now may be taking a softer line on the topic (if it addresses it at all).Ryan Chittum, CJR's main guy on the 'finance' beat, has been pretty chippy about the mess, imho.
The biggest problem with 'business/finance' reporters 'beat' reporting has been and will always be that the people hired to do it may be assumed to be "boosters." No newspaper in the world going to hire a really critical reporter--somebody who doesn't automatically, by default, buy the dominant discourse. Even the 'critical' economists--like Krugman, occasionally Robert EReich--accept the basic terms and internal logic...
In the same way your local fash-wrap covers local high-school sports, the guys who write for the finance pages are committed to making the local squad look good, and to 'supporting' the local boys.
The essence of Mark Mitchell's contribution is detailed reporting of virulently active fraud in the U. S. financial sector which is robbing billions in hard-earned capital from the Middle Class, and the fraud is affirmatively aided by federal government officials.Mitchell presents evidence this is so, and much more evidence is available. Mainstream media, including even the supposedly anti-Establishment Frontline on PBS, parrot the Wall Street party line that poor executive management destroys companies (meaning retail investors were dumb to invest in them), making no reference whatever to fraudulent trading practices which crush companies, no matter how good their management or products. If you're an investor who's lost money in the markets, you have a job and hope to keep it, or you're unemployed and need means of supporting yourself and your family, you have a dog in this fight and you ought to become engaged in a meaningful way.
Five years ago I invested in a company I’ll call ABC Corp. ABC appeared to be trading extra heavily over short a period of time on a US Stock Exchange; the float kept rolling over. Because of the high volume it appeared to me that real shares weren’t trading, they were probably IOU counterfeit shares. When I requested my shares in certificate form, I learned ABC’s transfer agent was having a difficult time accumulating sufficient authentic ABC shares from my broker that could be transferred. I contacted the company to ask for direction.
The CFO of the ABC sent me the following message (I've edited certain names but left my broker as is):
Monday, July 21, 2003 6:00 PM
Sir:
You are on the unfortunate side of what I believe is a multi-trillion US dollar problem - so large that it is on the verge of sending the US economy into recession. If you check ABC Corp.'s press releases back to July 2002, the Company has started litigation in three countries suing most of Wall Street over the epidemic of "naked short selling" that exists since the US's 3-day securities settlement system only applies to the payment side of the transaction and the share delivery side is routinely never delivered. The result is banks, brokerages, market makers, and hedge funds that sell non-existent securities and the NASD, SEC, and all other regulating bodies allow it to go on. The investor is none the wiser unless they attempt to actually obtain delivery of what they purchased. The broker statement you get only indicates what the broker said he purchased for you, and they say you can buy and sell it anytime, and they will sell those non-existent securities for you any time you wish, but the securities you actually thought you bought are not really there a lot of the time - it is all a big fraud on the investor. Our litigation and those of other companies that include AMEX, NASDAQ, and NYSE exchange companies show how large the dynamic really is. All you can do that I believe is effective is complain to the SEC in writing and demand a response, or sue your broker in small claims court. The SEC will not do anything but may if many others also complain. The suit will cost you little, and cost the brokerage everything. They will find you stock in short order. They know they have no defense to not providing what they contracted with you for.
I am available for further discussion per the contact numbers below. The further response you got from TD Waterhouse regarding "certificate only" reasoning is from the entity that is perpetrating fraud on you. I would not expect the answer to be correct.
Signed xxxx ABC CFO
Thanks for passing that along, Jackdaw. Fascinating.
I left this comment at Avedon's place, re: Mitchell
I had some fun with the Mitchell's meandering, horrifyingly written, logical fallacy-laden opus here: The Story of Sleep Rapture
To say that the only responses to "Deep Capture" have been ad-homs from those accused is patently unfair. Mitchell's work is sponsored by Patrick Byrne of Overstock.com, who has lashed out irrationally at any that have questioned his "leadership" of the company. His attacks on Bethany McLean - who unearthed the Enron scandal - have been particularly vitriolic, sexist and hateful.
There is plenty of room for honest discussion on U.S. financial journalists, as well as the practice of naked short-selling. But when those debates are being driven by someone with an obvious agenda, then the discussion has flown into the world of conspiracy.