- Editorial Commentary -

“A small group of thoughtful people could change the world. Indeed, it’s the only thing that ever has.” ~Margaret Mead

August 19, 2009 (FinancialWire) (By Mark Faulk) — Years before SEC chairman Christopher Cox invoked a one-month ban in July of 2008 against naked short selling in 19 battered financial stocks, including Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), Lehman Brothers (OTC: LEHMQ.PK), Credit Suisse (NYSE: CS), Merrill Lynch (DOA, as in dead on arrival), Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE), an eclectic “small group of thoughtful people” sounded the alarm about a financial system gone horribly wrong. Activist Dave Patch started InvestigatetheSEC.com in late 2003, and in early 2004 I began reporting on financial fraud on my website The Faulking Truth. At around the same time, the late Gayle Essary began to utilize his own forums, Investrend and Financial Wire, to bring greater exposure and an air of credibility to the cause. Others, including Bud Burrell, Bob O’Brien, Rod Young, DeWayne Reeves, Darren Saunders, Mary Helburn, and economists Suzanne Trimbath and Robert Shapiro, worked tirelessly to warn the country about the potential train wreck years before it happened. Efforts to reform our financial markets were further galvanized when Overstock (NASDAQ: OSTK) CEO Patrick Byrne, along with fellow crusaders Judd Bagley, Brent Baker, and Mark Mitchell, joined the rapidly escalating war. Forbes writer Elizabeth Moyer and Euromoney magazine’s Helen Avery covered the scandal for the financial media, but the Wall Street controlled corporate media for the most part either ignored the issue or attempted to discredit those who exposed the corruption.

At first, the focus of stock market reform advocates was something called “naked short selling”, a predatory trading practice used to illegally manipulate stock prices. The fraud appears to have originally been fueled mostly by Canadian brokers and offshore lenders and hedge funds, who victimized small, struggling companies and their investors. They utilized naked short selling and a lending practice that became known as “death spiral financing” because targeted companies were often forced into bankruptcy. The con artists bet against the company and its shareholders by taking advantage of a trading system that allowed them to “sell” shares that they didn’t own, and in many cases, never even borrowed. They could literally destroy the company, and its shareholders, by creating so much negative pressure that the stock eventually collapsed under the weight of the massive selling. But the key to the scheme was the con artists’ ability to short sell the companies’ stock without having to ever acquire the shares to cover their positions. They could buy and sell stock that didn’t exist, shares that were never delivered, in effect creating an unlimited supply of counterfeit stock. 

Because regulators who were assigned the task of policing the financial markets ignored naked short selling and other types of blatant fraud, the criminals became bolder, moving from small penny stock companies to larger companies such as Overstock, Delta Airlines (NYSE: DAL), Krispy Kreme (NYSE: KKD), Netflix (NASD: NFLX), Martha Stewart Living (NYSE: MSO), Global Crossing (NASD: GLBC), and TASER (NASD: TASR). Hedge funds grew exponentially during the first decade of the 21^st century, and began to come under the control of Wall Street’s largest players, with Goldman Sachs and J. P. Morgan eventually becoming the world’s largest hedge funds. In the end, they began to devour their own and turned on each other, adding to the market collapse that began in September of 2008. 

It wasn’t just the media and federal regulators who aided and abetted Wall Street in their financial assault on middle-class America. This was the most lopsided redistribution of wealth in the history of the world, and our political leaders in Washington blatantly ignored it until it collapsed around them. They squandered countless opportunities to fix the system long before it collapsed around them, and in fact, for the most part denied that a problem even existed. Our country runs on a system designed by millionaires for the benefit of billionaires, and as long as the money kept flowing, they could bury their collective heads in the sand at their private golf courses.

A clear majority of Americans have finally gotten the message. They realize that our financial markets are in turmoil not because of the natural ebb and flow of our economy, but because of a flawed and corrupt system. Our markets were intended to mirror our free enterprise system, but instead have begun to strongly affect our economy in a decidedly adverse manner. The tail has begun to wag the proverbial dog, and the results have been devastating to our country and the world’s economic well-being. The SEC has decided to make permanent a temporary ban on naked short selling that was set to expire on July 31st, but activists recognized long ago that naked short selling is simply a symptom of…here’s that mantra again…a financial system that is rigged from the ground up.

As a country, we’re now in the “what next?” phase of this epic crisis. The recent ban on naked short selling by the SEC is nothing more than a band-aid on an amputated limb, but it’s a start. If we are not diligent in holding President Obama’s and Congress’ feet to the fire we will end up with new regulations that are just as wrought with deliberately placed loopholes as our current system. Lawmakers and regulators, answering to the same moneyed special interest groups who sold us down the river in the first place, will close one door of corruption, only to open three more. That is a fact that has been borne out throughout history.

Over the next few months, I’ll address some of the individual aspects of the stunning collapse of our economy, how we got here in the first place, where we are now, and what we can all do to move the process forward in a positive way. But whether the topic is the failure of the SEC and our elected officials in Washington to protect investors, the massive follies of the Bush/Obama bailout, the imminent overhaul of the SEC, or any other of the myriad of issues that we face both as a country and worldwide, the message will remain the same, the mantra will continue to be repeated until every American hears it in their sleep: The financial system itself is broken, and it’s up to us to hold our public officials, from the White House to the halls of Congress and the SEC, accountable for their past inaction and their current actions that affect our country’s economic future.

(This is the conclusion of Mark Faulk’s “Financial Armageddon In Retrospect”. To read Part One, go to http://www.financialwire.net/2009/08/12/financial-armageddon-in-retrospect-part-one/).

Mark Faulk, author of “The Naked Truth: Investing in the Stock Play of a Lifetime”, (www.thenakedtruthbook.com) has been covering financial fraud and naked short selling on his website since early 2004, and has written over 150 articles on the topic of financial reform. For over five years, he and a small group of dedicated activists have been educating investors, Congress, the SEC, and even the President about the imminent danger of allowing rampant fraud to continue. In his very first article on The Faulking Truth website on March 19, 2004, he coined the phrase “financial terrorism”, which has come to epitomize the culture of greed and manipulation that dominates Wall Street. His articles have been reprinted or excerpted in numerous major publications, including The Huffington Post and Financial Wire, and financial journals such as the prestigious Capco Journal of Financial Transformation. In the fall of 2008, he worked on a yet-to-be released major documentary about financial fraud. He has made numerous appearances on television and logged hundreds of hours in radio interviews.

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