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Bored to
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Wall Street's Naked Swindle

A scheme to flood the market with counterfeit stocks helped kill Bear
Stearns and Lehman Brothers — and the feds have yet to bust the
culprits

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By  Matt Taibbi

Apr 05, 2010 4:09 PM EDT

This article originally appeared in RS 1089 from October 15, 2009. This
issue and the rest of the Rolling Stone archives are available via All Access,
Rolling Stone's premium subscription plan. If you are already a subscriber, you
can click here to see
the full story. Not a member? Click here to learn more
about All Access.

On Tuesday, March 11th, 2008,
somebody — nobody knows who —made one of the craziest bets Wall Street has ever
seen. The mystery figure spent $1.7 million on a series of options, gambling
that shares in the venerable investment bank Bear Stearns would lose more than
half their value in nine days or less. It was madness — "like buying 1.7 million
lottery tickets," according to one financial analyst.

But what's even crazier is that the bet paid.

At the close of business that afternoon, Bear Stearns was trading at $62.97.
At that point, whoever made the gamble owned the right to sell huge bundles of
Bear stock, at $30 and $25, on or before March 20th. In order for the bet to
pay, Bear would have to fall harder and faster than any Wall Street brokerage in
history.

The very next day, March 12th, Bear went into free fall. By the end of the
week, the firm had lost virtually all of its cash and was clinging to promises
of state aid; by the weekend, it was being knocked to its knees by the Fed and
the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan
Chase (which had been given $29 billion in public money to marry its hunchbacked
new bride) at the humiliating price of … $2 a share. Whoever bought those
options on March 11th woke up on the morning of March 17th having made 159 times
his money, or roughly $270 million. This trader was either the luckiest guy in
the world, the smartest son of a bitch ever or…

Or what? That this was a brazen case of insider manipulation was so obvious
that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking
Committee, couldn't help but remark on it a few weeks later, when questioning
Christopher Cox, the then-chief of the Securities and Exchange Commission. "I
would hope that you're looking at this," Dodd said. "This kind of spike must
have triggered some sort of bells and whistles at the SEC. This goes beyond
rumors."

Cox nodded sternly and promised, yes, he would look into it. What actually
happened is another matter. Although the SEC issued more than 50 subpoenas to
Wall Street firms, it has yet to identify the mysterious trader who somehow
seemed to know in advance that one of the five largest investment banks in
America was going to completely tank in a matter of days. "I’ve seen the SEC
send agents overseas in a simple insider-trading case to investigate profits of
maybe $2,000," says Brent Baker, a former senior counsel for the commission.
"But they did nothing to stop this."

The SEC's halfhearted oversight didn't go unnoticed by the market. Six months
after Bear was eaten by predators, virtually the same scenario repeated itself
in the case of Lehman Brothers — another top-five investment bank that in
September 2008 was vaporized in an obvious case of market manipulation. From
there, the financial crisis was on, and the global economy went into full-blown
crater mode.

Like all the great merchants of the bubble economy, Bear and Lehman were
leveraged to the hilt and vulnerable to collapse. Many of the methods that
outsiders used to knock them over were mostly legal: Credit markers were pulled,
rumors were spread through the media, and legitimate short-sellers pressured the
stock price down. But when Bear and Lehman made their final leap off the cliff
of history, both undeniably got a push —especially in the form of a flat-out
counterfeiting scheme called naked short-selling.

That this particular scam played such a prominent role in the demise of the
two firms was supremely ironic. After all, the boom that had ballooned both
companies to fantastic heights was basically a counterfeit economy, a mountain
of paste that Wall Street had built to replace the legitimate business it no
longer had. By the middle of the Bush years, the great investment banks like
Bear and Lehman no longer made their money financing real businesses and
creating jobs. Instead, Wall Street now serves, in the words of one former
investment executive, as "Lucy to America's Charlie Brown," endlessly creating
new products to lure the great herd of unwitting investors into whatever tawdry
greed-bubble is being spun at the moment: Come kick the football again, only
this time we'll call it the Internet, real estate, oil futures. Wall Street has
turned the economy into a giant asset-stripping scheme, one whose purpose is to
suck the last bits of meat from the carcass of the middle class.

What really happened to Bear and Lehman is that an economic drought
temporarily left the hyenas without any more middle-class victims —and so they
started eating each other, using the exact same schemes they had been using for
years to fleece the rest of the country. And in the forensic footprint left by
those kills, we can see for the first time exactly how the scam worked — and how
completely even the government regulators who are supposed to protect us have
given up trying to stop it.

This was a brokered bloodletting, one in which the power of the state was
used to help effect a monstrous consolidation of financial and political power.
Heading into 2008, there were five major investment banks in the United States:
Bear, Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs. Today only Morgan
Stanley and Goldman survive as independent firms, perched atop a restructured
Wall Street hierarchy. And while the rest of the civilized world responded to
last year's catastrophes with sweeping measures to rein in the corruption in
their financial sectors, the United States invited the wolves into the
government, with the popular new president, Barack Obama — elected amid promises
to clean up the mess — filling his administration with Bear's and Lehman's
conquerors, bestowing his papal blessing on a new era of robbery.

To the rest of the world, the brazenness of the theft — coupled with the
conspicuousness of the government's inaction — clearly demonstrates that the
American capital markets are a crime in progress. To those of us who actually
live here, however, the news is even worse. We’re in a place we haven't been
since the Depression: Our economy is so completely fucked, the rich are running
out of things to steal.

If you squint hard enough, you can
see that the derivative-driven economy of the past decade has always, in a way,
been about counterfeiting. At their most basic level, innovations like the ones
that triggered the global collapse — credit-default swaps and collateralized
debt obligations — were employed for the primary purpose of synthesizing out of
thin air those revenue flows that our dying industrial economy was no longer
pumping into the financial bloodstream. The basic concept in almost every case
was the same: replacing hard assets with complex formulas that, once unwound,
would prove to be backed by promises and IOUs instead of real stuff.
Credit-default swaps enabled banks to lend more money without having the cash to
cover potential defaults; one type of CDO let Wall Street issue mortgage-backed
bonds that were backed not by actual monthly mortgage payments made by real
human beings, but by the wild promises of other irresponsible lenders. They even
called the thing a synthetic CDO — a derivative contract filled with
derivative contracts — and nobody laughed. The whole economy was a fake.

For most of this decade, nobody rocked that fake economy — especially the
faux housing market — better than Bear Stearns. In 2004, Bear had been one of
the five investment banks to ask the SEC for a relaxation of lending
restrictions that required it to possess $1 for every $12 it lent out; as a
result, Bear’s debt-to-equity ratio soared to a staggering 33-1. The bank used
much of that leverage to issue mountains of mortgage-backed securities,
essentially borrowing its way to a booming mortgage business that helped drive
its share price to a high of $172 in early 2007.

But that summer, Bear started to crater. Two of its hedge funds that were
heavily invested in mortgage-backed deals imploded in June and July, forcing the
credit-raters at Standard & Poor’s to cut its outlook on Bear from stable to
negative. The company survived through the winter — in part by jettisoning its
dipshit CEO, Jimmy Cayne, a dithering, weed-smoking septuagenarian who was
spotted at a bridge tournament during the crisis — but by March 2008, it was
almost wholly dependent on a network of creditors who supplied it with billions
in rolling daily loans to keep its doors open. If ever there was a major company
ripe to be assassinated by market manipulators, it was Bear Stearns in 2008.

Then, on March 11th — around the same time that mystery Nostradamus was
betting $1.7 million that Bear was about to collapse — a curious thing happened
that attracted virtually no notice on Wall Street. On that day, a meeting was
held at the Federal Reserve Bank of New York that was brokered by Fed chief Ben
Bernanke and then-New York Fed president Timothy Geithner. The luncheon included
virtually everyone who was anyone on Wall Street — except for Bear Stearns.

Bear, in fact, was the only major investment bank not represented at
the meeting, whose list of participants reads like a Barzini-Tattaglia meeting
of the Five Families. In attendance were Jamie Dimon from JPMorgan Chase, Lloyd
Blankfein from Goldman Sachs, James Gorman from Morgan Stanley, Richard Fuld
from Lehman Brothers and John Thain, the big-spending office redecorator still
heading the not-yet-fully-destroyed Merrill Lynch. Also present were old Clinton
hand Robert Rubin, who represented Citigroup; Stephen Schwarzman of the
Blackstone Group; and several hedge-fund chiefs, including Kenneth Griffin of
Citadel Investment Group.

The meeting was never announced publicly. In fact, it was discovered only by
accident, when a reporter from Bloomberg filed a request under the Freedom of
Information Act and came across a mention of it in Bernanke's schedule.
Rolling Stone has since contacted every major attendee, and all declined
to comment on what was discussed at the meeting. "The ground rules of the lunch
were of confidentiality," says a spokesman for Morgan Stanley. “Blackstone has
no comment," says a spokesman for Schwarzman. Rubin declined a request for an
interview, Fuld's people didn't return calls, and Goldman refused to talk about
the closed-door session. The New York Fed said the meeting, which had been
scheduled weeks earlier, was simply business as usual: "Such informal, small
group sessions can provide a valuable means to learn about market functioning
from people with firsthand knowledge."

So what did happen at that meeting? There's no evidence that Bernanke and
Geithner called the confidential session to discuss Bear's troubles, let alone
how to carve up the bank's spoils. It's possible that one of them made an
impolitic comment about Bear during a meeting held for other reasons,
inadvertently fueling a run on the bank. What's impossible to believe is the
bullshit version that Geithner and Bernanke later told Congress. The month after
Bear's collapse, both men testified before the Senate that they only learned how
dire the firm's liquidity problems were on Thursday, March 13th — despite the
fact that rumors of Bear's troubles had begun as early as that Monday and both
men had met in person with every key player on Wall Street that Tuesday. This is
a little like saying you spent the afternoon of September 12th, 2001, in the
Oval Office, but didn't hear about the Twin Towers falling until September
14th.

Given the Fed's cloak of confidentiality, we simply don't know what happened
at the meeting. But what we do know is that from the moment it ended, the run on
Bear was on, and every major player on Wall Street with ties to Bear started
pulling IV tubes out of the patient's arm. Banks, brokers and hedge funds that
held cash in Bear's accounts yanked it out in mass quantities (making it harder
for the firm to meet its credit payments) and took out credit-default swaps
against Bear (making public bets that the firm was going to tank). At the same
time, Bear was blindsided by an avalanche of "novation requests" — efforts by
worried creditors to sell off the debts that Bear owed them to other Wall Street
firms, who would then be responsible for collecting the money. By the afternoon
of March 11th, two rival investment firms — Credit Suisse and Goldman Sachs —
were so swamped by novation requests for Bear's debt that they temporarily
stopped accepting them, signaling the market that they had grave doubts about
Bear.

All of these tactics were elements that had often been seen in a kind of scam
known as a "bear raid" that small-scale stock manipulators had been using
against smaller companies for years. But the most damning thing the attack on
Bear had in common with these earlier manipulations was the employment of a type
of counterfeiting scheme called naked short-selling. From the moment the
confidential meeting at the Fed ended on March 11th, Bear became the target of
this ostensibly illegal practice — and the companies widely rumored to be behind
the assault were in that room. Given that the SEC has failed to identify who was
behind the raid, Wall Street insiders were left with nothing to trade but
gossip. According to the former head of Bear’s mortgage business, Tom Marano,
the rumors within Bear itself that week centered around Citadel and Goldman.
Both firms were later subpoenaed by the SEC as part of its investigation into
market manipulation — and the CEOs of Both Bear and Lehman were so suspicious
that they reportedly contacted Blankfein to ask whether his firm was involved in
the scam. (A Goldman spokesperson denied any wrongdoing, telling reporters it
was “rigorous about conducting business as usual.”

The roots of short-selling date back
to 1973, when Wall Street went to a virtually paperless system for trading
stocks. Before then, if you wanted to sell shares you owned in Awesome Company
X, you and the buyer would verbally agree to the deal through a broker. The
buyer would take legal ownership of the shares, but only later would the broker
deliver the actual, physical shares to the buyer, using an absurd,
Brazil-style network of runners who carried paper shares from one place
to another — a preposterous system that threatened to cripple trading
altogether.

To deal with the problem, Wall Street established a kind of giant financial
septic tank called the Depository Trust Company. Privately owned by a consortium
of brokers and banks, the DTC centralizes and maintains all records of stock
transactions. Now, instead of being schlepped back and forth across Manhattan by
messengers on bikes, almost all physical shares of stock remain permanently at
the DTC. When one broker sells shares to another, the trust company "delivers"
the shares simply by making a change in its records.

This new electronic system spurred an explosion of financial innovation. One
practice that had been little used before but now began to be employed with
great popularity was short-selling, a perfectly legal type of transaction that
allows investors to bet against a stock. The basic premise of a normal short
sale is easy to follow. Say you're a hedge-fund manager, and you want to bet
against the stock of a company — let's call it Wounded Gazelle
International(WGI). What you do is go out on the market and find someone — often
a brokerage house like Goldman Sachs — who has shares in that stock and is
willing to lend you some. So you go to Goldman on a Monday morning, and you
borrow 1,000 shares in Wounded Gazelle, which that day happens to be trading at
$10.

Now you take those 1,000 borrowed shares, and you sell them on the open
market at $10, which leaves you with $10,000 in cash. You then take that$10,000,
and you wait. A week later, surveillance tapes of Wounded's CEO having sex with
a woodchuck in a Burger King bathroom appear on CNBC. Awash in scandal, the
firm's share price tumbles to 3½. So you go out on the market and buy back those
1,000 shares of WGI — only now it costs you only $3,500 to do so. You then
return the shares to Goldman Sachs, at which point your interest in WGI ends. By
betting against or "shorting" the company, you've made a profit of $6,500.

It's important to point out that not only is normal short-selling completely
legal, it can also be socially beneficial. By incentivizing Wall Street players
to sniff out inefficient or corrupt companies and bet against them,
short-selling acts as a sort of policing system; legal short-sellers have been
instrumental in helping expose firms like Enron and WorldCom. The problem is,
the new paperless system instituted by the DTC opened up a giant loophole for
those eager to game the market. Under the old system, would-be short-sellers had
to physically borrow actual paper shares before they could execute a short sale.
In other words, you had to actually have stock before you could sell it. But
under the new system, a short-seller only had to make a good-faith effort to
"locate" the stock he wanted to borrow, which usually amounts to little more
than a conversation with a broker:

Evil Hedge Fund: I want to short IBM. Do
you have a million shares I can borrow?

Corrupt Broker [not
checking, playing Tetris]: Uh, yeah, whatever. Go ahead and sell.

There was nothing to prevent that broker — let's say he has only a million
shares of IBM total — from making the same promise to five different hedge
funds. And not only could brokers lend stocks they never had, another loophole
in the system allowed hedge funds to sell those stocks and deliver a kind of IOU
instead of the actual share to the buyer. When a share of stock is sold but
never delivered, it's called a "fail" or a "fail to deliver" — and there was no
law or regulation in place that prevented it. It's exactly what it sounds like:
a loophole legalizing the counterfeiting of stock. In place of real stock, the
system could become infected with "fails" — phantom IOU shares — instead of real
assets.

If you own stock that pays a dividend, you can even look at your dividend
check to see if your shares are real. If you see a line that says "PIL"— meaning
"Payment in Lieu" of dividends — your shares were never actually delivered to
you when you bought the stock. The mere fact that you're even getting this money
is evidence of the crime: This counterfeiting scheme is so profitable for the
hedge funds, banks and brokers involved that they are willing to pay "dividends"
for shares that do not exist. "They're making the payments without complaint,"
says SusanneTrimbath, an economist who worked at the Depository Trust Company.
"So they’re making the money somewhere else."

Trimbath was one of the first people to notice the problem. In 1993, she was
approached by a group of corporate transfer agents who had a complaint. Transfer
agents are the people who keep track of who owns shares incorporations, for the
purposes of voting in corporate elections. "What the transfer agents saw, when
corporate votes came up, was that they were getting more votes than there were
shares," says Trimbath. In other words, transfer agents representing a
corporation that had, say, 1 million shares outstanding would report a vote on
new board members in which 1.3 million votes were cast — a seeming
impossibility.

Analyzing the problem, Trimbath came to an ugly conclusion: The fact that
short-sellers do not have to deliver their shares made it possible for two
people at once to think they own a stock. Evil Hedge Fund X borrows 100shares
from Unwitting Schmuck A, and sells them to Unwitting Schmuck B, who never
actually receives that stock: In this scenario, both Schmucks will appear to
have full voting rights. "There's no accounting for share ownership around short
sales," Trimbath says. "And because of that, there are multiple owners assigned
to one share."

Trimbath's observation would prove prophetic. In 2005, a trade group called
the Securities Transfer Association analyzed 341 shareholder votes taken that
year — and found evidence of over-voting in every single one. Experts in
the field complain that the system makes corporate-election fraud a comically
simple thing to achieve: In a process known as “empty voting,” anyone can
influence any corporate election simply by borrowing great masses of shares
shortly before an important merger or board election, exercising their voting
rights, then returning the shares right after the vote is over. Hilariously,
because you’re only borrowing the shares and not buying them, you can
effectively “buy” a corporate election for free.

Back in 1993, over-voting might have seemed a mere curiosity, the result not
of fraud but of innocent bookkeeping errors. But Trimbath realized the broader
implication: Just as the lack of hard rules forcing short-sellers to deliver
shares makes it possible for unscrupulous traders to manipulate a corporate
vote, it could also enable them to manipulate the price of a stock by selling
large quantities of shares they didn’t possess. She warned her bosses that this
crack in the system made the specter of organized counterfeiting a real
possibility.

"I personally went to senior management at DTC in 1993 and presented them
with this issue," she recalls. "And their attitude was, 'We spill more than
that.'" In other words, the problem represented such a small percentage of the
assets handled annually by the DTC — as much as $1.8 quadrillion in any given
year, roughly 30 times the GDP of the entire planet — that it wasn't worth
worrying about.

It wasn't until 10 years later, when Trimbath had a chance meeting with
lawyer representing a company that had been battered by short-sellers, that she
realized someone outside the DTC had seized control of a financial weapon of
mass destruction. "It was like someone figured out how to aim and fire the Death
Star in Star Wars," she says. What they "figured out, "Trimbath realized,
was an early version of the naked-shorting scam that would help take down Bear
and Lehman.

Here's how naked short-selling works: Imagine you travel to a small foreign
island on vacation. Instead of going to an exchange office in your hotel to turn
your dollars into Island Rubles, the country instead gives you a small printing
press and makes you a deal: Print as many Island Rubles as you like, then on the
way out of the country you can settle your account. So you take your printing
press, print out gigantic quantities of Rubles and start buying goods and
services. Before long, the cash you’ve churned out floods the market, and the
currency's value plummets. Do this long enough and you'll crack the currency
entirely; the loaf of bread that cost the equivalent of one American dollar the
day you arrived now costs less than a cent.

With prices completely depressed, you keep printing money and buy everything
of value — homes, cars, priceless works of art. You then load it all into a
cargo ship and head home. On the way out of the country, you have to settle your
account with the currency office. But the Island Rubles you printed are now
worthless, so it takes just a handful of U.S. dollars to settle your debt.
Arriving home with your cargo ship, you sell all the island riches you bought at
a discount and make a fortune.

This is the basic outline for how to seize the assets of a publicly traded
company using counterfeit stock. What naked short-sellers do is sell large
quantities of stock they don't actually have, flooding the market with “phantom"
shares that, just like those Island Rubles, depress a company’s share price by
making the shares less scarce and therefore less valuable.

The first documented cases of this scam involved small-time boiler-room
grifters. In the late 1990s, not long after Trimbath warned her bosses about the
problem, a trader named John Fiero executed a series of "bear raids" on small
companies. First he sold shares he didn't possess in huge quantities and
fomented negative rumors about a company; then, in a classic shakedown, he
approached the firm with offers to desist — if they’d sell him stock at a
discount. "He would press a button and enter a trade for half a million shares,"
says Brent Baker, the SEC official who busted Fiero. "He didn't have the stock
to cover that — but the price of the stock would drop to a penny."

In 2005, complaints from investors about naked short-selling finally prompted
thee SEC to try to curb the scam. A new rule called Regulation SHO, known as
"Reg SHO" for short, established a series of guidelines designed, in theory, to
prevent traders from selling stock and then failing to deliver it to the buyer.
"Intentionally failing to deliver stock," then-SEC chief Christopher Cox noted,
"is market manipulation that is clearly violative of the federal securities
laws." But thanks to lobbying by hedge funds and brokers, the new rule included
no financial penalties for violators and no real enforcement mechanism. Instead,
it merely created a thing called the "threshold list," requiring short-sellers
to close out their positions in any company where the amount of "fails to
deliver” exceeded 10,000 shares for more than 13 days. In other words, if
counterfeiters got caught selling a chunk of phantom shares in a firm for two
straight weeks, they were no longer allowed to counterfeit the stock.

A nice, if timid idea — except that it's completely meaningless. Not only has
there been virtually no enforcement of the rule, but the SEC doesn't even bother
to track who is targeting companies with failed trades. As a result, many stocks
attacked by naked short-sellers spent years on the threshold list, including
Krispy Kreme, Martha Stewart and Overstock.com.

This is the basic outline for how to seize the assets of a publicly traded
company using counterfeit stock. What naked short-sellers do is sell large
quantities of stock they don't actually have, flooding the market with “phantom"
shares that, just like those Island Rubles, depress a company’s share price by
making the shares less scarce and therefore less valuable.

The first documented cases of this scam involved small-time boiler-room
grifters. In the late 1990s, not long after Trimbath warned her bosses about the
problem, a trader named John Fiero executed a series of "bear raids" on small
companies. First he sold shares he didn't possess in huge quantities and
fomented negative rumors about a company; then, in a classic shakedown, he
approached the firm with offers to desist — if they’d sell him stock at a
discount. "He would press a button and enter a trade for half a million shares,"
says Brent Baker, the SEC official who busted Fiero. "He didn't have the stock
to cover that — but the price of the stock would drop to a penny."

In 2005, complaints from investors about naked short-selling finally prompted
thee SEC to try to curb the scam. A new rule called Regulation SHO, known as
"Reg SHO" for short, established a series of guidelines designed, in theory, to
prevent traders from selling stock and then failing to deliver it to the buyer.
"Intentionally failing to deliver stock," then-SEC chief Christopher Cox noted,
"is market manipulation that is clearly violative of the federal securities
laws." But thanks to lobbying by hedge funds and brokers, the new rule included
no financial penalties for violators and no real enforcement mechanism. Instead,
it merely created a thing called the "threshold list," requiring short-sellers
to close out their positions in any company where the amount of "fails to
deliver” exceeded 10,000 shares for more than 13 days. In other words, if
counterfeiters got caught selling a chunk of phantom shares in a firm for two
straight weeks, they were no longer allowed to counterfeit the stock.

A nice, if timid idea — except that it's completely meaningless. Not only has
there been virtually no enforcement of the rule, but the SEC doesn't even bother
to track who is targeting companies with failed trades. As a result, many stocks
attacked by naked short-sellers spent years on the threshold list, including
Krispy Kreme, Martha Stewart and Overstock.com.

"We were actually on it for 668 consecutive days," says Patrick Byrne, the
CEO of Overstock, who became a much-ridiculed pariah on Wall Street for his
lobbying against naked short-selling. At one point, investors claimed ownership
of nearly 42 million shares in Overstock — even though fewer than 24 million
shares in the company had actually been issued.

Byrne is not an easy person for anyone with any kind of achievement neuroses
to like. He is young, good-looking, has shitloads of money, speaks fluent
Chinese, holds a doctorate in philosophy and spent his youth playing hooky from
high school and getting business tips from the likes of Warren Buffett. But
because of his fight against naked short-selling, he has been turbofragged by
the mainstream media as a tinfoil-hat lunatic; one story in the New York
Post featured a picture of Byrne with a flying saucer coming out of his
head.

Nonetheless, Byrne's howlings about naked short-selling look extremely
prescient in light of what happened to Bear and Lehman. Over the past four
years, Byrne has outlined the parameters of a naked-shorting scam that always
includes some combination of the following elements: negative rumors planted in
the financial press, the flooding of the market with enormous quantities of
undelivered shares, absurdly high trading volumes and the prolonged appearance
of the targeted company on the Reg SHO list.

In January 2005 — at the exact moment Reg SHO was launched — Byrne's own
company was trading above $65 a share, and the number of failed trades in
circulation was virtually nil. By March 2006, however, Overstock was down to $28
a share, and Reg SHO data indicated an explosion of failed trades — nearly 4
million undelivered shares on some days. At those moments, in other words,
nearly a fifth of all Overstock shares were fake.

"This really isn't about my company," Byrne says. "I mean, I've made my
money. My initial concern, of course, was with Overstock. But the more I learned
about this, the more my real worry became 'Jesus, what are the implications for
the system?' And given what happened to Bear and Lehman last year, I think we
ended up seeing what some of those implications are."

Bear Stearns wasn't the kind of
company that had a problem with naked short-selling. Before March 11th, 2008,
there had never been a period in which significant quantities of Bear stock had
been sold and then not delivered, and the company had never shown up on the Reg
SHO list. But beginning on March 12th — the day after the Fed meeting that
failed to include Bear, and the mysterious purchase of the options betting on
the firm’s imminent collapse — the number of counterfeit shares in Bear
skyrocketed.

The best way to grasp what happened is to look at the data: On Tuesday, March
11th, there were 201,768 shares of Bear that had failed to deliver. The very
next day, the number of phantom shares leaped to 1.2 million. By the close of
trading that Friday, the number passed 2 million — and when the market reopened
the following Monday, it soared to 13.7 million. In less than a week, the number
of counterfeit shares in Bear had jumped nearly seventyfold.

The giant numbers of undelivered shares over the course of that week amounted
to one of the most blatant cases of stock manipulation in Wall Street history.
"There is not a doubt in my mind, not a single doubt" that naked short-selling
helped destroy Bear, says Sen. Ted Kaufman, a Democrat from Delaware who has
introduced legislation to curb such financial fraud. Asked to rate how obvious a
case of naked short-selling Bear is, on a scale of one to 10, former SEC counsel
Brent Baker doesn't hesitate. "Easily a10," he says.

At the same time that naked short-sellers were counterfeiting Bear's stock,
the firm was being hit by another classic tactic of bear raids: negative rumors
in the media. Tipped off by a source, CNBC reporter David Faber reported on
March 12th that Goldman Sachs had held up a trade with Bear because it was
worried about the firm’s creditworthiness. Faber noted that the hold was
temporary — the deal had gone through that morning. But the damage was done;
inside Bear, Faber’s report was blamed for much of the subsequent panic.

"I like Faber, he's a good guy," a Bear executive later said. "But I wonder
if he ever asked himself, 'Why is someone telling me this?' There was a reason
this was leaked, and the reason is simple: Someone wanted us to go down, and go
down hard."

At first, the full-blown speculative attack on Bear seemed to be working.
Thanks to the media-fueled rumors and the mounting anxiety over the company’s
ability to make its payments, Bear's share price plummeted seven percent on
March 13th, to $57. It still had a ways to go for the mysterious short-seller to
make a profit on his bet against the firm, but it was headed in the right
direction. But then, early on the morning of Friday, March 14th, Bear's CEO,
Alan Schwartz, struck a deal with the Fed and JPMorgan to provide an emergency
loan to keep the company's doors open. When the news hit the street that
morning, Bear's stock rallied, gaining more than nine percent and climbing back
to $62.

The sudden and unexpected rally prompted celebrations inside Bear’s offices.
"We're alive!" someone on the company's trading floor reportedly shouted, and
employees greeted the news by high-fiving each other. Many gleefully believed
that the short-sellers targeting the firm would get “squeezed" — in other words,
if the share price kept going up, the bets against Bear would blow up in the
attackers' faces.

The rally proved short-lived — Bear ended the day at $30 — but it suggested
that all was not lost. Then a strange thing happened. As Bear understood it, the
emergency credit line that the Fed had arranged was originally supposed to last
for 28 days. But that Friday, despite the rally, Geithner and then-Treasury
secretary Hank Paulson — the former head of Goldman Sachs, one of the firms
rumored to be shorting Bear —had a sudden change of heart. When the market
closed for the weekend, Paulson called Schwartz and told him that the rescue
timeline had to be accelerated. Paulson wouldn't stay up another night worrying
about Bear Stearns, he reportedly told Schwartz. Bear had until Sunday night to
find a buyer or it could go fuck itself.

Bear was out of options. Over the course of that weekend, the firm opened its
books to JPMorgan, the only realistic potential buyer. But upon seeing all the
"shit" on Bear's books, as one source privy to the negotiations put it —
including great gobs of toxic investments in the sub-prime markets — JPMorgan
hedged. It wouldn't do the deal, it announced, unless it got two things: a huge
bargain on the sale price, and a lot of public money to wipe out the "shit."

So the Fed — on whose New York board sits JPMorgan chief Jamie Dimon—
immediately agreed to accommodate the new buyers, forking over $29billion in
public funds to buy up the yucky parts of Bear. Paulson, meanwhile, took care of
the bargain issue, putting the government's gun to Schwartz’s head and telling
him he had to sell low. Really low.

On Saturday night, March 15th, Schwartz and Dimon had discussed a deal for
JPMorgan to buy Bear at $8 to $12 a share. By Sunday afternoon, however,
Geithner reported that the price had plunged even further. "Shareholders are
going to get between $3 and $5 a share," he told Paulson.

But Paulson pissed on even that price from a great height. "I can't see why
they're getting anything," he told Dimon that afternoon from Washington, via
speakerphone. "I could see something nominal, like $1 or $2 per share."

Just like that, with a slight nod of Paulson's big shiny head, Bear was
vaporized. This, remember, all took place while Bear's stock was still selling
at $30. By knocking the share price down 28 bucks, Paulson ensured that the
manipulators who were illegally counterfeiting Bear's shares would make an
awesome fortune.

Although we don't know who was behind
the naked short-selling that targeted Bear — short-traders aren't required to
reveal their stake in a company — the scam wasn't just a fetish crime for
small-time financial swindlers. On the contrary, the widespread selling of
shares without delivering them translated into an enormously profitable business
for the biggest companies on Wall Street, fueling the growth of a booming sector
in the financial-services industry called Prime Brokerage.

As with other Wall Street abuses, the lucrative business in counterfeiting
stock got its start with a semisecret surrender of regulatory authority byte
government. In 1989, a group of prominent Wall Street broker-dealers— led,
ironically, by Bear Stearns — asked the SEC for permission to manage the
accounts of hedge funds engaged in short-selling, assuming responsibility for
locating, lending and transferring shares of stock. In 1994, federal regulators
agreed, allowing the nation's biggest investment banks to serve as Prime
Brokers. Think of them as the house in a casino: They provide a gambler with
markers to play and to manage his winnings.

Under the original concept, a hedge fund that wanted to short a stock like
Bear Stearns would first "locate" the stock with his Prime Broker, then would do
the trade with a so-called Executing Broker. But as time passed, Prime Brokers
increasingly allowed their hedge-fund customers to use automated systems and
"locate" the stock themselves. Now the conversation went something like
this:

Evil Hedge Fund: I just sold a million
shares of Bear Stearns. Here, hold this shitload of money for
me.

Prime Broker: Awesome! Where did you borrow the shares
from?

Evil Hedge Fund: Oh, from Corrupt Broker. You know,
Vinnie.

Prime Broker: Oh, OK. Is he sure he can find those shares?
Because, you know, there are rules.

Evil Hedge Fund: Oh, yeah. You
know Vinnie. He's good for it.

Prime Broker: Sweet!

Following the SEC's approval of this cozy relationship, Prime Brokers boomed.
Indeed, with the rise of discount brokers online and the collapse of IPOs and
corporate mergers, Prime Brokerage — in essence, the service end of the short-
selling business — is now one of the most profitable sectors that big Wall
Street firms have left. Last year, Goldman Sachs netted $3.4 billion providing
"securities services" — the lion's share of it from Prime Brokerage.

When one considers how easy it is for short-sellers to sell stock without
delivering, it's not hard to see how this can be such a profitable business for
Prime Brokers. It's really a license to print money, almost in the literal
sense. As such, Prime Brokers have tended to be lax about making sure that their
customers actually possess, or can even realistically find, the stock they've
sold. That point is made abundantly clear by tapes obtained by Rolling Stone of
recent meetings held by the compliance officers for big Prime Brokers like
Goldman Sachs, Morgan Stanley and Deutsche Bank. Compliance officers are
supposed to make sure that traders at their firms follow the rules — but in the
tapes, they talk about how they routinely greenlight transactions they know are
dicey.

In a conference held at the JW Marriott Desert Ridge Resort in Phoenix in May
2008 — just over a month after Bear collapsed — a compliance officer for Goldman
Sachs named Jonathan Breckenridge talks with his colleagues about how the firm's
customers use an automated program to report where they borrowed their stock
from. The problem, he says, is the system allows short-sellers to enter anything
they want in the text field, no matter how nonsensical — or even leave the field
blank. "You can enter ABC, you can enter Go, you can enter Locate Goldman, you
can enter whatever you want," he says. "Three dots — I've actually seen
that."

The room erupts with laughter.

After making this admission, Breckenridge asks officials from the Securities
Industry and Financial Markets Association, the trade group representing Wall
Street broker-dealers, for guidance in how to make this appear less blatantly
improper. "How do you have in place a process," he wonders, "and make sure that
it looks legit?"

The funny thing is that Prime Brokers didn't even need to fudge the rules.
They could counterfeit stocks legally, thanks to yet another loophole — this one
involving key players known as "market makers." When a customer wants to buy
options and no one is lining up to sell them, the market maker steps in and
sells those options out of his own portfolio. In market terms, he "provides
liquidity," making sure you can always buy or sell the options you want.

Under what became known as the "options market maker exception," the SEC
permitted a market maker to sell shares whether or not he had them or could find
them right away. In theory, this made sense, since delaying the market maker
from selling to offset a big buy order could dry up liquidity and slow down
trading. But it also created a loophole for naked short-sellers to kill stocks
easily — and legally. Take Bear Stearns, for example. Say the stock is trading
at $62, as it was on March 11th, and someone buys put options from the market
maker to sell $1.7 million in Bear stock nine days later at $30.

To offset that big trade, the market maker might try to keep his own
portfolio balanced by selling off shares in the company, whether or not he can
locate them.

But here's the catch: The market maker often sells those phantom shares to
the same person who bought the put options. That buyer, after all, would love to
snap up a bunch of counterfeit Bear stock, since he can drive the company's
price down by reselling those fake shares. In fact, the shares you buy from a
market maker via the SEC-sanctioned loophole are sometimes called "bullets,"
because when you pump these counterfeit IOUs into the market, it's like firing
bullets into the company — it kills the price, just like printing more Island
Rubles kills a currency.

Which, it appears, is exactly what happened to Bear Stearns. Someone bought a
shitload of puts in Bear, and then someone sold a shitload of Bear shares that
never got delivered. Bear then staggered forward, bleeding from every internal
organ, and fell on its face. "It looks to me like Bear Stearns got riddled with
bullets," John Welborn, an economist with an investment firm called the
Haverford Group, later observed.

So who conducted the naked short- selling against Bear? We don't know — but
we do know that, thanks to the free pass the SEC gave them, Prime Brokers stood
to profit from the transactions. And the confidential meeting at the Fed on
March 11th included all the major Prime Brokers on Wall Street — as well as many
of the biggest hedge funds, who also happen to be some of the biggest
short-sellers on Wall Street.

The economy's financial woes might
have ended there — leaving behind an unsolved murder in which many of the prime
suspects profited handsomely. But three months later, the killers struck again.
On June 27th, 2008, an avalanche of undelivered shares in Lehman Brothers
started piling up in the market. June 27th: 705,103 fails. June 30th: 814,870
fails. July 1st: 1,556,301 fails.

Then the rumors started. A story circulated on June 30th about Barclays
buying Lehman for 25 percent less than the share price. The tale was quickly
debunked, but the attacks continued, with hundreds of thousands of failed trades
every day for more than a week — during which time Lehman lost 44 percent of its
share price. The major players on Wall Street, who for years had confined this
unseemly sort of insider rape to smaller companies, had begun to eat each other
alive.

It made great capitalist sense to attack these giant firms — they were easy
targets, after all, hideously mismanaged and engorged with debt — but an all-out
shooting war of this magnitude posed a risk to everyone. And so a cease-fire was
declared. In a remarkable order issued on July 15th, Cox dictated that
short-sellers must actually pre-borrow shares before they sell them. But in a
hilarious catch, the order only covered shares of the 19 biggest firms on Wall
Street, including Morgan Stanley and Goldman Sachs, and would last only a
month.

This was one of the most amazing regulatory actions ever: It essentially told
Wall Street that it was enjoined from counterfeiting stock — but only
temporarily, and only the stock of the 19 of the richest companies on Wall
Street. Not surprisingly, the share price for Lehman and some of the other lucky
robber barons surged on the news.

But the relief was short-lived. On August 12th, 2008, the Cox order expired —
and fails in Lehman stock quickly started mounting. The attack spiked on
September 9th, when there were over 1 million undelivered shares in Lehman. On
September 10th, there were 5,877,649 failed trades. The day after, there were an
astonishing 22,625,385 fails. The next day: 32,877,794. Then, on September 15th,
the price of Lehman Brothers stock fell to 21 cents, and the company declared
bankruptcy.

That naked shorting was the tool used to kill the company — which was, like
Bear, a giant bursting sausage of deadly sub-prime deals that didn't need much
of a push off the cliff — was obvious to everyone. Lehman CEO Richard Fuld,
admittedly one of the biggest assholes of the 21st century, said as much a month
later. "The naked shorts and rumormongers succeeded in bringing down Bear
Stearns," Fuld told Congress. "And I believe that unsubstantiated rumors in the
marketplace caused significant harm to Lehman Brothers."

The methods used to destroy these companies pointed to widespread and
extravagant market manipulation, and the death of Lehman should have instigated
a full-bore investigation. "This isn't a trail of bread crumbs," former SEC
enforcement director Irving Pollack has pointed out. "This audit trail is lit up
like an airport runway. You can see it a mile off. Subpoena e-mails. Find out
who spread false rumors and also shorted the stock, and you've got your
manipulators."

It would be an easy matter for the SEC to determine who killed Bear and
Lehman, if it wanted to — all it has to do is look at the trading data
maintained by the stock exchanges. But 18 months after the widespread market
manipulation, the federal government's cop on the financial beat has barely
lifted a finger to solve the two biggest murders in Wall Street history. The SEC
refuses to comment on what, if anything, it is doing to identify the wrongdoers,
saying only that "investigations related to the financial crisis are a
priority."

The commission did repeal the preposterous "market maker" loophole on
September 18th, 2008, forbidding market makers from selling phantom shares. But
that same day, the SEC also introduced a comical agreement called "Rule 10b-21,"
which makes it illegal for an Evil Hedge Fund to lie to a Prime Broker about
where he borrowed his stock. Basically, this new rule formally exempted Wall
Street's biggest players from any blame for naked short-selling, putting it all
on the backs of their short-seller clients. Which was good news for firms like
Goldman Sachs, which only a year earlier had been fined $2 million for
repeatedly turning a blind eye to clients engaged in illegal short-selling.
Instead of tracking down the murderers of Bear and Lehman, the SEC simply
eliminated the law against aiding and abetting murder. "The new rule just
exempted the Prime Brokers from legal responsibility," says a financial player
who attended closed-door discussions about the regulation. "It's a joke."

But the SEC didn't stop there — it also went out of its way to protect the
survivors from the normal functioning of the marketplace. On September 15th, the
same day that Lehman declared bankruptcy, the share price of Goldman and Morgan
Stanley began to plummet sharply. There was little evidence of phantom shares
being sold — in Goldman's case, fewer than .02 percent of all trades failed.
Whoever was attacking Goldman and Morgan Stanley — if anyone was — was for the
most part doing it legally, through legitimate short-selling. As a result, when
the SEC imposed yet another order on September 17th curbing naked short-selling,
it did nothing to help either firm, whose share prices failed to recover.

Then something extraordinary happened. Morgan Stanley lobbied the SEC for a
ban on legitimate short-selling of financial stocks — a thing not even the most
ardent crusaders against naked short- selling, not even tinfoil-hat-wearing
Patrick Byrne, had ever favored. "I spent years just trying to get the SEC to
listen to a request that they stop people from rampant illegal counterfeiting of
my company's stock," says Byrne. "But when Morgan Stanley asks for a ban on
legal short-selling, they get it literally overnight."

Indeed, on September 19th, Cox imposed a temporary ban on legitimate short-
selling of all financial stocks. The stock price of both Goldman and Morgan
Stanley quickly rebounded. The companies were also bailed out by an instant
designation as bank holding companies, which made them eligible for a boatload
of emergency federal aid. The law required a five-day wait for such a
conversion, but Geithner and the Fed granted Goldman and Morgan Stanley their
new status overnight.

So who killed Bear Stearns and Lehman Brothers? Without a bust by the SEC,
all that's left is means and motive. Everyone in Washington and on Wall Street
understood what it meant when Lehman, for years the hated rival of Goldman
Sachs, was chosen by Treasury Secretary Hank Paulson — the former Goldman CEO —
to be the one firm that didn't get a federal bailout. "When Paulson, a former
Goldman guy, chose to sacrifice Lehman, that's when you knew the whole fucking
thing was dirty," says one Democratic Party operative. "That's like the Yankees
not bailing out the Mets. It was just obvious."

The day of Lehman's collapse, Paulson also bullied Bank of America into
buying Merrill Lynch — which left Goldman Sachs and Morgan Stanley as the only
broker-teens left unaxed in the Camp Crystal Lake known as the American economy.
Before they were hacked to bits, Merrill, Bear and Lehman all nurtured booming
businesses as Prime Brokers. All that lucrative work had to go somewhere. So
guess which firms made the most money in Prime Brokerage this year? According to
a leading industry source, the top three were Goldman, JPMorgan and Morgan
Stanley.

We may never know who killed Bear and Lehman. But it sure isn't hard to
figure out who's left.

While naked short-selling was the
weapon used to bring down both Bear and Lehman, it would be preposterous to
argue that the practice caused the financial crisis. The most serious problems
in this economy were the result of other, broader classes of financial misdeed:
corruption of the ratings agencies, the use of smoke-and-mirrors like
derivatives, an epidemic tulipomania called the housing boom and the overall
decline of American industry, which pushed Wall Street to synthesize growth
where none existed.

But the "phantom" shares produced by naked short-sellers are symptomatic of a
problem that goes far beyond the stock market. "The only reason people talk
about naked shorting so much is that stock is sexy and so much attention is paid
to the stock market," says a former investment executive. "This goes on in all
the markets."

Take the commodities markets, where most of those betting on the prices of
things like oil, wheat and soybeans have no product to actually deliver. "All
speculative selling of commodity futures is 'naked' short selling," says Adam
White, director of research at White Knight Research and Trading. While buying
things that don't actually exist isn't always harmful, it can help fuel
speculative manias, like the oil bubble of last summer. "The world consumes 85
million barrels of oil per day, but it's not uncommon to trade 1 billion barrels
per day on the various commodities exchanges," says White. "So you've got 12
paper barrels trading for every physical barrel."

The same is true for mortgages. When lenders couldn't find enough dope
addicts to lend mansions to, some simply went ahead and started selling the same
mortgages over and over to different investors. There are now a growing number
of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like
chump change," says April Charney, a legal-aid attorney based in Florida. Just
like in the stock market, where short-sellers delivered IOUs instead of real
shares, traders of mortgage-backed securities sometimes conclude deals by
transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note
— instead of the actual mortgage. A paper presented at the American Bankruptcy
Institute earlier this year reports that up to a third of all notes for
mortgage-backed securities may have been "misplaced or lost" — meaning they're
backed by IOUs instead of actual mortgages.

How about bonds? "Naked short-selling of stocks is nothing compared to what
goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the
practice of selling bonds without delivering them is so rampant it has even
infected the market for U.S. Treasury notes. That's right — Wall Street has
actually been brazen enough to counterfeit the debt of the United States
government right under the eyes of regulators, in the middle of a historic
series of government bailouts! In fact, the amount of failed trades in Treasury
bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single
week last July, some $250 billion worth of U.S. Treasury bonds were sold and not
delivered.

The counterfeit nature of our economy is troubling enough, given that
financial power is concentrated in the hands of a few key players — "300 white
guys in Manhattan," as a former high-placed executive puts it. But over the
course of the past year, that group of insiders has also proved itself
brilliantly capable of enlisting the power of the state to help along the
process of concentrating economic might — making it less and less likely that
the financial markets will ever be policed, since the state is increasingly the
captive of these interests.

The new president for whom we all had such high hopes went and hired Michael
Froman, a Citigroup executive who accepted a $2.2 million bonus after he joined
the White House, to serve on his economic transition team — at the same time the
government was giving Citigroup a massive bailout. Then, after promising to curb
the influence of lobbyists, Obama hired a former Goldman Sachs lobbyist, Mark
Patterson, as chief of staff at the Treasury. He hired another Goldmanite, Gary
Gensler, to police the commodities markets. He handed control of the Treasury
and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent
their whole careers being bellhops for New York bankers. And on the first
anniversary of the collapse of Lehman Brothers, when he finally came to Wall
Street to promote "serious financial reform," his plan proved to be so
completely absent of balls that the share prices of the major banks soared at
the news.

The nation's largest financial players are able to write the rules for own
their businesses and brazenly steal billions under the noses of regulators, and
nothing is done about it. A thing so fundamental to civilized society as the
integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no
longer be protected, not even in a crisis, and a crime as vulgar and conspicuous
as counterfeiting can take place on a systematic level for years without being
stopped, even after it begins to affect the modern-day equivalents of the
Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme
for second-rate grifters in Brooklyn has become a major profit center for Wall
Street. Our burglar class now rules the national economy. And no one is trying
to stop them.
SEC to listen to a request that they stop people from rampant
illegal counterfeiting of my company's stock," says Byrne. "But when Morgan
Stanley asks for a ban on legal short-selling, they get it literally overnight."

Indeed, on September 19th, Cox imposed a temporary ban on legitimate short-
selling of all financial stocks. The stock price of both Goldman and Morgan
Stanley quickly rebounded. The companies were also bailed out by an instant
designation as bank holding companies, which made them eligible for a boatload
of emergency federal aid. The law required a five-day wait for such a
conversion, but Geithner and the Fed granted Goldman and Morgan Stanley their
new status overnight.

So who killed Bear Stearns and Lehman Brothers? Without a bust by the SEC,
all that's left is means and motive. Everyone in Washington and on Wall Street
understood what it meant when Lehman, for years the hated rival of Goldman
Sachs, was chosen by Treasury Secretary Hank Paulson — the former Goldman CEO —
to be the one firm that didn't get a federal bailout. "When Paulson, a former
Goldman guy, chose to sacrifice Lehman, that's when you knew the whole fucking
thing was dirty," says one Democratic Party operative. "That's like the Yankees
not bailing out the Mets. It was just obvious."

The day of Lehman's collapse, Paulson also bullied Bank of America into
buying Merrill Lynch — which left Goldman Sachs and Morgan Stanley as the only
broker-teens left unaxed in the Camp Crystal Lake known as the American economy.
Before they were hacked to bits, Merrill, Bear and Lehman all nurtured booming
businesses as Prime Brokers. All that lucrative work had to go somewhere. So
guess which firms made the most money in Prime Brokerage this year? According to
a leading industry source, the top three were Goldman, JPMorgan and Morgan
Stanley.

We may never know who killed Bear and Lehman. But it sure isn't hard to
figure out who's left.

While naked short-selling was the weapon used to bring down both Bear and
Lehman, it would be preposterous to argue that the practice caused the financial
crisis. The most serious problems in this economy were the result of other,
broader classes of financial misdeed: corruption of the ratings agencies, the
use of smoke-and-mirrors like derivatives, an epidemic tulipomania called the
housing boom and the overall decline of American industry, which pushed Wall
Street to synthesize growth where none existed.

But the "phantom" shares produced by naked short-sellers are symptomatic of a
problem that goes far beyond the stock market. "The only reason people talk
about naked shorting so much is that stock is sexy and so much attention is paid
to the stock market," says a former investment executive. "This goes on in all
the markets."

Take the commodities markets, where most of those betting on the prices of
things like oil, wheat and soybeans have no product to actually deliver. "All
speculative selling of commodity futures is 'naked' short selling," says Adam
White, director of research at White Knight Research and Trading. While buying
things that don't actually exist isn't always harmful, it can help fuel
speculative manias, like the oil bubble of last summer. "The world consumes 85
million barrels of oil per day, but it's not uncommon to trade 1 billion barrels
per day on the various commodities exchanges," says White. "So you've got 12
paper barrels trading for every physical barrel."

The same is true for mortgages. When lenders couldn't find enough dope
addicts to lend mansions to, some simply went ahead and started selling the same
mortgages over and over to different investors. There are now a growing number
of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like
chump change," says April Charney, a legal-aid attorney based in Florida. Just
like in the stock market, where short-sellers delivered IOUs instead of real
shares, traders of mortgage-backed securities sometimes conclude deals by
transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note
— instead of the actual mortgage. A paper presented at the American Bankruptcy
Institute earlier this year reports that up to a third of all notes for
mortgage-backed securities may have been "misplaced or lost" — meaning they're
backed by IOUs instead of actual mortgages.

How about bonds? "Naked short-selling of stocks is nothing compared to what
goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the
practice of selling bonds without delivering them is so rampant it has even
infected the market for U.S. Treasury notes. That's right — Wall Street has
actually been brazen enough to counterfeit the debt of the United States
government right under the eyes of regulators, in the middle of a historic
series of government bailouts! In fact, the amount of failed trades in Treasury
bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single
week last July, some $250 billion worth of U.S. Treasury bonds were sold and not
delivered.

The counterfeit nature of our economy is troubling enough, given that
financial power is concentrated in the hands of a few key players — "300 white
guys in Manhattan," as a former high-placed executive puts it. But over the
course of the past year, that group of insiders has also proved itself
brilliantly capable of enlisting the power of the state to help along the
process of concentrating economic might — making it less and less likely that
the financial markets will ever be policed, since the state is increasingly the
captive of these interests.

The new president for whom we all had such high hopes went and hired Michael
Froman, a Citigroup executive who accepted a $2.2 million bonus after he joined
the White House, to serve on his economic transition team — at the same time the
government was giving Citigroup a massive bailout. Then, after promising to curb
the influence of lobbyists, Obama hired a former Goldman Sachs lobbyist, Mark
Patterson, as chief of staff at the Treasury. He hired another Goldmanite, Gary
Gensler, to police the commodities markets. He handed control of the Treasury
and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent
their whole careers being bellhops for New York bankers. And on the first
anniversary of the collapse of Lehman Brothers, when he finally came to Wall
Street to promote "serious financial reform," his plan proved to be so
completely absent of balls that the share prices of the major banks soared at
the news.

The nation's largest financial players are able to write the rules for own
their businesses and brazenly steal billions under the noses of regulators, and
nothing is done about it. A thing so fundamental to civilized society as the
integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no
longer be protected, not even in a crisis, and a crime as vulgar and conspicuous
as counterfeiting can take place on a systematic level for years without being
stopped, even after it begins to affect the modern-day equivalents of the
Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme
for second-rate grifters in Brooklyn has become a major profit center for Wall
Street. Our burglar class now rules the national economy. And no one is trying
to stop them.

This article originally appeared in RS 1089 from October 15, 2009. This
issue and the rest of the Rolling Stone archives are available via All Access,
Rolling Stone's premium subscription plan. If you are already a subscriber, you
can click here to see
the full story. Not a member? Click here to learn more
about All Access.

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Albums

Songs

Movies

Maroon
5 Hands All
Over

Buy

John
Legend and the Roots Wake
Up! Recommended

Buy

Robert
Plant Band of
Joy Recommended

Buy

Weezer
Hurley

Buy

Linkin
Park A Thousand
Suns

Buy

More

Taylor
Swift "Mine"
Recommended

Buy
Play

Robert
Plant "Angel
Dance" Recommended

Buy
Play

John Legend
and the Roots "Wake Up
Everybody" Recommended

Buy
Play

Beck
"Summertime"

Buy Play

Robyn
"Hang With
Me"

Buy
Play

More

Wall Street:
Money Never Sleeps Twentieth
Century Fox

Buried
Lionsgate

Waiting for
"Superman" Paramount
Vantage Recommended

Catfish
Universal
Pictures Recommended

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The Durable Led Zeppelin
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Inside the Rolling Stones' 'Exile' SessionsAll Access

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Being James Brown
By Jonathan LethemAll Access

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Bob Dylan's America
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Taibbi: McChrystal and Us

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Rolling
Stone's Guide to the Twilight Saga: Vampires, Werewo

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Rob
Sheffield on the Summer's Best Jams

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The Dark
Side of Pink Floyd: The Illustrated History of the

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