This post is a double header, the Fannie and Freddie scenario, and rabid naked shorting of gold and silver mining stocks.

Out of the two, the “Frannie” situation has the potential to create more problems, but before we address that let me leave you with one thought on the naked shorting thing:

I have said for a long time now that we have not seen anywhere near the actual losses that brokerage houses and hedge funds have really taken from the sub-prime fallout that is still working its way through the financial system. Balance sheets are suffering badly.

To find a fundamental reason for the massive sell off across multiple sectors we may need look no further than the credit crisis and its effect on liquidity: to repair hemorrhaging balance sheets, funds and firms need liquidity, and badly.

So badly in fact, that it appears they have thrown caution to the wind, and are willing to naked short virtually any bid they see.

A naked short is when a brokerage sells stock it doesn’t own, under the pretenses of making good on it later, but then never actually “makes good” on the sale.

Meaning, you paid for the stock, but the stock didn’t really exist when the broker sold it to you. This is called a “short sale”, because the broker was “short” the shares meaning it didn’t have the shares it sold you at the time of the sale.

Normally, the broker would have to go out and buy that stock it sold you, in order to send them to your broker to make good on the transaction. When a broker sells the stock, but then never delivers the shares, that is called a naked short.

Of course if you and I did this, we would be thrown in prison, but you and I do not have the privilege of owning the Federal Reserve as many of these Investment Banks do, nor that of having US Government in our back pocket, so you and I will have to make due as normal mortals for now.

What is happening here is basically counterfeiting shares and selling them into the market. What apparently started out as a “loophole” in the system appears to have gotten severely out of hand.

Visit this site: http://www.failstodeliver.com/ . The site tracks “Failures to Deliver”. A Failure to deliver is what it is called when stock is sold, but the shares are never delivered.

Enter in your favorite mining stock.

In fact, enter a whole bunch of mining stocks, and you will notice a similar pattern. For a very long time, you don’t see too many “failures to deliver”. Then right around half way through 2007, you start to see a meteoric rise in the number of failures to deliver.

What gives there?

I figure it kind of went down like this:

One senior trader at a brokerage firm to his buddy in early part of 2007: “Hey Bill, you wont believe this man, two months ago I sold like two million shares naked short, and to this day no one has said anything about it”.

Bill says back to his counterpart: “You are kidding me Jack, that’s crazy, I have got to try this”.

Bill goes out and sells a few million shares naked short. A few months go by. No one says a word. No one goes to jail.

Bill rings up Jack: “Jack, you aren’t going to believe this, but I did what you said, and no one has said a word. I mean,  not even a peep. I can believe the SEC is asleep on this one.”

“Hey Jack, I was wondering, do your balance sheets look as bad as ours? I mean, we cant even report our losses because if we did, people would freak out and it would be down the drain for sure…”

Jack replies: “Yeah they sure are. Say, if no one ever goes to jail for naked shorting, and no one ever says anything, why don’t we like……are you thinking what I am thinking?”

The end of 2007 comes around, and every firm on Wall Street starts naked shorting like there is no tomorrow. They figure what the heck, this game is up, might as well make as much as we can before it all goes to hell in a hand-basket, right?

Now, this entire story is completely made up and totally conjecture on my part. But I ask you, is it really that far fetched?

So where does this go and what does it mean to us Rapid Trenders?

Well personally I am just sitting tight to see what is going to happen with the naked short situation. If it just goes on and on, IMO people are throwing money into a black hole.

In the mean time, I am just buying physical gold and silver bullion.

This wont stop until the public is enraged about it.

For now, not enough people have enough gumption to put Washington in check. The SEC is obviously just a tool, like FDIC, that is supposed to serve a function protecting the people, but in reality are just a safety blanket (a binky) so that average sheeple dont ask questions.

If the SEC will turn a blind eye while their buddies on Wall Street counterfeit shares in an alarmingly increased rate, then Wall Street will keep right on printing money (shares), I mean heck, our own government has been doing it so long, it only makes sense if their buddies are allowed to as well, right?

In short: No lifeguard on duty, swim at your own risk, at least until enforcement bodies admit there are sharks in the water and are willing to do something about it.

Now for the Fannie Freddie situation.

Basically I see it like this:

Last year, the subprime situation imploded.

This forced lots of write downs all over the world, and balance sheets are looking pretty bad, with many firms doing everything they can to stay solvent.

This continues right up until today, with many firms on the ropes, struggling to dodge the knockout punch with everything they have.

Every time a firm goes down, gets bailed out, rescued by FDIC, or turned into a “Conservatorship” like what is happening with Fannie and Freddie, it causes more losses on other firms books.

This is precisely the reason that Bear Stearns was not allowed to fail, and is precisely the reason why the US will nationalize every single major financial firm on Wall Street if it comes to that, because the alternative is the detonator that will set off the Derivative Weapons of Mass Destruction metldown.

This is the domino effect. There are alot of firms out there that owned stock in Fannie and Freddie. With that stock revaluing to virtually zero, this is going to cause a tremendous burden on balance sheets the world over. Balance sheets that are already struggling to stay upright.

“During this time period shareholders lost over 95% of their investment totalling over $100 billion. Future losses for the US Government are currently estimated at another $300 billion. However, since these two entities either hold or have guaranteed nearly $6 trillion in mortgages on real estate that has already declined over 30% it is easy to see how losses could be much higher.” – Bullion Management Group

I happen to concur with that.

Throw another two factors into the mix: China and Russia.

China has been a massive shareholder in Fannie and Freddie.

“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu Yongding, a former adviser to China’s central bank, said last week. “If it is not the end of the world, it is the end of the current international financial system.”

Bottom line is, anyway you look at it, my feeling is these events are bullish for gold and silver over the long term.

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This entry was posted on Wednesday, September 10th, 2008 at 12:50 pm and is filed under Archived. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.