Book SummaryNaked, Short and Greedy, by Susanne Trimbath

1-Page Summary1-Page Book Summary of Naked, Short and Greedy

The emergence of "phantom shares" and the practice of naked short selling can be attributed to the complex challenges inherent in the processes of clearing and settling stocks.

Trimbath highlights a significant shortfall in the US financial system's regulatory structure that allows for the creation of more shares than the company has formally issued. She describes the excess shares using the term "phantom shares." The existence of these phantom shares can negatively impact stock market prices, potentially enabling unscrupulous traders to seize ownership of assets rightfully owned by the founders of the company. She characterizes the predicament as a breakdown in regulatory oversight.

The book explores the intricate mechanisms involved in the clearing and settlement of stocks within the United States, shedding light on the creation of "phantom shares."

Susanne Trimbath explains that the design of the electronic system in the United States is deliberately configured to ensure the swift and orderly execution and finalization of stock market transactions. The system aimed to simplify the procedure, thus facilitating the completion of transactions more smoothly. The circumstances have also facilitated the process for traders to conduct transactions involving the sale of equities they lack possession of, commonly referred to as "short selling," and in instances where the trades remain unsettled, this results in what amounts to electronic stand-ins for stocks that are, in fact, nonexistent. Susanne Trimbath describes the combination of short selling, securities lending, and unsettled trades as a notorious collective responsible for significant challenges.

The creation of a unified system for managing and completing trade transactions was intended to simplify issues linked to physical certificates, but it unintentionally led to new problems concerning trades that were not settled and short selling without adequate backing.

Prior to the early 1970s, when a centralized system for clearing and settlement was not yet in place, the trading of shares usually necessitated the physical exchange of paper certificates. Every transaction necessitated the physical handover of the relevant certificates to the buyer. If a seller attempts to sell shares they do not own, the transaction would fail, requiring correction by the parties involved. Should shares fail to be delivered, the transaction would be invalidated, thereby ensuring that the seller who does not provide the shares is not compensated, and releasing the purchaser from the responsibility to pay for shares that were not received.

In her analysis, Trimbath emphasizes that the stock market faced considerable challenges in the late 1960s when the increase in trade volumes made it impossible to issue and distribute physical stock certificates for transactions within the necessary time period. A centralized system was created to maintain possession of all the brokers' certificates and to facilitate the electronic pairing of transactions.

In the United States, electronic systems facilitate the bulk of trading activities. Susanne Trimbath details the infrastructure for executing and finalizing securities transactions, emphasizing the function of the National Securities Clearing Corporation (NSCC) in settling trades and the duty of the Depository Trust Company (DTC) in maintaining custody of the securities utilized by brokers for trade settlements. At the end of the trading day, brokers must reconcile their accounts by making a consolidated payment to the DTC, regardless of the day's transaction volume or total value. The current centralized framework continues to allow transactions to remain unresolved without enforcing their annulment. She contends that the system allows for trades to remain unresolved for an indefinite period.

Brokerage firms may participate in trades with stocks they neither possess nor have borrowed, resulting in scenarios where the volume of shares exchanged surpasses the total number issued by the company.

Prior to the creation of unified systems for clearing and settlement, brokers possessed an in-depth knowledge of their customers and engaged in transactions solely with entities they trusted to settle swiftly. If the seller fails to deliver the shares they've sold, the brokers will keep the payment and the transaction will be annulled. Current regulations do not require the DTCC and its associated entities to annul transactions that are unsuccessful in settling. The US settlement system is structured to facilitate continuous transactions, ostensibly aligned with the objectives of federal regulations.

Central depositories' stock lending programs facilitate the increase in what are known as phantom shares by allowing shares to be re-lent without keeping accurate records of ownership.

Trimbath clarifies that the settlement of short sales usually involves obtaining shares from a stock lending program, which operates within a centralized securities depository. However, these loans are often perceived as a method to reconcile trades that do not successfully complete delivery, despite lacking a specific repayment deadline. When a share is loaned out to finalize a trade that remains unsettled, it leads to a decrease in the depository account of the person who lent the share. The regulations and rules overseeing settlement transactions permit the recipient of the borrowed shares, whether they are intended for settling a short sale or a regular trade, to place such shares into their depository account, thus rendering them accessible for potential further lending. Whenever a share is loaned out, it results in the creation of an extra, fictitious share.

The impact of phantom shares on the methods of corporate governance and regulatory practices.

Trimbath argues...

Naked, Short and Greedy Summary The impact that the widespread occurrence of non-existent shares has on specific companies and their shareholders.

Susanne Trimbath raises concerns about the impact of nonexistent stock holdings on both investors and company founders, highlighting how the regulatory system designed to protect the public from financial fraud unintentionally continues to allow the problem of these phantom shares to persist. Because Wall Street brokers and banks have a financial incentive to maintain the status quo, she believes they have been misleading the SEC and Congress about the magnitude and systemic risks of the problem.

Companies' diminished ability to access capital markets.

Short selling, along with stock lending and unsettled trades, creates phantom shares that impede the ability of entrepreneurs to initiate, operate, and expand their enterprises in America. The author elucidates that an oversupply of shares in the market can lead to a reduction in the worth of individual shares, thereby complicating the process for companies to secure funding from public and private sources.

Engaging in short selling can distort the valuation of stocks and disrupt the seamless execution of trade settlements, thereby impeding companies' capacity to raise funds.

Trimbath, along with many others, believes...

Naked, Short and Greedy Summary Initiatives to address the prevalent problem of nonexistent stock shares and enhance the integrity of the financial infrastructure through legal and regulatory reforms.

Despite numerous complaints from stakeholders and companies impacted by share dilution, the SEC has largely failed to effectively oversee the activities resulting in the emergence of non-existent shares. Trimbath attributes the problem to the American financial markets' reliance on self-governance, which allows Wall Street intermediaries and financial institutions to create rules that facilitate the selling of shares they do not own, the continuous re-lending of the same borrowed stocks, and the resulting failure to deliver the shares when it's time to settle the transactions.

Regulatory attempts to address the challenges associated with naked short selling and the frequent instances of trades that fail to settle.

Trimbath argues that the measures implemented by the SEC to prevent the creation of phantom stock shares have largely been unsuccessful in reaching their intended objective. Trimbath believes that if the duty to deliver securities for transaction completion is not rigorously enforced, the anticipated outcomes of regulation will consistently fall short.

In response to the challenges posed by naked short selling and the failure to meet delivery commitments,...

Naked, Short and Greedy Summary The unresolved matter's wider consequences, along with the resistance to reform from political and institutional bodies, stem from the shares that remain unrecorded.

The writer argues that the continuous presence of non-existent shares is due to the US capital markets being self-regulated, allowing banks and brokers to create rules that shield them from being held responsible for their deeds. She argues that two main elements contribute to the insufficient supervision: the failure of US regulatory agencies to keep pace with the self-regulated rules and procedures of the banking and securities sector, and the hesitance of the US Congress to take action, thereby allowing those who pose a risk to oversee the protection of the at-risk parties.

Conflicts arise due to the goals and power of regulatory bodies.

Susanne Trimbath believes that the SEC neglects the problems related to naked short selling and settlement failures, even though individuals from within the industry, whose firms are frequently involved in these transactions, assert that they have the matters in hand. She contends that the considerable influence wielded by lobbyists from financial institutions and brokerage firms on the creation and enforcement of market regulations is due to the revolving door of personnel transitioning from regulatory agencies and legislative roles to...