Tom A's Stock Picks

MBIA - a high-demand security

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I want to tell you how pleased I was to receive a UPS Express Envelope from Charles Schwab, my broker. Inside was another UPS Express Envelope - for my convenience in replaying - together with a high quality folder, a letter, a contract, and a brochure. It seems that Schwab would like to borrow my shares of MBI - they are "high-demand securities."

Schwab is always looking for new opportunites to help their clients get the most out of their investments. In this case, they can get me another 1.5% per year by borrowing my shares. I called Howie Kennedy, the author of the letter, to see what it was about. If (for example) Goldman Sachs would like to borrow some shares to be sold short, for a customer or perhaps for their own account, they would naturally contact the Securities Lending departments of anyone who might have the shares available. Schwab cannot lend my shares without my permission, unless I'm on margin, which I don't use. But, with my permission, they will borrow my shares and lend them out, paying me interest and posting collateral. I declined the offer.

I asked Howie if my shares of ABK (with another broker) would also be "high-demand." Yes, they are. As a matter of fact there is a list of high-demand securites which they like to have access to. So using the list, they check the customer accounts and helpfully approach anyone who owns the target shares.

Think about it a minute: if there is a list of shares that are high-demand, everyone involved in the operation has to know what shares are on the list. Well any brokerage employee with a normal level of intelligence who becomes aware of what stocks are in hgh demand would naturally to the right thing, which would be to short as much of the target stocks as he dared. Anyone invovled in the operation of locating the shares, sending out the letters, and making the follow up phone calls would be well aware of what stocks are to be shorted.

The letter was dated September 4th. Surprise, surprise, today MBI is down 15% on high volume. By further coincidence tonight my Financial Consultant, a helpful fellow named Matt Teeporeten, called "just to follow up" on the letter. So helpful, to ask to borrow my shares so they can be sold short and drive the stock price down. Or used to cover some naked short-seller's tracks. In the best case scenario, I have a panic attack, sell the shares as they tank, and the borrower Schwab is representing covers by buying my shares. A sweet deal.

You don't need a formal conspiracy - just business as usual, a list of high-demand securities, a group of people whose normal job dutes expose them to working to round up the shares to be sold short, and human nature to look out for number one. Result, stocks mysteriously head south, as if by common consent. Remember, there a host of people involved in tracking down and lending the shares. The whole operation is well-orgainzed and efficient - but, that's what it is, an operation.

Wall Street is a crooked and manipulative place. It strikes me as a strange coincidence that I receive a fancy mailing and a follow-up call about borrowing may shares, which have been there for 6 months or more, just before the shares tank.

There is a list. BSC is no longer on it, neither are FRE and FNM. AIG is on it. LEH is at the head of the list. MBI and ABK are in perpetual demand: however, they are made of tougher stuff than BSC, FRE or FNM or they would long since be gone. The whole process, even if done according to the forms of legality, is inherently manipulative.

The present financial crisis will not abate until the uptick rule is restored and laws against naked short-selling and stock manipulation are enforced by our servants at the SEC.