Today’s post is going to be a little bit deeper than usual. It isn’t my usual personal finance article, but it fits in well with some of the scams that I’ve written about over the years.
I’d like to introduce to the video below. Before you click on it and see that it is nearly an hour and 20 minutes long, I thought I’d give you some quick background. The presentation is from Overstock CEO Patrick Byrne. Although in this video he’s not talking about Overstock or using his connection there at all. Patrick Byrne earned his undergrad degree at Dartmouth and his Ph.D. at Standford.
I say this to convey a simple message. He’s a pretty smart cookie. When he’s passionate something as he is here, we should take notice. Here’s the video:
The first five minutes of the video are a little bit of an introduction of himself and Overstock. While he wasn’t there to talk about Overstock, I thought it was interesting that he was turned down by 85 out of 85 venture capitalists to start the company. However, when the dot com bust happened Overstock ended up liquidating much of the venture capitalists’ companies property. He includes this great quote from Warren Buffet that I’ve never heard before, “If you aren’t going to kick a man when he’s down, when are you going to kick him?”
He beautifully transitions that into his humanitarian efforts at OverStock, called WorldStock, which is like a fair trade supplier of merchandise from around the world.
Then at the 5 minute mark, he ends the Overstock thing and tells you to forget about it as he goes on with his presentation on economic warfare, stock market manipulation, and organized crime (all those links go to the same video I’ve embedded above).
I realize that sounds like the stuff of a crazy conspiracy theorist. That’s specifically why I spent so much of this article on Byrne’s background and intelligence. Again I’ll urge you to watch the video because I honestly can’t do it justice here…
… but I’ll try anyway. (Side note: This is complex and if I get a couple of details wrong, don’t shoot me.)
It starts off with two lawyers who were convicted for fraud. They hired people to buy shares in a company knowing that it was going to drop in value in the next weeks/months. Then these people could sue the company with the law firm for the damages.
So the question is, “How did they know the companies were going to lose value in weeks/months?”
The answer is particially in the settlement process for stock trades. The process for a trading a stock is very complex involving two investors, their broker/dealers, and how their broker/dealers send a trade through a company called the DTCC. Money and stocks travel back and forth within accounts at the DTCC… for the most part without shares of stock reaching the buyer.
In the day of paper trades, the system needed fault tolerance for when paper stocks got lost (the sack fell off the truck, the dog ate them, maybe a fire). Thus they created something called a “Failure to Deliver” (FTDs), which is like a copy of the stock. It is very similar to the stock, but when it comes to voting rights things get confusing.
The system still has to account for the shares to be recovered (maybe the sack of notes gets found or the dog didn’t eat the stock after all). This means that essentially more stock is created. Due to the rules of supply and demand, more supply brings the price of the stocks down.
There is an estimated $200 billion dollars worth of FTDs in US stock out there. Byrne makes the point that to clean this up, it costs much more than $200 billion dollars in the same way that cleaning up asbestos or mold from your home is very pricey (he uses different examples, but I’m trying to dumb it down a bit). He says this could be a multi-trillion dollar problem.
He then switches to explaining what a “bust out” is. It’s a mafia term. In fact he uses clips from The Sopranos and Goodfellas to explain it. Essentially it is a way to bleed a company of its cash and credit then have it file for bankruptcy. The clips give the best example.
Going back to the lawyers knowing which companies were going to decline in value… they were supposedly aware of the bust outs.
Byrne combines these two things together and show a couple of examples. He ties the organizations doing the bust outs with Middle East terrorists’ and their families. He even shows that one occured days before Sept 11, 2001.
Again, this all sounds like consiparcy level stuff. However, Byrne backs it up with documentation from high-ranking Admirals and even President Obama signing an executive order that seems to agree this represents a real danger to not only the United States’ financial system, but the world’s financial system.
I wish there were steps the average citizen could take. I didn’t see Byrne recommend anything. It makes me feel a little helpless.
We all know there are risks in investing in stocks, but this is probably one of the risks that very few people are aware of.