Elon Musk has implicitly accused SEC of being Wall Street’s puppet, calling them “the Shortseller Enrichment Commission.” In an astonishing statement, Musk said:
“There is no rational basis for a long holder to lend their stock to shorts, as it dilutes the shareholder base & gives the short a strong incentive to attack the company by whatever means possible, including regulators.”
He has called for short selling to be made illegal, calling a practice whereby passive index funds lend stocks to short sellers as a scam. He says:
“Where this breaks down is in passive index funds, which constitute most of the market. The holders of those funds, mostly small investors & retirement funds, don’t realize that their stocks are being lent to short sellers, diminishing their true equity return…
Index managers like Blackrock pocket make excessive profit from short lending while pretending to charge low rates for “passive” index tracking.
The CIO of a major pension fund is the one who deserves credit for uncovering this scam.”
Blackrock is one of the biggest fund with trillions of assets under management, mostly from pension funds. Some 10% of wages go to pension funds which by law have to invest them mainly in public stocks.
Pension funds usually are holders of the stocks for the long term with a duty “to ensure the benefits are maximised for members,” i.e. workers.
Some argue this duty has been breached because while the pension fund has an interest in the stock price going up, they lend the stock to short sellers which lowers the price.
Short selling is a practice whereby you temporarily borrow a stock in the belief that the price goes down. You then sell it at say $150. If the price goes down, you buy the same stock at say $100, giving the stock back to the lender while pocketing the $50 in profits.
The practice can be immensely profitable with billions made through it. It usually starts with the pension fund or index fund “loaning” the stock to banks which loan it to hedge funds.
Hedge funds then use complex algorithms to sell the borrowed stock on market usually in a manner designed to drive down the share price so as to benefit the short selling hedge fund.
Musk is arguing short-selling has an additional perverse incentive in driving short-sellers “to attack the company by whatever means possible, including regulators.”
One documented means, albeit by a competitor, has been the planting of “op-eds” even in national papers. This has led to a narrative in Tesla supporters that big short-selling hedge funds are behind some negative press.
This chess game between one of the most innovative company and Wall Street has brought attention to a practice that was briefly suspended during the banking crash in 2008.
Following some scrutiny after the banking crisis, a British MP then revealed in 2010 that the pension depositors – as in the body where some of the wages first go to and are meant to be managed – do not even know their stocks or government debt bonds/gilts are being lent. Moreover, rather than receiving the borrowed stock back, sometime they are paid “in-kind.” The British MP said:
“Unknown to the Trustees the bank was lending out both shares and gilts owned by this pension fund. In spite of current pressures on UK gilts, they are one of the safest bets in the world. In return, however, the pension fund was being given gilts from third-world countries which, while they had the nominal value of the UK gilts, would have proved almost valueless had the bank gone under and the pension fund tried to sell the replacement assets.
Pension funds were being paid for the risk of lending their assets but the returns were miniscule. Some figures cited to me was a return of £900 in every £1M pounds lent. The bank, I believe, was pocketing practically the whole of the fee it gained from lending out the pension fund shares.”
An amendment was then put forth to parliament by Frank Field MP who argued pension fund custodians, like banks, are “gambling with assets committed to their safekeeping.” The amendment said that short-selling is prohibited unless:
“The share price at the time of the transaction was higher than it was at the close of the previous trading day of the market on which the share was listed; or the short-selling was by a person who borrowed the shares, and the beneficial owners of the shares had given prior permission at an annual general meeting for the shares to be lent.”
This failed, presumably because it hardly attracted any attention amid all the chaos that was on-going at the time. Yet the legitimacy of this practice is quite suspect.
No one would hesitate from saying for example that the parking lot shouldn’t have the right to rent out your car without your permission. Yet some would say banks should have the right to lend out your own assets, which you might not even get back if they make a bad bet and instead get some in-kind potentially worthless stock.
“Three U.S. pension funds sued six of the world’s largest banks on Thursday, including Goldman Sachs Group Inc and JP Morgan Chase & Co, accusing them of conspiring to stifle competition in the more than $1 trillion stock lending market.”
So reports Business Insider in a fairly astonishing short article which details allegations of banks cornering the stock lending market. We quote the relevant part:
“The funds claimed in the lawsuit that the defendants conspired to take down upstart stock lending platforms AQS, which was developed by Quadriserv Inc, and SL-x, which would have allowed lenders and borrowers to interact directly.
The lawsuit claimed that in 2012 Goldman Sachs threatened to stop doing business with Bank of New York (BNY) Mellon if it continued to support the AQS platform and that the bank agreed to stop using it. BNY Mellon declined to comment.
The lawsuit said that through a joint project called EquiLend LLC, the banks purchased SL-x’s intellectual property and shelved it, according to the lawsuit. The funds accused the banks of establishing EquiLend in 2001 to safeguard their interests in the stock lending market.”
It appears therefore stock holders, like pension funds, have no choice but to be complicit in what Musk calls a scam because there is no competition and there is no law to prevent banks from lending assets deposited in their holdings as custodians for safe keeping, nor is there a way to opt-out from banks or stock-brokers lending your own assets.
What’s more, there is naked short selling where you don’t even have to actually borrow the asset, relying instead only on a promise that the asset holder will send it in a few days or weeks.
In the meantime the trade can be closed. Knowing this, the asset holder, in most instances banks, can make 10x promises for one stock share. This then may artificially create sell pressure because supply has artificially been increased considerably.
This practice was legal prior to the banking crash, but then was made illegal, in theory. In practice, SEC’s enforcement is usually very selective and hardly ever aimed at banks or where it matters.
This selective enforcement, and SEC’s general practice of creating policy through the threat of court action, has led to considerable criticism.
Moreover, bankers appear to have gained some sort of backdoor to SEC, planting their man or woman to chair the most important regulator in US which oversees the entire economy. Here is Wikipedia:
“In June 2010, the SEC settled a wrongful termination lawsuit with former SEC enforcement lawyer Gary J. Aguirre, who was terminated in September 2005 following his attempt to subpoena Wall Street figure John J. Mack in an insider trading case involving hedge fund Pequot Capital Management; Mary Jo White, who was at the time representing Morgan Stanley later nominated as chair of the SEC, was involved in this case.”
They cite a now taken down article from Rolling Stones, but the archive thankfully still has it. After the announcement Mary Jo White was to become SEC chair, they say:
“Couldn’t they have found someone who wasn’t a key figure in one of the most notorious scandals to hit the SEC in the past two decades?
And couldn’t they have found someone who isn’t a perfect symbol of the revolving-door culture under which regulators go soft on suspected Wall Street criminals, knowing they have million-dollar jobs waiting for them at hotshot defense firms as long as they play nice with the banks while still in office?”
Jay Clayton, the current SEC chair, is revolving doors on steroids with his agency behind many decisions that have appeared as if designed to attack cryptos. Here is the New York Times:
“After spending years cultivating an elite roster of Wall Street and corporate clients, Jay Clayton will now be responsible for policing some of those same types of companies.
Mr. Clayton… has represented big banks like Goldman Sachs and Barclays as well as prominent hedge funds…
Mr. Clayton… has also personally invested in a number of hedge funds and private equity firms…
His wife, Gretchen, who works at Goldman Sachs, has a number of investments in Goldman-managed funds.”
SEC’s declaration they were to settle with Musk for his tweet of taking Tesla private sent the company’s stock down some 16%. Musk’s tweet sent it up 12%, and may have led to some losses in some of Clayton’s hedge funds.
Musk’s reason for that tweet was because he could not have private discussions with big shareholders because then they might have taken positions based on this insider information. He thus wanted to make it public.
SEC is saying that was fraudulent, with a court now apparently looking at whether this settlement is reasonable. Here is a Tesla fan:
“Incredible, so essentially the SEC wanted to implement the kind of nonsensical coup of ‘independent’ directors that shorts tried to get passed at the shareholder meeting to interfere with Elon’s ability to lead Tesla? Who dictated the settlement terms to the SEC – was it Chanos, Spiegel or Left?”
It is unclear what the court will say regarding this settlement, but there must be a distinction between a tweet and an actual authoritative statement say on Tesla’s website.
The tweet naturally led to speculation, but arguably it is the sort of speculation that all big shareholders would have engaged in had they informally been told of the plans to take Tesla private.
Funding secured was perhaps going slightly overboard, but then no one really believed it with most wondering of what exactly was being planned.
What exactly is manipulation, therefore, might need a bit of an update for the digital age where Twitter is different from a formal announcement.
The announced intention to take Tesla private was big news and naturally caused quite a bit of discussion, but then why should such discussion be limited to big investors only?
The latter would most certainly lead to insider trading with SEC itself suspected of engaging in insider trading over the many decisions they make.
SEC obviously is not going to prosecute itself, with this regulator having no oversight even though arguably some of their decisions can be seen as market manipulation.
While SEC’s chair is obviously completely biased, if not corruptly doing banker’s bidding against cryptos in a regulatory attack.
While Musk is now suggesting SEC was used against Tesla by short sellers, a suggestion that needs some evidence besides SEC asking for exactly what short-sellers want.
Yet there is clearly a need for a complete overhaul of outdated SEC, which should be broken up, just as the practice of stock lending without permission should be scrutinized and even banned because it amounts to theft as bankers are using other people’s assets without their consent.