Optimal Governance of Capital Markets

February 14, 2009

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

February 14, 2009

To:       Honorable President Barack Obama

Copies to:

  • Honorable Vice President Joe Biden
  • Honorable Speaker Nancy Pelosi
  • Honorable Senator Harry Reid
  • Honorable Senator John McCain
  • Honorable Senator Claire McCaskill
  • Honorable Senator Roland W Burris

Sub:     Optimal Governance of Capital Markets

Dear President Obama,

Banks have skated on thin ice.  They have multi-leveraged through hedge fund subsidiaries to circumvent the regulatory minimum capital requirement to take huge leveraged bets against American households and then against each other. This has bankrupted households, institutions and governments.  Banks now have little credit left to fund real businesses that create jobs.  A Global Trust (a new bank) and Safe Banking policy (for existing banks) proposed in my previous memos are necessary to thwart the vampires of capitalism.[1] But optimal governance of capital markets is very crucial to pull the economy from the rut where the holding companies (HCs) have driven it via their market-making subsidiaries.

My earlier memos have argued how market-making can bankrupt households, banks and even the Treasury.  My rational inference, without having the HCs’ trading books, is as follows:

When investors buy securities due to positive sentiments, the market makers (MMs) sell the securities short nakedly.  The MMs are supposed to simply facilitate transfer of securities from existing owners willing to sell to new owners (buyers) of those securities for a commission.  MMs are not supposed to sell securities short by law. But a holding company (HC) can use a firewalled financial subsidiary to operate as an MM and another firewalled subsidiary for naked short-selling when positive sentiments develop and genuine security owners are reluctant to sell. The SEC has justified such naked short-selling by HCs by speciously suggesting that it is necessary for hedging.  But the firewalled financial subsidiaries are distinctly separate legal entities which are treated by the law as ordinary citizens for whom naked short-selling is illegal. 

You have eloquently stated that the law should apply equally to all.  Are the HCs subverting the law that bans naked short-selling?  My inference is that either the MM subsidiary or an allied financial subsidiary (hedge fund) of an HC is engaged in illegal naked short-selling.  The confidential trading books of the MMs and allied financial subsidiaries can reveal the truth about the extent of illegal naked short-selling. 

Why is the SEC justifying illegal naked short-selling as needed for hedging by HCs?  My inference is that such illegal naked short-selling, justified as needed for hedging, is the primary mechanism by which a few vampires of capitalism looted household savings to cause the Great Depression in 1930’s and widespread financial gloom and doom now.  In fact in early 1980’s the FBI caught, charge-sheeted and prosecuted such illegal short-sellers at the CBOT and CME commodity trading pits. 

My inference is that illegal naked short-selling is rampant at the market-making HCs and that it is the financial Frankenstein that has bankrupted the American households, banks and governments.  I had offered the SEC in 2001 to conduct pro bono research to serve the best interest of taxpayers if the SEC procured data (even anonymously) from the confidential trading books of market-making HCs.  But the SEC remained nonchalant to the proposal.  I have thus learnt that the SEC is not serving the best interest of taxpayers.  I have been, therefore, communicating this matter directly with the political leaders who represent people. 

You have responded to my letter on illegal naked short-selling by starting that the SEC would be taking appropriate actions.  But the subsequent SEC policy banned naked short-selling of financial companies by all except those of the market-making institutions.  Why?  The law clearly treats equally citizens and companies like HCs.  How can the SEC subscribe to the HC ruse of hedging to perpetuate illegal naked short-selling, which causes continual financial depressions? 

The SEC continues to make justifications in behalf of the market-making institutions.  The SEC is not serving the vast majority of the effective producers who form the basis of any income of even the market-making institutions and the tax that funds the government including the SEC.  More importantly, my rational inference is that the capital markets are now locked up because of huge illegal naked short positions at the market-making HCs. 

I believe that the illegal naked short positions including underwritten credit default swaps (short-sold put options) are major parts of the “bad assets” that are hobbling the HCs.  Why are the Treasury and Federal Reserve using up vast amounts of government borrowed funds, but not demanding that the banks list their bad assets?  The financial industry would like to sell such “assets” – which are indeed huge un-hedged liabilities – to the taxpayers.  If the government “buys” such bad assets, the same HCs will perhaps short-squeeze the U.S. Treasury and taxpayers.  The markets can skyrocket but the Treasury will be bankrupt.   

The major capital market participants (market-making HCs) are in a ditch from which they are unable to get out.  They are bankrupt.  They have no capital to pay for (cover) their illegal naked short positions or illegal obligations using which they have built their pseudo empires.  A government rescue in any form will mean assuming those obligations that will preserve the empires by bankrupting the Treasury. How much have the Treasury and Federal Reserve made from their “investments” in bad assets so far?  The current system of capitalism, predicated on bankrupting the vast majority of effective producers, has not worked.  It never could.  It has to be remedied. 

Solution: First float the Global Trust bank to generate new credit flows through the globally linked markets.  Then simultaneously seize the trading books of all market-making HCs with illegal naked short positions and stop them from trading, while ensuring that trades by other genuine buyers and sellers clear through the computerized exchange system. 

 

With profound regards,

Sankarshan Acharya



[1]“A Corruption of Capitalism”, CNBC’s Dylan Ratigan, host of ‘Fast Money’ and ‘Closing Bell,’ who tells TSC’s Debra Borchardt that Citigroup’s potential deal with Morgan shows just how bad things are and does not expect the bank to last. http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=11534899&src=finance&ch=633473