http://www.pro-prosperity.com/UnconstitutionalityOfShortsellingAndPrivateMarketClearing.html
April 25, 2010
To: Honorable President Barack Obama
Cc: Honorable House Speaker Nancy Pelosi
Honorable Senators Harry Reid and Richard J. Durbin
Honorable Oversight and Government Affairs Committee
Honorable Senate Banking and Finance Committee
Honorable Senate Permanent Subcommittee on Investigations
Honorable Senate Agriculture Committee
Sub: Short Selling to Control the BOD, Raise CEO Compensation and Take over a Solvent, Valuable Company
Dear President Obama,
The U.S. constitution does not permit a private company or the government to seize private property, for example, taking over another company by zeroing out the current security holders of the latter.
The Congress does not approve of such unconstitutional seizures. The Congress has strong antitrust laws to prevent takeovers of rival competing companies. The Congress has even broken up large companies that have grown too big to raise their product prices and to pay too little to employees.
1. I present below a numerical illustration of unconstitutional takeover of a solvent, valuable company by an acquirer that (a) controls the market clearing house and (b) uses the capital-destructive weapon of “short selling” granted by the Security and Exchange Commission.[1]
2. The acquirer does not need to lobby for government seizure of a valuable rival to achieve the takeover.
3. The acquirer simply creates a precarious situation to scare the government regulators as well as the Congress to achieve an unconstitutional takeover of a valuable, solvent rival.
4. The example below is about how JPMorgan and Chase could orchestrate a low-cost takeover of a highly valuable and solvent Washington Mutual through a panicky government seizure of the latter. I cannot assert whether or not J.P. Morgan did it exactly the way illustrated in the example, without the private trading data at the Clearing House and at J.P. Morgan and Chase and at their affiliates.
5. This example illustrates how the FDIC and other regulatory agencies could simply be trapped by fear due to an acquirer’s unconstitutional short selling shenanigans, allowed by the Security and Exchange Commission.
6. This example shows why (a) illegalizing short selling and (b) a government takeover of the market clearing house are essential for prevention of unconstitutional seizure of hard earned private property and for maintenance of prosperity amid national security and stability.
7. This example also illustrates the importance of synchronizing all rules and practices permitted by regulatory agencies with the laws passed by the Congress.
Example
(The figures are inexact.)
JPMorgan and Chase conceives of a plan (Project West) to acquire a successful, well-capitalized and valuable bank, Washington Mutual Bank (which is a subsidiary of Washington Mutual Incorporated, a bank holding company), to expand its operations to western parts of the United States. At this time, mutual funds passively hold 90% of 1.7 billion common shares of WMI.
JPM then floats its interest in buying WMI. It does so to facilitate short selling of 1.5 billion shares of WMI common stock. JPM creates these shares synthetically or by pulling out of thin air. The Clearing House controlled by JPM does not question JPM on non-delivery of shares sold short. JPM sells these shares to the passive mutual funds, pension plans and individual investors. No buyer suspects anything when JPM has expressed interest in WMI.
JPM simultaneously buys 500 million WMI shares through some of its subsidiaries. JPM has to buy some and sell more to entice other buyers through talks of buying WMI. At the end of the trading, JPM holds 1.5 billion shares short in its private trading-inventory account and 500 million shares long in its investment account. JPM files its long positions with the SEC and wins confidence of all other mutual fund holders.
JPM has helped create a rule to not let regulatory agencies inspect its trading-inventory account held in its market making subsidiary. JPM has successfully justified and lobbied for keeping such accounts ultra secret.
At the time of constitution of the BOD and appointment of key personnel like the Finance Director of WMI, JPM now dangles its long positions of 500 million shares to project its weight as a benevolent large shareholder of WMI seeking to place its people in a company planned to be acquired.
JPM then obtains all important data to make a low-ball offer of $8 per share to buy WMI. But the WMI CEO refuses. Then JPM appointed WMI BOD fires the CEO with a golden parachute to replace him with a pliant WMI CEO to serve JPM’s interest.[2]
JPM then uses its long and short positions to drive down the price of JPM stock to $1 per share. Cohorts of JPM like Goldman Sachs recommend everyone to sell WMI short.
JPM simultaneously compels the public rating agencies to downgrade WMI bonds and stocks. The rating agencies have a model to downgrade securities based on dropping stock price. The rating agencies thus follow their model.[3] JPM merely advises the rating agencies to perform their fiduciary duty of downgrading securities of a company with falling stock prices.
The rating downgrades make sure that WMI cannot raise capital on a competitive basis. Then rumors circulate in the grapevine about the FDIC contemplating seizure of WMI. This leads to some WMB depositors withdrawing their funds. The FDIC, Federal Reserve and Treasury are now scared. So is Congress. They are so scared that they have to now ask JPM to takeover WMB’s assets and deposits by zeroing all other security holders (WMI equity and debt and WMB bondholders).
Private property is thus seized unconstitutionally and given away to JPM for pittance.
JPM CEO, after 1.5 years of the seizure, brags before his shareholders about the immense value of WMI assets it brought for them: about $18 billion in annualized profits which amount to a present value of assets of $360 billion, by using even a very high cost of capital of debt (5%) employed in the acquisition, and by assuming no growth.
Washington Mutual Bank was not in default at the time of seizure. The WMB bonds were fully protected with the scheduled coupon payments duly paid on time. WMB bonds would be protected fully even if WMB were not seized and stayed with its previous parent company. Washington Mutual Incorporated (the parent holding company of WMB) was not in default at the time of seizure. Even now, in the bankruptcy court, WMI is highly solvent with all WMI bonds trading in the market above par.
That the WMI BOD has acted at the behest of JPM is obvious. On bankruptcy, the WMI BOD has appointed a Debtor’s attorney to propose a plan of reorganization by giving away significant assets of the bankrupt WMI estate to JPM to void any legitimate claim of equity in the estate.
So, JPM has accomplished its Project West plan, unconstitutionally, to grow bigger to dictate sharper terms to the Congress and Regulators, more vociferously than ever before.
WMB was solvent with much more than the minimum required capital, as per the testimony of its primary regulator, the OTS, signed by the FDIC. The FDIC now faces a legal suit from Washington Mutual Bondholders for about $20 billion. These bondholders are too taxpayers.
Thousands of families, whose security holdings have been zeroed out due to the seizure, have lost their wherewithal to live or retire. Some of them have committed suicide. Some have faced painful divorce. They too are the taxpayers. Should their possessions have been unconstitutionally seized?
Such unconstitutional seizure and pervasive tragedy leading to depression is possible due to short selling. Short selling creates shares to increase its supply (beyond the legally approved outstanding under the company law) to depress the price and rob the true owners of a company. Short selling is unconstitutional and illegal, yet it is permitted by the Security and Exchange Commission.
