October 16, 2008
I'm writing to PROTEST your exempting institutions from disclosing option based short positions derived from the strategy of "synthetic shorting" via use of NAKED long puts, and short calls.
The ability for institutions to engage in FRAUDULENT contracts wherein they do not even possess the underlying common shares violates the original creation of these derivative instruments as legitimate hedging tools for POSSESSORS of the underlying stock.
The VERY CONCEPT of permitting institutions to engage in naked option tranactions, where they do not actually possess control over the underlying stock is no different that outright naked short selling. Both activities VIOLATE the market based "price discovery" process.
Now even the most obtuse person can understand that if I enter into a contract to sell you something that I don't own, I'VE COMMITTED FRAUD AGAINST YOU. If I engage in writing you an option to buy a house that I purported to you that I own, when actually I am just "betting" I can buy in the future under the assumption the ACTUAL OWNER will be a willing seller, I've defrauded you.
Were I to engage in such a transaction ANYWHERE on this planet, I'd be arrested and locked up. But not in this market place..
FURTHERMORE, this practice of permitting Naked synthetic shorting possesses a ABSOLUTE SYSTEMIC RISK associated with the potential that people will actually take possession of their physical stock certficates, or just go completely off margin and hold on to their shares with an iron fist. Without their shares being available for sale, option market markets (eg: financial institutions) on ON THE HOOK because they permitted such a transaction to take place.
Haven't we learned by now that these hidden naked and unregulated derivative markets are exactly what Warren Buffett has stated they are, ticking time bombs?
DO YOUR JOBS PEOPLE AND REQUIRE THAT PUT BUYERS AND CALL SELLERS ACTUALLY POSSESS THE ABILITY TO DELIVER THE UNDERLYING COMMON STOCK
A copy of this email is being sent to Sen. John McCain, who I hope, takes this up with Commissioner Cox.
I'm am VERY ANGRY at this manipulation that the SEC has permitted to be perpetrated against investors, pension funds, and those retirees who actually believed that government regulators were looking out for their interests.