Securities lending "mischief" to blame for 2008, says Overstock CEO
27 October 2017 Las Vegas
Image: Shutterstock
The settlement crisis of September 2008 was caused by “mischief on the securities lending desk,” according to Overstock chief executive Patrick Byrne.
Over-allocation of locates by agent lenders, resulting in borrowers engaging in naked short selling, was at the heart of what went wrong in 2008, said Byrne, speaking at the Money20/20 financial technology conference in Las Vegas.
Byrne said: “2008 was a settlement crisis. The thing that actually caused the government to act was when the settlement system froze on the morning of Wednesday 15 September.”
He explained: “It did that because of the mischief on the securities lending desk that underlies short selling.”
The role settlement played in the financial crash has been “forgotten from history”, said Byrne.
In a court-obtained document accessed as part of Byrne’s lengthy lawsuit with several banks relating to naked short selling of Overstock shares, it was revealed securities lending makes up 75 percent of the revenue of prime brokerage desk.
“It’s a desk hardly anyone even knows about,” Byrne declared.
Byrne also touched upon the ongoing, high-profile legal dispute between three US pension plans accusing six banks that operate as prime brokers in securities lending, describing the class action suit as likely to be the first trillion dollar lawsuit.
The Iowa Public Employees’ Retirement System, Orange County Employees Retirement System and Sonoma County Employees’ Retirement Association filed an anti-trust class action in the US Southern District Court of New York on 16 August and called for treble damages and injunctive relief.
The plaintiffs allege the existence of systematic suppression of free market development by the defendants, which include Morgan Stanley, J.P. Morgan, Bank of America, Credit Suisse, and UBS, between 2009 and 2016.
According to the complaint, the defendants formed a cabal in order to maintain high fees for their securities lending services by boycotting start-up lending platforms and threatening clients to do the same.
“They [the pension funds] figured out that they have been looted to the tune of about 2 to 3 percent per year ... by that craziness in the system,” Bryne said.
Bryne claimed that Overstock’s blockchain portfolio company tZero will soon conduct a market raid on the war chest of lending revenue of prime brokers by offering pension funds a 80/20 earning split via a blockchain solution.
As of 1 November, tZero will boast $120 billion of inventory with 8,000 active traders, which Byrne predicts will significantly disrupt traditional securities lending desks.
Byrnes final “surprise” announcement was that tZero will be conducting an initial coin offering (ICO), with details to be finalisation on 8 November.
The ICO will utilise Simple Agreement for Future Tokens, with up to 500 million token up for grabs. According to Byrne it will be one of the biggest ICOs ever to come to market.
Over-allocation of locates by agent lenders, resulting in borrowers engaging in naked short selling, was at the heart of what went wrong in 2008, said Byrne, speaking at the Money20/20 financial technology conference in Las Vegas.
Byrne said: “2008 was a settlement crisis. The thing that actually caused the government to act was when the settlement system froze on the morning of Wednesday 15 September.”
He explained: “It did that because of the mischief on the securities lending desk that underlies short selling.”
The role settlement played in the financial crash has been “forgotten from history”, said Byrne.
In a court-obtained document accessed as part of Byrne’s lengthy lawsuit with several banks relating to naked short selling of Overstock shares, it was revealed securities lending makes up 75 percent of the revenue of prime brokerage desk.
“It’s a desk hardly anyone even knows about,” Byrne declared.
Byrne also touched upon the ongoing, high-profile legal dispute between three US pension plans accusing six banks that operate as prime brokers in securities lending, describing the class action suit as likely to be the first trillion dollar lawsuit.
The Iowa Public Employees’ Retirement System, Orange County Employees Retirement System and Sonoma County Employees’ Retirement Association filed an anti-trust class action in the US Southern District Court of New York on 16 August and called for treble damages and injunctive relief.
The plaintiffs allege the existence of systematic suppression of free market development by the defendants, which include Morgan Stanley, J.P. Morgan, Bank of America, Credit Suisse, and UBS, between 2009 and 2016.
According to the complaint, the defendants formed a cabal in order to maintain high fees for their securities lending services by boycotting start-up lending platforms and threatening clients to do the same.
“They [the pension funds] figured out that they have been looted to the tune of about 2 to 3 percent per year ... by that craziness in the system,” Bryne said.
Bryne claimed that Overstock’s blockchain portfolio company tZero will soon conduct a market raid on the war chest of lending revenue of prime brokers by offering pension funds a 80/20 earning split via a blockchain solution.
As of 1 November, tZero will boast $120 billion of inventory with 8,000 active traders, which Byrne predicts will significantly disrupt traditional securities lending desks.
Byrnes final “surprise” announcement was that tZero will be conducting an initial coin offering (ICO), with details to be finalisation on 8 November.
The ICO will utilise Simple Agreement for Future Tokens, with up to 500 million token up for grabs. According to Byrne it will be one of the biggest ICOs ever to come to market.
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