Allen Short sends me this link to InvestmentNews, for an article that probably includes the word FAIL more times than your average post on LOLFed:

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).

The outstanding U.S. public debt is $10.3 trillion.

“Current [fail] levels are at historic levels,” said Rob Toomey, managing director of the Securities Industry and Financial Markets Association’s funding and government and agency securities divisions. “There’s been significant flight to quality” with the market turmoil, he said.

With the strong demand for Treasury securities, “some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them,” Mr. Toomey said.

Emphasis mine. Historic levels of fail. EPIC levels of fail.

The important thing to know here is that failure to deliver can make a market illiquid, and the market in US treasuries is NOT a market we want to be illiquid right about now, what with it being how the federal government bankrolls all of our everything.

Furthermore, PATRICK BYRNE ALERT. Naked shorts in the pool:

[S]ome delivery failures are intentional.

As with naked shorting of stocks, naked shorting of Treasuries “allows you to avoid the borrowing costs,” Ms. Trimbath said.

“There can be circumstances in a low-rate environment where it’s cheaper to fail” than deliver, Mr. Toomey said. Such an environment also reduces incentives to act as a lender of securities, he said.

Some of the fail in this article is actually over my head, but even I can grasp that a failure-to-deliver rate over 20% is pretty epic. I also have never physically seen a T-bill, if they even exist in physical form and are not merely mystical, like unicorns, and that is why Treasury’s logo is on the boat.