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Archive for the ‘Insider Trading’ Category

Insider Trading Is Perfectly Legal – But Only For Members Of The U.S. Congress

Did you know that insider trading is perfectly legal in the United States?  Well, not for 99.9% of the population.  It is actually only a very small percentage of the population that can legally indulge in insider trading – the members of the United States Congress.  In fact, a law that would ban insider trading by members of Congress has been stalled for years on Capitol Hill.  So why wouldn’t lawmakers in Washington D.C. want to apply the same rules to themselves that apply to the rest of us?  After all, how are we supposed to respect the integrity of those “serving” in Congress when they are playing by an entirely different set of rules?  The American people aren’t stupid.  They can see what is going on.  The truth is that there is a reason why approval ratings for Congress are at an all-time low.

The sad thing is that this issue has gotten very little attention in the mainstream media.  Nobody seems really that upset about it.  But it is a travesty that our lawmakers can legally make trades in the open market based on inside information that they have gained by being in positions of authority.  As the Wall Street Journal recently explained, they can generally make all the money they want off of insider information without any fear of prosecution because “insider-trading laws generally do not apply to lawmakers, leaving them free to trade on nonpublic information.”

But members of the U.S. Congress are generally in a greater position to influence the fortunes of individual companies than almost anyone else.  For example, certain members of the U.S. Congress may know that certain legislation is going to be introduced that would have a dramatic impact on the economic fortunes of a particular industry or corporation.  What would stop those members of Congress from making very profitable trades in the marketplace based on that information?

Nothing.  Nothing at all.

So, is there any evidence that members of Congress have been involved in this sort of activity?

Well, there is at least one study that seems to indicate that members of the U.S. Congress have been much more successful in the stock market than members of the general public….

A 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.

Of course Congress could stop all of this by simply passing a law that bans insider trading by our lawmakers.

But they refuse to do it.

Instead, it is likely that our “leaders” will continue to make millions of dollars by betting against the U.S. economy and very few people will even raise an objection.

In the upcoming Wall Street sequel, Gordon Gekko makes a statement that seems very appropriate for the world in which we now live….

“Someone reminded me I once said ‘Greed is good’ – now it seems it’s legal”

Congress Refuses to Outlaw Insider Trading For Lawmakers

by Peter Gorenstein

Even a cynic can find Washington’s hypocrisy shocking at times. The Wall Street Journal reports today a House bill that would force lawmakers to make greater disclosures on financial transactions and disallow them from trading on nonpublic information is going nowhere fast.

That’s right. Members of Congress are currently allowed to profit on insider trading!

The bill, which has been languishing in the House for four years, would require elected officials “to make their financial transactions public within 90 days of a purchase or sale” and “prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job,” the WSJ reports.

It seems they’re above the transparency they’ve been calling for on Wall Street.

This comes a day after the same newspaper reported several lawmakers profited by betting against the housing and stock market in 2008.  And some did it using derivatives they’ve recently been railing against.

As our colleague Henry Blodget wrote Tuesday, “If you’re going to complain about how awful short-selling is and how evil and venal people are for doing it, you should probably abstain from the practice yourself.”

 
The Wisdom of Crowds: Americans Refusing To Buy Into the Rally

By Charles Hugh Smith

The U.S. stock market has been rallying for over a year, yet “retail” investors are selling, not buying. Is this “the wisdom of crowds” in action?

A funny thing happened on the way to the greatest stock market rally since the 1930s–the “retail” (individual) investor is selling stock mutual funds, not buying. As I noted yesterday, According to BusinessWeek/Bloomberg, U.S. investors dumped $369 billion into bond mutual funds since March of 2009, while according to Reuters, they extracted $26 billion from equity/stock funds. In other words, the great unwashed public isn’t buying into the “return of a new Bull Market” and “the recession is over, we have a V-shaped recovery” stories being relentlessly flogged by “tout TV,” the MSM and inside-the-Beltway hacks and factotums.

Perhaps they are taking note of reality on the ground, and refusing to accept the pearls of wisdom being forced on them by their “betters”?

Analysts and other “experts” are confounded that the public is recalcitrantly refusing to buy into their usual “pump and dump” schemes. In the normal course of events, “experts” pump stocks as the greatest investment opportunity of a generation and that making money in the market is like stealing candy from a baby, etc.

Then, as the “retail” investor/speculator buys into the hype, the insiders sell (distribute) their shares, leaving the “retail” marks holding the bag as the insiders go short and profit from the collapse of stock valuations.

This worked extremely well for the “smart money” in 1998-2002 and again in 2003-2007.

Individuals are shunning stocks like the Devil himself (more than an analogy) while placing their money in “safe” bonds (safe until interest rates rise–see yesterday’s entry) and money market funds, which are holding about $3 trillion in cash.

The “experts” and apparatchiks are drolling over that $3 trillion; they keep hoping the retail investors will finally break down and transfer those trillions into the stock market, and thence into the accounts of the “smart money.”

Remarkably, individual investors seem to have learned the old lesson, of “once burned, twice shy” rather well. Having lost $11 trillion since the global financial meltdown began in earnest in late 2008, “the little guy” no longer believes the stock market is a fair and open market, nor that it is a “wise investment” to “buy and hold” as their “betters” keep insisting.

This raises the interesting possibility that the “crowd” has more insight and wisdom than the “experts” and shills. The notion that groups have a collective wisdom which exceeds that of “experts” was explored in two recent books: The Wisdom of Crowds and Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business .

“Crowdsourcing” is now a hot buzzword, but in essence any transparent market is form of crowdsourcing. But as we all know, the transparency of the stock market is only a useful illusion–useful to those pulling the strings behind the screen.

The crowd is no longer buying the “the stock market is a transparent, open market” propaganda, which is partly why they’re pulling money out of equity mutual funds.

In other words, the crowd is speaking by staying away in droves.

There is abundant evidence that the “smart money” has melted the market higher by buying and selling to themselves in various forms of high-frequency trading and manipulation of the futures contracts. None of this raises an eyebrow on “the Street” or in Washington; the “smart money” players are benefitting, and the only fly in the ointment is the retail investors’ annoying refusal to jump on board the “Bull market rally” so insiders can sell to them before pulling the plug.

It seems clear that the crowd of individual investors is telling the “smart money” that they can take this rally and shove it. The “experts” continue to cluck and tsk-tsk that the “dumb” individual who is sitting on cash instead of being fully invested in the wonderful stock market is foolishly mssing out on a rally which “has plenty of legs” and “is only moving higher as corporate profits recover” and all the other enticing siren-songs they have long mastered.

Maybe the “smart money” experts are right, and the market will only keep rising essentially forever, as it did from 1982 to 2007. But then maybe the “crowd” has sniffed a rat and is refusing to play the 3-card monte game offered by the “experts.”

Interestingly, corporate insiders are selling at a furious pace. Doesn’t that give the lie to the “smart money” assertions that corporate profits are set to skyrocket and the stock market is the one place you want to be if you want to rake in stupendouly easy gains?

We’ll see who is wiser, the crowd or the “smart money.”

Carnage Continues: PHK (Who Smells Smoke?)

Posted by Karl Denninger

The “rumor on the street” at the time of the dump in PHK a few days ago was claimed to be a “fat-fingered” trade.

Uh huh.

Let me guess.  We’ve had three fat-fingered days in a row, right?  The first one which was an honest mistake, and now two days of follow-up which were also honest fat-finger mistakes?

Pretty impressive to lose all of the gains since October – in three days.

Of course this isn’t being discussed on CNBS, nor the real reason for it, nor is anyone calling out those who disseminated the “claim” that this was a “fat-finger” mistake originally.

Yeah.

This is high-yield debt by the way.  A PIMCO fund on top of it.  Closed end, and yes, it does trade at a rather insane premium to NAV, but closed-end funds have a habit of doing that.

But gee, here we are in the New Year, the selling continues at ridiculous volumes compared to the historical average, and in a market where the DOW is up 160 points this issue is down another 5% today.

Who’s whistling past the grave here?  If there’s a problem with the constituents in this fund then one has to ask if this is an “isolated incident” or whether it implies some really ugly things around the corner in the credit markets.

If you remember we had “little signals” like this back in 2007 – just before everything went totally to hell.  Anyone remember this?

That’s from 2007.  There were a few “signals” in this fund during that year…. and of course we all know what came next.

If this is fund-specific then why is it showing up in DPO too – erasing all the gains back to JULY?

Uh huh.  A 25% decline in less than 5 days eh?

I’ll go out on a limb here a bit: The “fat finger” claim IS A LIE and there’s something nasty brewing here that, as is the usual practice, has been leaked to certain “privileged” players in the market.

You’re welcome to believe this won’t infest and reflect into the broader marketplace.  I believe, as has been the pattern over the last several years, one ignores signals like this at considerable peril.

You, the ordinary trader and investor, will never be “cut in” on the deal and given the opportunity to get out before the curtains are on fire and people start succumbing to the smoke, and those who both leaked whatever inside information there is and who traded on it will not go to prison for doing so.

Nor will the “mainstream media” investigate this and report on it.  Not on CNBC, not on Bloomberg, not in the Wall Street Journal, NOWHERE.

Your only defense is to look for signals like this and get damn defensive when you see them – right or wrong – because someone who has more information than you do certain as the sun rising in the eastern sky is doing exactly that.

Uhhhhh… Ok, Keep Buying Fools

Posted by Karl Denninger

 Following up on the earlier ticker….  (above)

I have written hundreds of articles documenting that unregulated, speculative derivatives (especially credit default swaps) are a primary cause of the economic crisis.

And I have pointed out that (1) the giant banks will make a killing on carbon trading, (2) while the leading scientist
crusading against global warming says it won’t work, and (3) there is a
very high probability of massive fraud and insider trading in the
carbon trading markets.

Now, Bloomberg notes that the carbon trading scheme will be centered around derivatives:

The
banks are preparing to do with carbon what they’ve done before: design
and market derivatives contracts that will help client companies hedge
their price risk over the long term. They’re also ready to sell
carbon-related financial products to outside investors.

 

[Blythe]
Masters says banks must be allowed to lead the way if a mandatory
carbon-trading system is going to help save the planet at the lowest
possible cost. And derivatives related to carbon must be part of the
mix, she says. Derivatives are securities whose value is derived from
the value of an underlying commodity — in this case, CO2 and other
greenhouse gases…

 

 

Who is Blythe Masters?

She is the JP Morgan employee who invented credit
default swaps, and is now heading JPM’s carbon trading efforts. As
Bloomberg notes (this and all remaining quotes are from the
above-linked Bloomberg article):

Masters, 40, oversees the New York bank’s environmental businesses as the firm’s global head of commodities…

 

As
a young London banker in the early 1990s, Masters was part of
JPMorgan’s team developing ideas for transferring risk to third
parties. She went on to manage credit risk for JPMorgan’s investment
bank.

Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap.

Some in congress are fighting against carbon derivatives:

“People
are going to be cutting up carbon futures, and we’ll be in trouble,”
says Maria Cantwell, a Democratic senator from Washington state. “You
can’t stay ahead of the next tool they’re going to create.”

 

Cantwell,
51, proposed in November that U.S. state governments be given the right
to ban unregulated financial products. “The derivatives market has done
so much damage to our economy and is nothing more than a
very-high-stakes casino — except that casinos have to abide by
regulations,” she wrote in a press release…

However, Congress may cave in to industry pressure to let carbon derivatives trade over-the-counter:

The
House cap-and-trade bill bans OTC derivatives, requiring that all
carbon trading be done on exchanges…The bankers say such a ban would
be a mistake…The banks and companies may get their way on carbon
derivatives in separate legislation now being worked out in Congress…

Financial experts are also opposed to cap and trade:

Even
George Soros, the billionaire hedge fund operator, says money managers
would find ways to manipulate cap-and-trade markets. “The system can be
gamed,” Soros, 79, remarked at a London School of Economics seminar in
July. “That’s why financial types like me like it — because there are
financial opportunities”…

 

Hedge fund manager Michael Masters,
founder of Masters Capital Management LLC, based in St. Croix, U.S.
Virgin Islands [and unrelated to Blythe Masters] says speculators will
end up controlling U.S. carbon prices, and their participation could
trigger the same type of boom-and-bust cycles that have buffeted other
commodities…

 

The hedge fund manager says that banks will
attempt to inflate the carbon market by recruiting investors from hedge
funds and pension funds.

 

“Wall Street is going to
sell it as an investment product to people that have nothing to do with
carbon,” he says. “Then suddenly investment managers are dominating the
asset class, and nothing is related to actual supply and demand. We
have seen this movie before.”

Indeed, as I have previously pointed out, many environmentalists are opposed to cap and trade as well. For example:

Michelle Chan, a senior policy analyst in San Francisco for Friends of the Earth, isn’t convinced.

 

“Should
we really create a new $2 trillion market when we haven’t yet finished
the job of revamping and testing new financial regulation?” she asks.
Chan says that, given their recent history, the banks’ ability to turn
climate change into a new commodities market should be curbed…

 

“What
we have just been woken up to in the credit crisis — to a jarring and
shocking degree — is what happens in the real world,” she says…

 

Friends
of the Earth’s Chan is working hard to prevent the banks from adding
carbon to their repertoire. She titled a March FOE report “Subprime
Carbon?” In testimony on Capitol Hill, she warned, “Wall Street won’t
just be brokering in plain carbon derivatives — they’ll get creative.”

Yes,
they’ll get creative, and we have seen this movie before …an
inadequately-regulated carbon derivatives boom will destabilize the
economy and lead to another crash.

The degree of insider trading in this market is getting ridiculous. And the strangest thing is those who are executing on blatantly obvious material, non-public insider information, are no longer concerned the least bit about getting caught as they realize that the “mighty” SEC will do nothing against them, courtesy of the example the SEC has set by finding absolutely nobody “responsible” (except, of course, the regulator’s own future employers who thus get immunity from prosecution) for the greatest market heist in history in which over $5 trillion has been transferred from the middle class to the Wall Street oligarchy (future providers of paychecks for SEC staffers).

Today’s grotesque example of the SEC’s futility to act as even a modest deterrent to insider trading activity: New York Community Bancorp (which, just so happens, is a $602 million recipient of TLGP debt), whose stock surged in the final minutes of trading for reasons (then) unknown. As reader QevolveQ pointed out at 5:30 pm, the activity in both the stock and the calls of the company was many standard deviations away from average and raised major red flags. Those questions were quickly put to rest when it became known at 6:33 pm that NYB would in fact receive FDIC subsidies to acquire newly failed AmTrust Bank in a transaction that would be “immediately accretive to earnings.” And how wouldn’t it be:

Under the terms of the agreement, the Community Bank did not acquire any
of AmTrust Bank’s  non-performing loans serviced by AmTrust Bank or any
other real estate owned; construction, land, or development loans;
private-label securities, or mortgage servicing rights, nor did it
acquire any of the assets or assume any of the obligations of the
holding company.

No, those would conveniently be funded by Ms. Bair herself. The cost to the FDIC, and US taxpayers, to make NYB a richer enterprise: $2 billion. This is value that will go straight to the bank’s bottom line. As a result of this middle-class subsidy it was a certainty that its shares would spike.

The smoking gun here comes straight from a quick observation of NYB’s intraday P/V chart: the jump at 3:24pm on statistically significant volume is a clear signal that someone was fully aware of the soon to be announced transaction:

Furthermore, as QeQ highlights, “8,933 of the Dec 12 calls traded vs. 2,244 OI, finishing +300% on the day.” A very solid return for a few hours of trading. The block trades are visible below: one set of 2,500 Dec $12 calls bought at $0.20, followed promptly by two more 2,500 blocks around $0.25. With the stock poised to open much higher than its closing price, someone is sure to make a killing.

It is practically certain that the NYB stock and option transactions came courtesy of a insider tip. And as NYB is both a ward of the state, courtesy of its TLGP umbilical cord, and as the bank would soon become $2 billion richer as a result of some more middle class-to-Wall Street fund flows, it is very likely that the FDIC itself is the source of such leak. We truly hope that one of D.C.’s most ineffective and useless females (if grossly, grossly overpaid for her “work” in 2008) will analyze whether the agency headed by another such female has been responsible for yet more illegal insider trading activity. That the government is only capable of promoting unpunished criminal activity would not surprise anyone at this point. And as this will be one of those cases when everything is handed to the SEC on a silver platter, we don’t doubt that some minor scapegoat will be put away to make it seem like the most worthless organization in the world earns its $1 billion annual budget fair and square. What is chilling is the complete disdain that insider traders now flaunt when it comes to fear of retribution by the “regulators.” And when Ms. Mary “$3.3 Million” Schapiro is done catching any and all masterminds behind this dastardly deed, we would all be very grateful if she could leave her keys, her chauffeur, and her masseuse as she packs her banker box full of Wall Street indulgences on the way out of public office once and for all – Ms. Schapiro, the public does not want you betraying its trust any longer. Now please go work for Goldman Sachs where your continued betrayal of U.S. interests will be welcome and compensated much better than the meager $3.3 million you made at Finra. The sooner you get into a job that requires efforts more consummate with your diminished capacity, the sooner you can continue counting the $5-$25 million in cash payouts you slurped up from FINRA’s defined benefit plans.