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Wall Street Swindle
Old 10-23-2009, 06:07 AM   #1
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Wall Street Swindle

I have to admit that Iím not too powerful when it comes to understanding the intricacies of financial markets. It probably isnít the best practice to get financial education from The Rolling Stone but this item is shocking.

Iíd like to know if this is simply sensationalism or are these circumstances as damning as they appear to be? Do those among us with a more sophisticated perspective have an opinion about this?

It is a long article but, as they say, riveting.

"On Tuesday, March 11th, 2008, somebody ó nobody knows who ó made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness ó "like buying 1.7 million lottery tickets," according to one financial analyst."


Wall Street's Naked Swindle : Rolling Stone
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Old 10-23-2009, 08:02 AM   #2
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Wow!! Where to invest is the question? The game is crooked and the odds are definitely stacked against you and the foxes are in charge of the chicken coop...
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Old 10-23-2009, 08:18 AM   #3
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It's financial terriorism.
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Old 10-23-2009, 09:08 AM   #4
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I went back and checked my correspondence from this period. The imminent failure of BS was probably widely known sometime March 12-13 among those on the Street. BS clients were jumping ship left and right. Other I banks knew not to honor BS debt or promises and not to accept BS as a counterparty.

It may not be too hard to imagine someone knowing about this as early as March 11, and acting on the information. Whether it was insider trading or not is a question of law. A guy taking a post-workout shower in the locker room of his gym on the corner of Wall and Broad may have heard a couple of I bank execs in the stalls next door talking business and figured out from that that BS was toast. That isn't insider trading (or it didn't used to be).

Just as plausibly, an I bank may have sold a boatload of CDS's on BS and used the way out of the money puts bought on March 11 as a hedge. Make a bunch of millions on ultra short term CDS's on BS, then spend a million or two in the options market to hedge. BS goes broke, you pay out big on the CDS, but you also get paid big on the way out of the money puts.
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Old 10-23-2009, 02:51 PM   #5
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Thanks for the link, interesting (even "riveting") reading.

I learned something about "naked short selling". I've got some obvious questions/observations.

If the option buyer made $270 million, who took the loss? Someone had to buy 9 million shares of BS for $30 a share. Do individuals typically sell put options? Is this mainly an institutional market? If an institution took the loss, did the taxpayers end up bailing it out?

The short-selling and options buying didn't bankrupt the company. They drove the share price down. If the company had been solvent (i.e. if it had assets in excess of its borrowing) the drop in share price would have been temporary. At worst, they had a liquidity problem, and a white knight should have bought them for the discounted excess of assets over liabilities. (This is really a question, not a statement.) Did JPM's later increase in purchase price indicate anything about BS's condition?

Regardless of the details, the overall drift of the article is that we are becoming a kleptocracy. Powerful people use gov't to line their own pockets. The methods are more round-about than they used to be, but the result is the same. That's not a new thing, over history most governments have probably been most interested in finding ways to help the powerful steal from the weak. (Aristotle called this the "perverted" state of gov't, at least in my English translation.) As a result, over history, most ordinary people have been pretty poor. IMO, ordinary people have good lives only to the extent that we are able to keep this activity constrained. It seems to be growing again.

This also reminds me why I don't want to be in individual stocks. It makes me more worried about whether the gov't will be able to live up to its promises to retirees regarding SS, the PBGC, and TIPS.
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Old 10-23-2009, 03:07 PM   #6
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Quote:
Originally Posted by cantlogin View Post
It probably isnít the best practice to get financial education from The Rolling Stone
Agreed.
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Old 10-23-2009, 03:34 PM   #7
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Quote:
Originally Posted by cantlogin View Post
"On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst."
Except the article itself says . . .

Quote:
rumors of Bear's [liquidity] troubles had begun as early as that Monday [March 10th]
So it's not really shocking that someone put on a large bearish bet the day after rumors started that the company was having liquidity problems.
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Old 10-23-2009, 03:47 PM   #8
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I finally understand what they mean when they say that a stock is under attack by short-sellers. I had read about naked short selling, but didn't make the connection to phantom shares and the impact of flooding the market with them.

Thanks for posting.
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Old 10-24-2009, 05:42 AM   #9
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snip... Did JPM's later increase in purchase price indicate anything about BS's condition?

I read an article about Jamie Dimon and it said BS cost JPM a lot of money... but that it made JPM the bank to go to for other stuff...

So, the assets JPM got from BS did not produce income... but maybe overall 'goodwill' being shown as the only strong bank did...

At least... from what I read....
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