On Traders Behaving Badly and Cognitive Bias

The Jim Cramer chatter precipitated by his Daily Show appearance included some links to an infamous interview Cramer gave in 2007, where he discussed how he would, as a hedge fund manager, push the prices of stocks he was short down via the futures market. It was arguably a public admission of market manipulation.

What was most striking about this incident was how quickly it was forgotten.

Now, of course, one can cynically say, that’s what traders do. And there have been times when I’ve had the vast misfortune to be watching the ticks (I hate trading, I put on very few trades, and I sweat them all and second guess myself hugely) and have seen more than once some end of day action that was clearly tape painting (and my pro investor buddies saw it the same way).

But nobody seems offended at the notion that the markets aren’t safe for mere mortals, just the sharks, even the whole US investing mythology touts how transparent, open, and well policed US securities markets are.

That’s one level of heinousness.

The next, which gets even less attention, is how traders play games with their own firms. I don’t mean the rogue trader version (although that is an out of control variant, usually born out of a trader taking on big risk to get himself out of a lossmaking position, making matters MUCH worse, then hiding his losses from management as he continues to spiral downward).

I would very much like knowledgeable readers to elaborate (particularly with any incidents they can vouch for or appeared in the press, even in specialized industry publications) but here are some typical variants (note these are crude typologies, so corrections and elaborations welcome):

Marking phony prices. Can be done in illiquid markets where what you trade doesn’t relate (much, at all) to any benchmarks). It has to be reasonably credible (you can’t be showing gains when your sector is losing, for instance). Management is supposed to have ways to vet/validate pricing, but the funkier it is, the harder it is for management to keep.

Colluding with your trader buddies to produce market prices that are distorted. This reportedly happened with collateralized loan obligations, where traders would trade them among them selves in small lots at fictive prices that they then used for valuation purposes. That kept them in the upper 80s for a while while the the rest of the credit markets were falling more severely, but the CLOs then started to be priced more realistically (I assume some real trades got done, making the ruse impossible to maintain). I presume this is a favorite activity at year end, particularly since a lot of institutions cut way back on trading as of Dec 15 to square their books, so year end volumes are particularly thin.

Now these are really amateur versions, but are still effective. Think of the games that are possible with derivatives.

Yet this type of chicanery gets perilous little notice. Why? Because management is complicit, either by commission or omission. The poster boy of “commission” was Joe Jett, the Kidder Peabody so called rogue trader who in fact never lost the firm a dime, but reported huge phantom profits due to a flaw in Kidder’s reporting system. I won’t bore you with details, but there is good reason to believe that Jett thought the profits were real, that he did not think he was perpetrating a fraud.

However, anyone with an operating brain cell, and particularly his bosses, should have questioned the idea that it was possible to make such monster profits in the Treasury market, Even if Jett had miraculously discovered some anomaly, it should have been arbitraged away, pronto.

So what happened? Jett was barred from the securities industry, and forced to disgorge his bonuses (I am going from memory, but I believe they were about $8 million). And what happened to his boss, Ed Cerullo, who made $20 million thanks to Jett? Nada.

That’s why this crap continues. As long as banks are playing with other people’s money, and the higher ups have plausible deniability, they have no incentive to rein this stuff in, save maybe a token case here and there so they can pretend they really were on top of things. And I’m being charitable and assuming the higher ups were not actively enabling it.

In a recent post on Andrew Cuomo’s investigation of Merrill’s 2008 bonus payments, I noted that Cuomo was also looking into how the Merrill traders marked their books, since it appears they held off marking down positions until after bonuses were determined. I commented that I had often heard tell of traders playing year end games, but never with enough detail for it to be substantiated. I got some confirming reader comments. From Expat:

What! Traders manipulate marks at year end to increase their bonuses! I’m shocked, appalled, flabbergasted, etc.

I also have twenty years of trading experience and can assure you that this is what happened. Most traders, trading managers, and senior managers must have known what was going on (sale to BOA but with early bonuses). The early bonuses were no doubt explained by saying it would be much more complicated to make the payments once the buy was completed (different payroll systems, tax implications, board approval, etc.). All good reasons to steal several billion bucks.

Not only should every Merrill employee have to cough up his bonus, but Thain, all senior managers and the boards of both Merrill and BOA should be beaten to death with baseball bats (think cornfield scene in “Casino”).

From vlade:

This behaviour was/is common. In some companies, where you had a revenue ceiling (as it was recognised that too much of a revenue meant you were probably taking too much risks, so your bonus was capped at some revenue number), people used to shift PnL between quarters. So, if you made 50M, but your cap was 30M, you tried to shift 20M to the next quarter (so you’d have to make only 10M, and not loose the extra 20 you might have got by a lucky bet).

From one Anonymous:

I was a junk bond trader for a large firm during the 1990’s. I was intimately involved in year-end book-marking chicanery to boost profits and hide bad positions.

I can guarantee you that the traders at Merrill violated every securities rule in the books and every possible code of ethics in order to boost profits.


So we have some confirmation of what I have heard merely from being within hailing distance of a trading floor from time to time: traders will cheat to maximize their bottom line, which makes sense, since they are screened and incentivized to be the sort that will seek aggressively to extract as much as they can (yes, there may be some exceptions, but I would bet they wind up going over to the buy side).

So why isn’t there more understanding of and outrage about this? After all, this is the heart of the looting that went on. If firms will tolerate (or even encourage) overly aggressive behavior that appears to generate profit, it isn’t just the nominal miscreants that are at fault, but the whole chain of command all the way to the top (after all, just as in the Jett case, they profited and therefore had reason not to probe too hard).

The same can be said for selling toxic products to customers. The worst is that that appears to have been a risk that paid off handsomely. How many successful prosecutions and regulatory actions have there been? UBS and Merrill on auction rate securities. I can’t think of any actions on fraudulent sales practices on CDOs, even though they would seem to be a prime candidate. Even poor clearly screwed Jefferson County isn’t suing or declaring bankruptcy (although that appears to be that the people involved in the deal are still in positions of authority, and a suit or default would likely expose that they were complicit. And a municipal bankruptcy is no biggie, markets are amazingly forgiving, particularly in a case where it was part of a negotiating strategy).

So here is my theory: the details are not specific enough for the public to see it as real. And if they can’t formulate a picture, they can’t believe it happens all that often (after all, if it did, surely it would be in the Wall Street Journal).

That is an example of a cognitive bias called the availability heuristic. If we can have examples, the more concrete the better, the more likely we are to believe that a phenomenon is valid (that is why anecdotal evidence is more persuasive than it ought to be).

Go back and look at the Cramer tape. It’s actually brilliant. He is not very specific! There is no “when I was short X stock in 2004, I did F, T, and H and the price fell by $Z and I made $100,000 in two days.” It’s all murky, to the point where Henry Blodgett, in parsing the transcript, had to insert words at quite a few junctures to make what Cramer say make sense to him (and note I in reading the transcript would have inserted different words). That’s why this incident never really stuck to Cramer. It all came off like knowing innuendo, but he didn’t present a smoking gun.

So unless we have a Pecora commission, or a lot of ex-traders and trading managers coming forth with particulars, the great unwashed public is not going to know enough of what happened to know where to direct its diffuse but well warranted anger over having been had.

I encourage readers to provide suggestions, links to any known incidents or articles about market manipulation and internal games playing with position valuations (most important, in fixed income and derivatives markets, since that is where the big damage was done), either links to stories or personal examples (per above, the more specific, the better) or write me at yves@nakedcapitalism (I promise I will not go public with any information unless given explicit permission).

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  1. Anonymous

    While these manipulation games occur on different scales on different derivatives desks, they represent a miniscule amount in the grand scheme of things and sort themselves out within relatively short periods of time(exceptions being the occasional rogue trader and ponzi scheme). It is wrongplaced to expend much energy trying to make an issue out of it when there are so many more pressing problems right now.

  2. Timo

    USA = Northern Banana Republic of America. Travel there at your own risk.

    UK = New Eastern Island. Beware of violent beggars.

  3. Anonymous

    Cramer is a blowhard who talks up his own position and importance, as well as his (short-term) ability to move a market. He was a person who benefited far more from his partners than his partners benefited from him, and when the partners came to terms with this reality they showed him the door.

    Other than the very short term, or in extremely thinly traded stocks, no one can move the market for anything other than a moment. There are simply too many people who would want the other side of the trade and drive things back toward equilibrium. Whoever attempted to manipulate the market would get burned on the exit.

    In thinly traded markets, or in securities for which there is no clear price, much more manipulation occurs, particularly near reporting periods. It was not uncommon over the last few years to have BOTH sides of a trade book profits for reporting/incentive fee purposes.

    Still, the shananigans a trader might be able to pull off pale in comparison to what is allowed for major financials due to the “flexibility” inherent in the accounting guidelines. Oddly enough—or perhaps not oddly enough—the discussed changes to M2M accounting will give even greater license to the likes of C and BAC and anyone else who needs to look good. We are going back to a time where the Emperor does not need any new clothes. (Oh how I wish the Japanese or the Indonesians would start lecturing the US!)

    Of course, eventually winter comes, and no matter what the market collectively is willing to accept as gospel, the Emperor is going to get cold. There will be opportunities to fade any rally that results from either M2M changes or reported results of the big financials.

  4. Yves Smith

    Thanks, but the bigger issue, which took up most of the post, is that in retrospect, much in the way of the profits in the 2004-2007 period in the securities industry were exaggerated, and bonuses were paid out on exaggerated profits. This left the firms with less equity than they would otherwise have had when the storm hit.

    Of course, one can argue that they would have levered up anyhow, and got themselves in the same heap of trouble. However these firms had shifted from having substantial agency businesses to being dominated by their trading/prop trading ops, and those from everything I have been told, had a least some, perhaps a lot, trader rent taking. I’d like to get to the bottom of this.

    Cramer serves to illustrate that markets can be pushed around, and that may be more significant in terms of trader marks than real profit extraction. But he is speaking of what he did at a hedge fund, while I am more interested in what went on at the big firms.

  5. retread

    We may all not be talking about the same elephant part.

    I for one am hoping someone in this thread can explain at a typical big firm (Merrill, UBS, Goldman, etc). for the funkier products that seem to have caused a lot of the pain (CDOs, CLOs, but maybe also some of the higher risk RMBS and CMBS) how was trader pricing validated for stuff that was not very liquid?

    How are trading books massaged into reported finacials?

    Who exactly is in that reporting/activity chain (do the desk heads or risk managers play any role)? What if any questions might a CFO take to a CEO or COO?

    If someone would shed some light, we’d all be a lot smarter.

  6. Jojo

    None of this stuff is new or restricted to the securities industry. Any position where a majority of compensation is based on commissions or bonuses for performance is suspect. Or where a public company needs to meet the expectations of Wall Street or their investors.

    How many companies have gotten caught inventory stuffing the channel in order to meet the numbers that Wall Street expects (and the ones you hear about are only the ones that got caught)?

    Business in a capitalistic society is inherently corrupt. Be very wary of anyone selling you something that gets compensated on commission.

    Having worked in sales for many years, I have seen many different ways of manipulating sales to maximize ones commission or position for the next fiscal year. For instance, If you know you are not going to hit your number or accelerators, then you push business into the next quarter or year, so you get off to a good start on the next quarter or year (assuming you are confident you will not be fired). OTOH, if the bonuses/accelerator’s are high enough, you might work to bring business into this quarter/year by any means possible. You might give huge discounts for a multi-year contract or multi-product purchase. If you know you are not going to stay with the company, you might get some friendly companies to take delivery of something, get your bonuses for closing the sale and then have them return it or not pay for it. Once you’ve collected your commission/bonus, few companies will come after you for a chargeback if you have already left the company. I worked in one company where one of the top salespeople used to quote prices 15-20% higher than list price (since the price sheet was confidential, the customer had no way of knowing), then discount the same amount. The customer thought he was getting a good deal and the salesperson got hired commissions. Management knew this was happening but let this guy continue to do this.

    Anytime there is a significant $$ at stake, “most” people will try to game the system to their advantage. It’s just the nature of living in a money oriented, competitive society.

    If you want to stop all of this, then you need to put the majority of people in sales with salary and a very small bonus or commission. I have heard that this is how they do it in Japan but have no first hand knowledge.

  7. Jmd

    It might be useful to look at the marks that were given to customers on positions similarly held by the relevant banks acting as the customers’ prime brokers. When I worked at various banks these marks often differed dramatically…start with Bear, Lehman and then move on to the ‘living’. I am sure that the hedge funds could be persuaded to share their margin call e-mails and substantiating data for the past two years or so. Btw, looking at how existing prime brokers mark positions could also add a lot of clarity to the price of the so-called illiquid securities. They all have them and they are all marking them daily.

  8. donebenson

    Regarding trading manipulation, don’t forget the Enron traders who manipulated the price of electricity in California, by creating artificial shortages.

  9. Anonymous

    One of your posts on goldman and trade hedging caught my eye a while ago. They said they knew where they were hedged constantly during the day. You seemed to believe it. That’s a lot of computing power, and backend.

    I can imagine that there were fortunes made on gaming the brokers hedges. The naked shorting stories illustrate it, but not very well.

    If you knew who was not hedged right, before they were, you could play one broker off another, if you were big enough.

    In the case of naked shorting, imagine that a hedge fund or other big guy decides to go short on XX. He calls his broker and they can’t locate the shares. The story then goes that the broker can’t find the shares, but sells short anyway, resulting in an FTD.

    The short position is still able to hold on as long as the broker will hold the line. Prisoners dilema. No reason for either to name the other, they both lose. This is assuming the short worked.

    Now, imagine you have 20 guys call 20 different brokers. Even harder.

    But what if you just targeted the brokers that you knew did not have the required securities to short.

    I imagine it was hard for the arb guys to stay out of this trade. After a while it would become pretty clear what everyone had, and how much.

    Add the birth of computers and acutally being able to track this better than the broker, and you have a broker by the balls.

  10. artichoke

    How is the less liquid stuff priced? With caution.

    There are models that provide values for all or almost all the contracts traded. While the mathematics may or may not be complex, this is not really the issue. Experts are hired to produce that math competently.

    The problem is that the models still use questionable inputs, because nothing better is available. For example, when pricing a spread option, the usual model depends on the correlation between the two legs of the spread. That is usually not well observable.

    This is typical of “Class C” models or “Level 3” assets. The prices cannot be more accurate, not because of the model itself, but because of the inputs to the model. Part of the modeler’s job is to find the best possible inputs, and these are not worse than other available choices.

    Since markets, especially for fixed-income and commodities products, are extremely incomplete, this is just the way it must be for over-the-counter exotic products.

    I am quite worried about proposals to allow more “judgment” or whatever they call it in marking these positions. Currently, fairly conservative methodologies are required for estimating the inputs to these models. A bit of slack would result in huge changes in values produced by these models. Needless to say the firms will have no trouble knowing what to tweak. In fact their “greeks” already computed by the risk-management organization may tell them exactly what changes would help the most.

  11. Hubert

    Not to defend Cramer too much but he at least has a rest of decency to make these things public.

    Reminds me of Blodget who too felt disgusted by what he was doing and could not refrain from putting this into e-mails.

    I still do not understand why Blodget is used for poster-boy of dot-com area. He was one of the few analysts who did not take the dirty process for granted.

    So should Cramer not be given more credit for at least indicating the truth in public ?

  12. Anonymous

    Amaranth and the natural gas market. The organized manipulation of the futures market leading to last years record oil prices. GS selling MBS to its’ customers while shorting the same.

    Corporate financial statements are a joke. There is no way to tell which are accurate and which are management fabrications. In the last 500 days of trading, the market has declined 50 % in price. That shouldn’t happen in a transparent world.

    On the way up, very few question the motivation. Heads roll only when the crash comes. As long as Madoff delivered a piece of paper that said you are up 12 %, nobody asked any questions. In fact, his scam was making the mark feel special and lucky to be able to put money with Bernie.That they were fortunate in life to be part of the Bernie’s secret don’t ask don’t tell system for beating the market, while other former lawn sprinkler salesman failed. Never occured to these people that they were being scammed.

    The get rich quick mentality reached a 25 year crescendo in 2007, providing the fertile ground for the WS grifters to rewrite all the rules that were put in place after the last big financial speculation.

    No free lunch and no safe harbor for the saver. Americas deep, liquid, transparent, and investor friendly markets have been under attack by the banksters. It really is not safe to invest in American financial markets.

  13. Anonymous

    I traded single-stock options for ten years on both the sell-side (6 yrs) and the buy-side (4-years). I can tell you this: there is indeed a bit of mismarking that goes on. That’s my first point, and I’ll give you two examples in a moment.

    But first, I’d like to address the issue of traders “bullying” stocks to make money. I gotta be honest with you all: bullying stocks sounds like it’d be an easy thing to do, but in practice it’s not really even happening. Here’s why: if you’re gonna manipulate an illiquid stock, you need to take a big posy getting in and then out. While you can bully a stock getting in, it’s quite hard to find the liquidity to get out and still make money. I’m not saying it’s impossible, but it is quite hard unless you find a pocket of protective stops and take advantage of everyone buying to cover (for example) and puke you long into that.

    In fact, I think most times we hear Cramer or anyone else talking about how they “manipulate” the market, I think you are hearing EGO. HUGE EGOs. These guys are bragging about NOTHING. They don’t give hard examples because they don’t consistently manipulate small stocks because it is very hard to do so. It’s a LOSER’S game, and it happens a lot less than you think.

    Now, I will say this about TAKING ADVANTAGE OF THE MARKET: what Cramer did do, and what other more scummy funds do, is this: they trade around the order flow of Fido, et al. So if BA (Boeing) is down 5 points and it just looks like a disaster and Putnam comes in to buy three million shares because they are long already (or not), often you will hear SALESPEOPLE on the sell-side cash desks call hedgies upstairs and say, “Hey, I have a market buyer of BA, SIZE, would you like to *sell*?” The kicker here, obviously, is that the salesperson is not really looking for the other side of the trade, he’s not looking for someone to offer BA to Putnam. Rather, he’s saying to the hedgie: “I’m a SIZE buyer of BA, the stock is stretched like a rubber band to the downside, get ahead of my order, buy some stock NOW.”

    Guess what? That happens all the time. In fact, it happened to me once, same circumstances as described above. Yet, I was the one being picked off because Cramer’s fund got the call that XYZ was a huge buyer of BA, so he wants to buy calls in size from me to take advantage of that vanilla money order flow, so his trader calls my salesperson and gets me to sell calls in BA. Of course the stock ripped $3 in my face before I could get hedged and it was terrible PnL-wise indeed. But this is the one case when Cramer did not make out like a bandit because a small plane crashed into an apartment building in Italy (this incident happened not too long after 9/11), and all the aerospace and airline stocks tanked. Yea me. So the little guy (me) wins (I go from getting railroaded to flat PnL) in this case, and Cramer loses. It does not usually happen that way when rotten fundies trade flow like that.

    Now, with regards to mismarking books. Of course you can mismark books, and it does happen with OTC positions. A senior single-stock trader mismarked his OTC vega posy in the financials late last year to the tune of $70 million before management had the balls to step in and say/do anything. That is outrageous. And, the worst part about it is that it would have never happened unless a friend of mine beat down the doors at compliance to tell them that he did not want to inherit the fin posy’s that this senior trader was trying to unload on him. Very messy. Anyway, of course BOTH people got fired. My friend because he raised his hand and the other guy because he was a sleazy jerk to begin with.

    Mismarking in my experience is very much the exception to the rule, but it does happen. The fact that the firm above did not have the technology in place to verify trader marks is MINDBOGGLING. The firm is JPM, I have no problem saying, and it is quite sad that such a “haloed” firm really does not police it’s own equity derivs desk.

    The second example of mismarking took place at a European firm with technology about 100x better than JPM’s. That’s to say that this firm was all over traders making sure that their posy’s were marked correctly. That said, a senior trader did mismark his book to the tune of $10 million and got caught when he was transferred back to his original home in London. Of course, nothing happened to him because he was quite connected to VSM (very senior managment).

    All in all, I’d say I’ve worked with about 30 traders over the years, and all but two were quite honest.

    Sorry for the long post. But I felt I could finally contribute!

    P.S. The sleazy trader at JPM above, he got caught mismarking his book twice, once on the buy-side befor getting caught at JPM. Classy, right?

  14. George

    I am perhaps evolving to a higher level of cynicism. I routinely read many blogs (of which I consider Naked Capitalism one of the best) in order to get my head around these current problems.

    There are many “technical” blogs out there as well as numerous comments that reflect trading positions thoughts and ideas. In addition, I live and work in New York and am therefore surrounded by the financial industry and the various traders and analysts that form part of it.

    The post by annonymous above that “no one can move the market for anything other than a moment” seems to encapsulate the “efficient market” hypothesis. However, I think he fails to appreciate the absolute concentration of power in many of these seemingly “liquid” markets. I would tend to believe that the markets are more likely corrupt as there clearly are large amounts of money being made even today basically taking advantage of market inefficiencies.

    However, I want to move above and beyond the back and forth about these “markets.” I think a much deeper and more important point is being made in this crisis. We have certainy gone well beyond the fundamental purpose of investment in creating all of the “derivative” markets. And by that I mean, secondary markets of all kinds. The fundamental purpose of investment is to create value through profits. I lend you money or I invest in your project. You build a store or a factory and then you start producing things and you make a profit (or not).

    That is pretty much it folks. Everything else derives itself from that basic proposition.

    All of the “trends” and models and graph analysis is just trying to figure out the flow of these types of underlying investments.

    I guess the point I want to make is that I d not see a bottom here until the very last of this type of “derivative” analysis is gone. Finished. Buried. When the “traders” are finally destroyed and finished. When the last “Quant” finally capitulates and realizes that its model could not predict the future. Only then will a bottom be near. I am not saying the entire investment industry will collapse. What I am saying is when everyone finally stops thinking that they can “predict” things and “trade” their way to profits only then will a bottom be near. When we finally get back to the nuts and bolts of investment and all “speculation” is squeezed out will we start to see a bottom.

    Instead of “investment” we have true bets. People have not bought or invested in productive capacity, They have bought and sold promises to each other on pieces of paper.

    I find it the height of irony that when our country was attacked we were told to go “shopping” instead of making sacrifices. Now, here we are 8 years later being called upon to make sacrifices to save BANKS!!!

  15. Anonymous

    These shenanigans are only the symptom of a much bigger problem of the publicly owned corporation run by non-equity holding managers (or who build there wealth through management of the company rather than equity growth of the company).

    In particular, they have asymmetric risk profiles. They have every incentive to prime the pump for a number of up years and then give it all away in an “awful” year. If the manager were the owner of the equity, the asymmetric profile would disappear instantly.

    In fact, I’d go further. I wouldn’t be surprised to find out that a number of big institutions are actually ponzi schemes to loot from the bondholders while running a legitimate business.

  16. Thoreau

    Why should Madoff be incarcerated and the nationally renowned tax shelter crusader Mike Hamersley, of the California Franchise Tax Board, remain free? Madoff merely engaged in a time tested simple transparent scam and unlike the current Treasury Secretary, Geithner and Mike Hamersley apparently did not cheat on his taxes. Hamersely continues to purvey a scam so diabolical and a scam which has destroyed so many families’ lives that he is allowed to hold a high level job in the Government confiscating earnings from honest citizens who unlike Mike Hamersley did not lie to the Senate or the IRS about taxes. Hamersely told the Senate tax fraud was hiding the true facts from the IRS and engaging in paper transactions. Emails show Hamersley purveyed tax shelters for KPMG which resulted in tens of millions of tax fraud based on Hamersely’s definition of tax fraud to the Senate which hit the trifecta, sham paper losses, lying to the IRS, use of sham foreign companies and back dating (according to Hamersley’s definition of backdating). Why shouldn’t Bernie be free if the government not only allows Hamersely to be free but continue his charade on behalf of the Government?
    Why should Bernie Madoff be in the pen while KPMG remains a going concern and not indicted for its part in the greatest ponzi scheme in history which has resulted in a $50 Trillion destruction of world wealth? KPMG audits many of financial institutions which were the purveyors of this ponzi scheme. KPMG received 100s of millions in fees from these institutions to sign off on the fraudulent financials (check out Citi’s level three assets and the 100s of billions of exposure it has to bad debts or Citi’s $32 Trillion of derivative ticking time bombs). Madoff is nothing compared to KPMG and at least apparently Madoff paid his taxes. KPMG engages in massive tax fraud with its fraudulent foreign Bermuda captive sham foreign insurance company, Park, where not only does KPMG cheat on its own taxes but cheats its partners through contrived reinsurance arrangements devised by the good KPMG soldier, Claudia Taft. Why does everyone hate Madoff but not KPMG, Madoff’s crimes are simple and a drop in the bucket compared to the malfeasance purveyed by KPMG.

  17. darkcloud

    Great post, Yves. I take no issue with your article. Bravo to you.

    Informing the public is what is desperately needed, but I fear a gargantuan undertaking, nearly impossible. To see this is so, imho, one only needs to see the convenient timing of bad news and the speed with which the bad news disappears from the media radar. Because, imho, our media system is also corrupted, for the benefit of the elite, of course.

    At any rate, thanks for your insight and dedication. You are wonderful to do this for all who read your posts. We must hope and never give up, eh?

  18. Anonymous

    I’m not here to bash Cramer but the comment he makes about shorting F and doing F, H, T and making $100g in two days is total rubbish, there is no way, options, equities, and futures are just too liquid. You can “push” stocks around in a period of several minutes, possibly longer but no way you could put on a trade and wait for your profits to come in over a couple days. Cramer has noted himself as a trader, broker, and IB with GS, I’d like to see some proof to those claims, because as a stock broker at a top IB, we were basically ridiculed by the traders and IBs and looked at as pawns, and still are to this day. Retail clients are completely sucked dry by these banks, it is insane and all they have left for a revenue stream. Anyway, as far as illiquid markets go, such as CDOs, MBSs, etc., I’m sure they can be “marked” across a very wide range and I am completely terrified that the banks will be allowed to use mark to market and within 3 to 6 months will begin pointing fingers at everyone saying, see we told you, we are making billions now, it was all investor psychology. These comments by C and BAC that they are hugely profitable are their last desperate act, they have nothing left, through in the kitchen sink at this point. We have seen what 3-4 major banks fail and dumped billions into the remaining banks and the stocks have SLOWLY gone lower and lower and tested and retested and held lows for weeks and months now, yet, investors want to say the stocks are being manipulated? I’ve probably gone off on a tangent here, but, enjoy.

  19. lineup32

    the dot.com boom with VC tied to various investment banks taking worthless companies IPO and insiders at all levels shaking down the entire financial system. Add in a dose of 401K, pension funds and it doesn’t take much to realize the ponzi nature of the securities industry.
    Without fresh green the industry would quickly disappear.

  20. Anonymous

    Whart? Cramner not givin you the inside scoop? I’m losing my faith in the fixability of markets

  21. Warm, Dry and Well Fed


    Asking a reader to email you documentation on potentially illegal activities, activities that may land the emailer in front of a DA and end a career, without first giving the reader a way to cover the email tracks is unwise; I will not go into the details, but there is no way to use your regular computer to send truly unidentifiable email.

    And the most sophisticated and wary readers, the very ones who might love to send you the dirt, will be rightly too careful to chance it.

    For truly untraceable email buy an old laptop for $200 cash, get online at a Starbucks and create a yahoo account, then use the machine only for surfing in places like Starbucks and Panera and for posting information to the likes of NakedCapitalism(NOT for going to your real gmail account or your nephews Flickr page).

    And, if Yves wants the real dirt, she should set up a post office box and retain only scanned copies of the interesting incoming mail from the outraged executives, the bosses’ administrative assistants and the mail room clerks. In other words retain no DNA or stray fingerprints to reveal the sender’s identity.

    Safety first… and Yves, keep up the good work.

  22. rdd

    This is why the investment bank types of firms need to be separated from federally insured banks and made much smaller.

    If Merrill Lynch was smaller with less leverage allowed and privately held, then they could have played a fair amount of games and they would generally just have been stealing form their partners. That is how you get self-regulation.

    Making them public companies that are too big too fail simply allows them to steal from common shareholders who are beyond arms-length from internal company transactions and the taxpayers.

    Congress and the Administration need to split up these companies to the size where they can implode themselves if they want and we can just watch with bemusement from a distance.

  23. Anonymous

    “Warm, Dry and Well Fed” at 11:58 am makes very good points. Yves I recommend that you think along those lines.

  24. Anonymous

    When the president tries to talk up the markets and says the ‘P’ in P/E stands for ‘profit’ (WTF!?) you know we are in trouble.

    The manipulators have ruined it for everyone. The consumer is tapped out and the government is trying to fill the void with bailouts or else the Ponzi scheme fails in earnest. Without the consumer to feed the top (and recirculate the money) it all comes crashing down.

    The worst offenders of market manipulation is the government since they issue the reports and know the numbers before release and can wave a magic wand over the numbers just to ‘readjust’ the following month/quarter or years later.

    Gee, I wonder if they ever leak the official reports to GS or others, along with the real numbers so both sides can be played.

    You can’t control the long term trend. Consumers are tapped out or refuse to spend then the markets wait and wait. A loss of confidence and markets wait even longer.

  25. Anonymous

    "Warm, Dry and Well Fed" and Anon @ 1:42pm are right on..

    Although you're blogging and basically afforded the "protections" of the press, that didn't stop the govt from locking up NYT journalists when they withheld source names during the Valerie Plame stuff.

    It may seem excessive, but keeping an open and advertised "privacy"/security policy for potential whistleblowers is a smart idea. Wikilieaks might have an option where people can dump information and keep it temporarily private for you alone.

    If you post a short bit about the policy in the right-hand margin, or repeatedly in the posts, you might get some good info…. you might also be baiting the conspiracy crowd, so we might have to bear more off-topic 'spamming' comments than usual. We can bear it.. if you can handle the flood of links to Money As Debt & Zeitgeist, I say go for it.

    A blog does afford whistleblowers a less daunting leak option, than say the NYT, so you may get some good information from people sick enough to air it, but not ballsy enough to commit to a NYT/DoJ showdown.

    (P.S. – I've always wanted someone of strong repute to pick apart Money As Debt.. for the sake of disarming its incorrect assertions, and reinforcing the correct ones. You'd be opening up an nightmarish can of worms and incurring the wrath legions of bunker/arm-chair economists, but you'd be surprised how many people have watched and wholly taken to heart that and other 'money' movies — tens of millions, just look at the view counts. Rather than realizing that television & technology are driving our isolation and sense of diminished personal power/influence over our lives, they look to these conspiracy documents and use them as the "science" to back up their end of days/race war/return of oligarchy & slavery explanations. — Maybe an anonymous step-by-step critique sometime? It might do our collective Internet consciousness some good.)

  26. Anonymous

    One way to send anonymous email is to use one of the anonymous email services such as AnonEmail, but connect to it through a racetrack such as Tor.

  27. Blissex

    «The same can be said for selling toxic products to customers. The worst is that that appears to have been a risk that paid off handsomely.»

    WINNERS do whatever it takes. That’s the American way.

    «How many successful prosecutions and regulatory actions have there been?»

    HAHAHAAHAHA! In the USA? Why should the USA persecute the WINNERS?

    Look, I have been waiting and waiting, and in one open-and-shut case, the enormous amount of income tax evasion that was a large incentive behind backdating options (with backdated options income gets taxed as capital gains), there have been no convictions.

    Let’s here from Newt Gingrich celebrating what it takes be a good [Real] American:

    «If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter-murder, rape, and we have laws that don’t matter. [ … ] The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!” Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him. America is the most incentive-driven society on the planet.»

    Securities laws are among those that matter least — what does a few hundred billions of bustout fraud matter?

  28. Expat

    I would be happy to provide “fictional” accounts of my twenty years of commodity trading. I must say, though, I was a tad shocked to see that you included my bit about beating people to death with baseball bats. Kinda damages my credibility, though I stand by the sentiment if not the exact act!

  29. Anonymous

    I have said here and elsewhere that the retention monies or whatever they are being called is really hush money so the real criminal activities don’t leak out.

    It is not like there is real investigative journalism out there beyond what Yves and other bloggers provide to us.

    Since we seem to have selective rule of law and financial crimes are now being committed on an ongoing basis the chance of prosecution is dropping drastically….revolutions are caused by factors like this….just saying.

  30. Anonymous

    I’m sure congress would love to investigate this and have some traders testify before them.

    Unfortunately, there’s a baseball player somewhere taking steroids, and congress just doesn’t have the time to worry about a few bad apples on Wall Street.

  31. Dale

    Speaking of the ability to move individual stocks, I think it must be there, judging from the Yahoo chat boards. I used to read those quite a bit several years ago, and it became apparent after a while that there were about, as a rough guess, about 2 dozen guys using hundreds of different aliases making up about 90% of the posts across all of the boards. They would work in teams to pump and dump stocks. I assumed they were employed by hedge funds. I always wondered how much of an effect they had, but they must pay for themselves, because they are still there.

  32. bg

    I have no doubt that traders broke laws. I have no doubt that big banks lied about the quality of the assets they were peddling.

    But if I read the gist of your article, you seem to be saying the whole system is corrupt to its core. Again, this may be a valid premise, and if true you are doing a great service.

    Where I have doubts is that market manipulation was a big factor in our Minsky winter. Risk was undervalued which triggered ponzi betting. Writing earthquake insurance is very profitable when there are long gaps in major earthquakes and you have no loss reserve requirements. The banking industry has recently erased all historical profits. The thefts that occurred were not due to manipulation, but rather variations of ponzi theft.

    If all investment banks were created to arbitrage ponzi activity, then they should be taken down on those principles. Focusing on traders could well cause a backlash on trading (its not Fuld thats to blame, its einhorn! that filthy shorter is destroying lives!)

  33. ardano

    Dear Yves:

    This post is why NC is a must read for many.

    That said, the trading issue(s) needs to be framed in-time.

    Cramer’s comments are years old. The markets were different then. I believe in limited cases, some smaller funds were able to do what Cramer mentions. However, you can’t run serious money in that manner for the reasons mentioned above. Realistically, the numbers don’t work on a sustainable basis. If the trade works, it has to be a small position in, typically, a NASDQ stock. There has to be some story that allows for an exit, as these trades often will not hold as everyone runs for the closing transaction at once.

    Also, who is trading like that today? And how many funds have exploded because traders tried this and failed. Many hedgies believe their prime brokers can’t be trusted and have felt that way for years. One day the broker gives you a trade, the next day you’re holding the bag on a trade made by someone else.

    As for the macro point about CMO’s, CDO’s RMBS, CMBS, and other toxic securities…here again, there is a then and now element to be considered. There were games played years ago, but we’re way beyond that now. First, firms are dead. Today is the one year anniversery of the death of Bear Stearns. Second, for surviving banks, how much capital/ is there to to back these trades now? Third, there is a difference between what’s being held/trapped in inventory, and what’s trading with any liquidity.

    If there are any games being played now, the notion of “we’re all in” includes the government and the fed as its hard to play liars poker right now.

  34. Anonymous

    I have seen a fair share of tricks when I used to trade on the fixed income prop desk of a global bank. Aside from things that have already been mentioned above, i found that the interdealer brokers are usually the accomplice. some quotes could appear quite different between 4pm and 4:02pm to satisfy marking of different customers. the spreads can also be manipulated say 99/103 (suggesting a mid price of 101) or 99-100 (midprice of 99.5). this may sound small, but not when the bet is leveraged 100x.

    also, I would say there are as many traders that does cookie jar accounting as those who just want to overstate profits. There have been years when we knew bonus would be low, and traders would reserve profits for the year ahead when the payout would be higher on same P&L.

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