SIGTARP Probing Insider Trading

You have to love it. If the allegations prove true, it provides further evidence that the banksters cannot contain themselves. Here they get their bacon saved by the TARP (which was way too cheaply priced relative to the risk involved) and a host of hidden subsidies and supports. Yet the employees cannot stand to let an opportunity for personal enrichment go to waste, legal or not.

The Financial Times appears to have broken the story that the Office of the Special Inspector General is investigating reports of insider trading in connection with the TARP. And what makes this probe potentially serious (aside from the brazenness of it) is that the suspects include executives as well as foot soldiers:

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.

“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”

Yves here. With the notable exception of the network surrounding , Raj Rajaratnam, nearly all insider trading scandals have involved junior employees as the ones leaking confidential information, usually on corporate mergers. While most M&A deals involve lots of junior level support, knowledge of pending TARP financings at a particular firm would presumably be limited to comparatively few people, and then largely the very top officers.

SIGTARP is also looking into possible gaming of the Public Private Investment Partnerships, a potential pitfall that had worried many commentators. Note he indicates here the trades he is questioning may have been permissible, reflecting weak controls and program design:

Mr Barofsky….said there remained substantial problems with the structure of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.

He said there should be walls between fund managers taking part in PPIP, which co-invests government funds with those of the private sector, and managers at the same firm buying and selling similar securities.

An example of suspicious activity at an unnamed firm showed a manager selling a security from a non-PPIP fund and then buying it back at a slightly higher price with a taxpayer-supported PPIP fund minutes later.

“The rules are insufficient,” said Mr Barofsky. He said even if the behaviour, which Sig-Tarp is investigating, was found to be within the rules “it still creates this credibility issue, this reputational damage, this appearance of fund managers gaming the system”.

The Treasury said it had identified the suspicious behaviour and brought it to the attention of Sig-Tarp, showing that the system was transparent.

Yves here. Ahem, “bringing it to the attention” of SIGTARP falls well short of a remedy. And as we discussed at length, the PPIP made no sense unless it acquired securities at above current market prices (the whole point was to avoid having banks mark soured positions down to current market levels; had they been willing to do that, there would be no impediment to selling them). It will be interesting to see whether SIGTARP examines the contradictory claims made for the PPIP (that it was a good deal for the banks and taxpayers) and exposes what the structure was designed to hide, namely, the amount of the subsidies.

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    1. sgt_doom

      Negative, it was structured to be a cheat. Immediately after Geithner floated the PPIP idea, Michael Hudson exactly explained how it would go down as an insider trading scam benefitting the major players involved (the banksters and Blackrock, Invesco, Marathon, and so on….).

      Scams are be design, not be “accident.” Even though “they” keep repeating that, and the foundations which sponsor those so-called newsy shows keep supporting that, it’s really by design.

  1. alex black

    Only in Banksterland would the citizens be crazy enough to say “Hey! We’ve just been given the keys to the US Treasury, LEGALLY! We can loot it all we want! With no repercussions!” and then a minute later say “And hey, we can also make a little more if we’re just willing to risk 10-15 years in prison. Let’s DO it!”

    The proper word has not yet been created in psychiatry to describe this kind of thinking.

    1. DownSouth

      Au contraire. I think it has. It’s called “irrational rationality” or “mad rationality.”

      [N]ormative values, as factors that influence the choice of means, help ensure the primacy of ends. The preoccupation with means, with enhancing their strength, scope, quantity and quality, is the essence of industrialization, market economies and economics, technology and applied science, in short, of the modern age. However, this preoccupation, through a process known as goal displacement, tends to lead to the primacy of means over ends. Studies of organizations are replete with reports of organizations designed to serve a specific goal; however, when the design proved to be inappropriate, rather than adjust it, the organizational goal was replaced to suit the existing design. Multi-millionaires work “for their families,” destroying their family life in the process. Societies undermine their fabric in order to accelerate economic growth. This phenomenon has been referred to as irrational rationality, or mad rationality.
      –Amitai Etzioni, The Moral Dimension: Towards a New Economics

      1. Siggy

        I certainly enjoy your quotes. How do you do it?

        Mad irrationality indeed. Strikes me as being fraud and theft. No need for expansive explications.

        Have an investigation, render a bill of charges and lets have a trial!

        1. Sundog

          Siggy, if you’re asking about how to put quotes in italics, the normal HTML tag for italics seems to work. I’ll just do a quick test here to see if bold or strong work too. I dislike using tags without a preview option before posting… which this site used to have but doesn’t now at least in my somewhat customized Firefox setup.

        2. Sundog

          Well those tags seem to work but I must add this too.

          “How do you do it” is a question that occurs to me, too, when reading DownSouth’s amazing and seemingly endless stream of quotations that probe the issues behind the issues. Thanks for all your contributions, DownSouth!

  2. nemo

    Au contraire, continue using the term “bankster” with vigor. Encourage others to use it.

    It is a perfectly good word with an honorable history. As a portmanteau of “banker” + “gangster”, it captures a point of view about bankers perfectly.

    The word “bankster” dates back to the early New Deal era. Ferdinand Pecora didn’t invent the word, but he helped popularize it. We are more the poorer that we do not have a Pecora at work in our era.

    See Ron Chernow for a brief history of the word “bankster” in the 1930s.

    The word certainly fits the people responsible for making sure AIG’s counterparties were paid 100 cents on the dollar, at the taxpayer’s expense.

    1. alex black

      Yeah, I was gonna use the term “Sociopathic/criminally-minded/soul-sold-to-Mammon-and-Satan/pig-with-snout-up-taxpayers’-rectums/greed-intoxicated/”what-does-‘value-added-mean?’-businessmen/women” instead of banksters, but that just didn’t roll off the tongue as nicely.

    2. Eagle

      I figured out the intended association some time ago, but my first thought was to wonder why bank executives were being tied to youngsters. In any case, calling people names sounds silly when it’s done by kids, let alone full-grown adults.

        1. DownSouth

          Yep. If defending the bankers based on substance is hopeless, then attack the attackers for their form or style.

  3. CaitlinO

    I think banksters is the perfect term. Leeches, societal parasites, economic terrorists just miss somehow.

    Shyster would also capture the concept pretty well, but it’s already been co-opted by the lawyers.

  4. giggity

    This doesn’t surprise me at all, going back to the huge moves I was seeing happen with bank equities in late 2008 / early 2009. The massive gaps up and down at the mention of government propping / potential regs was enough to keep me totally out of the financial stocks. Too risky. There was definitely insider trading in the $billions, and a lot of bankster employees leaving the rational investor holding the bag. Sure, they should have been shorted to $0, but the government giveaways sure did help create profits.

    Hang em

  5. Jim in MN

    In a haze of Pink Floyd and Jethro Tull quotes on other sites the term ‘pigmen’ has gotten a fair bit of traction lately.

    Banksters v. Pigmen. Maybe a vote is in order.

  6. Sundog

    I like the term “bankster” for its historical resonance, but it’s too bad we don’t have a term that denotes the “heads I win, tails you lose” nature of those who “earn” vast compensation for serving giant publicly-supported finance corporations. “GSEster” seems just a wee bit too awkward and geeky. Maybe we can import a word from another language? Chinese or Russian seem likely sources.

    Speaking of scams, Edmund Andrews at the excellent Capital Gains & Games blog posted today about mortgage loans now on offer.

    “A $3 million no-doc, interest-only mortgage on your house even if you’re so squeezed that it’s up for sale. And, get this – it’s not from one of those mortgage brokers bank regulators love to blame. It’s from a national bank’s subsidiary, so you know they’re good for it.”

    Andrews offers some speculation on how it is that such loans are being offered. Unfortunately the bank is not named.

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