Secret Stress Test Results Create Opening for Insider Trading
A very interesting point from my CAP colleagues David Min and Joshua Picker who observe that the Obama administration’s decision not to publicly disclose the results of the “stress tests” has created huge potential opportunities for insider trading. This will be especially problematic since not only are the results of the tests unknown, but the public doesn’t know who has the results “or what proscriptions were placed on the communication of this information, other than that there was a ‘gag order’ against leaks to the press.”
Consequently, it’s hard to know who we should even be watching. At a minimum, this information needs to be forwarded to the SEC and to the TARP Inspector-General so that in the period between now and the May 4 release to the general public we can have some heightened scrutiny.
22 Responses to “Secret Stress Test Results Create Opening for Insider Trading”
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April 27th, 2009 at 6:28 pm
The SEC? Oh my. You poor innocent little lamb. What next? I suppose something about laws.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aXHVu97lAGjs
April 27th, 2009 at 7:09 pm
Yeah, sternly warning them to keep this under their hat for a couple of weeks will work just great. If they were serious, they’d back this with a court order. Grand jury leaks are rare because nobody likes pissing off someone who can throw you in jail for 6 months without a trial.
April 27th, 2009 at 7:24 pm
Geithner, Paulson and Bernanke have one and only one constant running through their decision-making. That is, fear. Simply they are afraid of their own shaddow. The guys might have been afraid a few months ago but they know they have these three, and us because they represent us, at a disadvantage. Here’s what I expect to hear from the three stooges about stress tests. They will say they have identified a few problem banks and are working to fix them. They will not touch Citi or BofA or JP Morgan. They will find some smaller bank to toss overboard and make a big splashy announcement about how they are getting tough on Wall Street. Meanwhile, the real zombies march onward. This charade will continue for the rest of the year. The zombies will pretend to be solvent and the market will continue it’s weak performance. Jobs will continue to erode, GDP will continue it’s slide and we will be stuck in the longest recession in US history. The Washington press will ignore these facts, continuing their love affair with the empty suits who lead us. Eventually, their love will come to an end as the situation in the real world gets worse. They will suddenly turn on Obama and scold the rest of us for being such saps. They will pretend they had nothing to do with it.
Our leaders are either posers, morons or rapacious self dealers. We should stress test the electorate.
April 27th, 2009 at 7:48 pm
I’m no fan of the whole keep-zombie-banks-kinda-sorta-alive policy,
but the particular concern about insider trading seems
overblown. The people who have the information are all
accountants, Treasury officials, or highly visible members of
the administration. And all those classes of people routinely
have access to sensitive secret information which might affect
stock prices. The stress tests obviously need to be handled
carefully, but not any more carefully than information about
normal corporate audits and policy discussions. It’s the same
thing.
April 27th, 2009 at 7:57 pm
Nick, I thinkl you match my cynicism, and I don’t think of that as disparaging. Cynicism is entirely warranted at this point. One correction, perhaps, however. Isn’t Paulson retired?
Bipartisanship blooms on the Potomac, and has been doing so for some time; a bipartisan, professional, criminal class. Entirely predictable, of course, but no less rank for its predictability.
April 27th, 2009 at 8:04 pm
This articles heart is in the right place but its eyes are on the wrong place. The possible gains from trading on the stocks and bonds of the banks is a sideshow. The prize is the assets of the banks which will be given the short straw. Make no mistake about this, there are going to be some designated losers. Not because they are worse off that C or BAC but just because.
They will be thrown into the tar pit so the vultures can swoop in and pick off the good stuff. Uncle Sam will end up with the bad.
Unless you look at all this stuff from a forensic perspective your missing the entire thing. It is a criminal operation. Pure and simple. This stuff makes makes the torture infrastructure look like the Latin Kings, compared to Paulson’s mafia. They have everything covered six ways to Sunday. Watch and learn.
April 27th, 2009 at 8:11 pm
When one examines the median investment performance among U.S. Senators, compared to market averages, it causes one to wonder if the blowhard members of the World’s Most Pompous Deliberative Body have access to this list. Look for Menendez and Bennett to increase their net worth by 20% over the next year.
April 27th, 2009 at 9:40 pm
The trades have already been made. You’re way too late.
April 27th, 2009 at 9:52 pm
Mickey Kaus already pointed this out.
April 27th, 2009 at 10:14 pm
Re “Grand jury leaks are rare because nobody likes pissing off someone who can throw you in jail for 6 months without a trial.”
————
Grand jury leaks are rare only because you can’t usually make several millions dollars off of them.
The Rosenbergs and Cohens passed the design of the fucking Atomic Bomb to Stalin. Who in their right mind thinks the lid can be kept on this?
It’s interesting to consider how it could be done. One issue is how many people know the information — if it is confined to a very small group of possible suspects then that lessens the likelihood of a leak. Another issue is whether people in that group have their livelihood based upon passing a polygraph test. (If they can score big enough to quit, then the poly’s no threat. No one can be forced to take one and no one can be convicted of a crime based on the results.)
Assuming someone feels lucky, then a simple signal method worked out in advance would work. E.g, If JP Morgan if fucked, then put a toy dog up on your bedroom window sile.
If Bank of America is fucked, put up a small teddy bear.
Indicate severity of problem by where you place the dog viewed from left (Badly Fucked) to right (Fucked so Bad that God Can’t Save Them). Bedroom window, of course, would need to be viewed via a powerful telescope from a distant point.
Ah yes. And if I scratch my balls while standing on the corner of 32th and G at 2 pm this Thursday, then sell everything and head for British Columbia.
April 27th, 2009 at 10:14 pm
There are always huge opportunities for insider trading. The government’s actions in response to the banking crisis have generated a continuing stream of opportunities for insider trading. The relevant questions are:
1. Did the decision to keep certain information non-public increase the likelihood that insiders would attempt to trade on that information?
2. Did the diecsion to keep certain information non-public increase the likelihood that insiders would be able to get away with trading on such information?
3. Did the stress tests really create new non-public information that the insiders did not already possess?
April 27th, 2009 at 11:04 pm
The part I liked best about the article was that they helpfully pointed out the ways other than buying the stocks stocks that one could profit from this information, like by shorting them. Yeah, shorting a bank stock right now, real subtle. I’ll give it a try, wonder what will happen:
Actual message I got when I just tried to short one of the magic 19 banks. You know why? Because shorting bank stocks is one of the most controversial things you can do right now and the Feds are watching it like hawks. Want to make money off of that with inside information without getting caught? Good luck.
Regardless, we have a discrete set of 19 semi-liquid companies about which this information is known, a discrete list of people who know it, and a limited set of scenarios by which could profit from this information – I know the profit opportunity is there, but do we think these people are nuts? This is the worst insider trading opportunity of all time – you’d have a better chance of going undetected by just running in there and robbing one of the freaking things.
Of course the article is right that the regulators, et al, should be “vigilant” about this risk, just like the fire department should be vigilant about the local fireworks factory and the police might want to keep an eye on the donut shop run by the mob across the street – thanks for the insight, aces, but we’re already on it.
What I don’t understand is that that David Min fella used to be an associate in this area at Wilmer Hale – that’s a great law firm. Was he just trying to write up something simple for the masses to get his feet wet or what? Or was he only tangentially involved and this was really the work of the other guy with the undergraduate degree in “Ethics, Politics and Economics and International Studies”?
I hope they correct me if I’m wrong, but right now I don’t get it and I don’t think Matt should be getting people concerned about it.
April 28th, 2009 at 1:21 am
“Secret Stress Test Results Create Opening for Insider Trading”
Ya think?
The real question is whether that’s a bug or a feature.
April 28th, 2009 at 1:42 am
Sounds like the usual public-private partnership.
April 28th, 2009 at 3:56 am
@6 rapier: “This stuff makes makes the torture infrastructure look like the Latin Kings, compared to Paulson’s mafia. They have everything covered six ways to Sunday. Watch and learn.”
It’s not over yet rapier.
Think of it as poker. The banksters are all in, on a bluff, and they have allowed their opponent to SEE THEIR HOLE CARDS. They are beaten, all that remains is for Obama to summon the will and call the bluff and end the game.
The banksters have arrogantly assumed that this young President will do what is expected and not call the bluff, that the game will be allowed to continue, in time honored fashion.
I believe Obama despises these people and the criminal system they have perpetrated. The banksters have underestimated this man. I predict he calls their bluff within 90 days.
April 28th, 2009 at 7:31 am
It’s worse than anyone imagined. From the Special Inspector General TARP report….
April 28th, 2009 at 7:57 am
“Heightened scrutiny?” Man, you are one funny guy, MY.
April 28th, 2009 at 8:24 am
The stress test is a PR exercise. It was conceived as such. You can have bank audits. A fairly thorough audit of C might take 200 auditors months. They have touted how they have 150 for the 19 working 6 weeks.
They are searching for the perfect answer. Not too hot, not too cold, just right. Everything is in flux. It might have sounded like a good idea when Tim mentioned it but he probably regrets it now. The entire thing is arbitrary. The timing, the standards, the conclusions but there it is. They have to follow through on it. The players, the remaining giants and the hedge funds, will play it with their trillion of hot money. Informed observers will be skeptical to contemptuous and the public will scratch their heads. The announcement will pass and nothing will change on a systematic basis.
The world needs capital. There is a $100 trillion dollar hole in the worlds financial asset accounts left when the bubbles burst. The hole will not be filled. It cannot be filled.
April 28th, 2009 at 8:42 am
Vermando, you’re obviously not a trader and as such I would not recommend you attempting to trade on margin. I can think of 5 different ways, independent of directly shorting a bank stock, to profit from a fall in its stock price.
What’s more if your broker’s telling you it’s not available it doesn’t necessarily mean there’s a ban on that security. Either your broker doesn’t have shares outstanding or the owner has requested their shares not be available to short.
k1
April 28th, 2009 at 10:44 am
As if we needed another reason to be weary of the stress tests… But I think the widespread negative opinion regarding the stress tests is contributing to a bit of exaggeration of the unique danger of this situation. These are people who work for the Fed and the Treasury Department and have access to cofidential and insider information on regular basis.
April 28th, 2009 at 11:46 am
” NEW YORK (AP) — Bank of America Corp. and Citigroup Inc., which have each received $45 billion in government bailout funds, have been told by regulators that “stress test” results show they may need to raise additional capital, The Wall Street Journal said Tuesday.
Charlotte, N.C.-based Bank of America is looking at a shortfall in the billions of dollars, the paper said, citing people familiar with the situation.”
—————-
Well, that didn’t take long, did it? hee hee
April 29th, 2009 at 1:33 am
It sucks that Obama hates capitalism and loves “capitalists” so much. It may be years before we see the end of the bailouts for these leaches.