So, I was flipping through some articles in Rolling Stone, when I found a very interesting economic story - yes, in Rolling Stone. The article, "Wall Street's Naked Swindle," takes a look at what happened in the options pits leading up to the death of Bear Stearns and Lehman Brothers. According to the article, an unknown option buyer made "one of the craziest bets Wall Street has ever seen," by shorting Bear Stearns. The unknown trader felt that Bear Stearns would lose "more than half" of its value in nine days or less, a bet that one financial analyst likened to buying 1.7 million lottery tickets.What is crazy is that this bet paid off, leading to only one conclusion: insider trading (cue dramatic music). When Bear Stearns dropped from roughly $63 to $2 per share on March 17th (just six days later), the person purchasing the options made roughly $270 million. Senator Chris Dodd from the Senate Banking Committee thought that something wasn't on the up and up with this trade, and the Securities and Exchange Commission (SEC) promised it would look into the trade. Of course, nothing has happened since.
Rolling Stone found out that there was a meeting held at the Federal Reserve Bank of New York, led by Ben Bernanke and Timothy Geithner (then the New York Fed President). As the article says, "The luncheon included virtually everyone who was anyone on Wall Street - except for Bear Stearns." So, there is this meeting on the same day that our mystery millionaire made the bet that Bear Stearns would collapse. Interesting coincidence? I think not. There is definitely something amiss here. What I am concerned about is the fact that the SEC has decided to basically ignore what seems like a flat-out, cut-and-dry case of insider trading. Of course, perhaps it is just my simple mind that thinks this - I am sure that the SEC and the powers that be have every reason not to investigate this multi-million dollar theft.
I wonder if Martha Stewart thinks that this is fair. I am not saying that she should not have been punished, but I don't think her offense was as egregious as what happened here. In fact, the Bear Stearns theft may be worse because of the government agents that could be involved - maybe that is why there is a blind eye turned toward this questionable trade. Seriously, what would have happened if it had been you or me making this trade? We would have been made an example of, perhaps sharing a jail cell with Bernie Madoff. The fact that there was no punishment is first of all fishy, second of all unfair, and finally it is a freaking joke. If it had been anyone other than someone involved in that meeting, the punishment would have been swift, severe, and perhaps unreasonably harsh. Think about it folks, perhaps you can come to a different conclusion - if you do, make sure to put it in the comment section.
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Reader Comments (Page 1 of 1)
10-20-2009 @ 3:09PM
rv said...
fine, I will be nicer this time,though what I said before the comment was deleted is TRUE.
what this guy did was buy puts with a low strike price. The way it works is that if the price of the stock goes below that price, they make money. Now lets apply logic to this situation. A trader who believes the stock will go down, and buys low k puts, is not necessarily betting on the stock to drop "more than half". He is simply betting the stock will go down. Consider this. What if the stock dropped 10%, and not half. The puts the trader bought would be worth more than they were before. The trader could sell those puts now, and make money, without the stock dropping 50%. What I'm saying is that the trader was probably lucky. He himself was not expecting for his puts to go into the money. He was just bearish on bear sterns, got VERY lucky, and got paid. Thi was not an obvious case of insider trading.
the analyst saying that the trader bought lottery tickets is only partially accurate, because as I said before, he could sell those "lottery tickets" for a profit, even if they didn't drop the entire amount.
again, why are you getting your financial news from rolling stone?
10-21-2009 @ 5:24AM
Dan Barnett said...
"The luncheon included virtually everyone who was anyone on Wall Street - except for Bear Stearns." So, there is this meeting on the same day that our mystery millionaire made the bet that Bear Stearns would collapse. Interesting coincidence? I think not. There is definitely something amiss here. What I am concerned about is the fact that the SEC has decided to basically ignore what seems like a flat-out, cut-and-dry case of insider trading."
You'll need to provide better evidence than this. Is it possible that Trader sees Bear Stearns excluded from meeting. Trader sees this as bad for Bear Stearns. Trader options Bear Stearns. Bear Stearns collapses more wildly than anyone expected & Trader rakes it in. Unless you contend that the meeting itself was somehow insider information your a long way from "beyond reasonable doubt" insider trading.
10-21-2009 @ 7:41AM
Willy said...
Dan and RV need to READ the the Rolling Stone piece, and they'll better understand the situation. Tiabbi lays out a carefully constructed plan by high-level officials to bring about the fall of Bear. It's compelling; it's believable; and it's not being investigated by authorities -- possibly the same authorities who helped engineer it.
Rolling Stone may be primarily a music magazine, but their investigative reports are as incisive, well-researched, and thoughtful as any other publication around.
10-21-2009 @ 1:38PM
rv said...
Willy, I started to read that, but decided to avoid wasting a good 20-30 min.
The fact remains this.
There is no proof that this guy was an insider.
Like I said before, he could have just been purchasing options being bearish, he didn't necessarily know that bear would tank.
What I forgot to add but Dan did, was that at no point would this guy be considered an insider. at what point did he have fiduciary duty to Bear sterns?
Lets say there was this meeting where everyone on wall st showed up except bear. That means that all the other ibanks have the same info that this trader does. That means this trader has no fiduciary duty to bear.
This article written by Mark is completely WRONG.
Too many writers on this site have an agenda (trying to fool the average joe who doesn't know much about markets), or they simply don't understand what is going on themselves. Either way, it angers me to see this on an investors blog.
10-28-2009 @ 12:38PM
monday1929 said...
There were $5.00 puts newly listed with only a few days left to trade. I just called the CBOE with a request for the names of who requested the listing.
There was a crime here. I am a 30 year option trader, and experts agree (uh oh) that this is clear-cut insider trading.
I am waiting a call back from the CBOE's legal dept.
Any bets on their reply?
The smoking gun is the individual/s who requested the listing of the March far out of the money Puts.
10-28-2009 @ 3:18PM
Insuralife said...
Nice job... sounds almost convincing...
How about this scenario: the puppet masters of the soon the be employer of both Ben and Timmy needed campaign cash!
Umm, was Hillary just betting that Bill might leave her with her investments??