“Independent traders know as a fact that Humungous Bank & Broker (HB&B) research analysts are biased and unaccountable. We also know they give short-term tips to their firm’s proprietary traders and sales people that are at odds with their longer-term published opinions. These unfair practices are permitted because the fundamental conflict of interest structure of the securities industry is permitted.
Today the Wall St Journal has reported that FINRA (the Financial Industry Regulatory Authority) has launched a broad inquiry into how up to a dozen Wall Street firms disseminate stock ratings and research. Important questions are being asked.
On August 24 this year, WSJ informed the public of how Goldman Sachs analysts were tipping their traders with info that differed from published reports. These regular meetings were called “trading huddles”. At the time, I called it insider trading, which is criminal.”
My Comment:
A reader commented earlier that “insider trading” is a big yawn as a story (for the latest insider trading arrest, see this case, of an ex-banker from Lazard, a relatively small case, admittedly)
Someone might come to that conclusion only if their knowledge of the practice were abstract and based on theoretical debate on the subject. But anyone who knows the history of the capital markets over the last 30 years or so knows that a big part of the story is that investment (merchant) banks turned into traders by the end of the century and that their proprietary trading became more important to them than their retail clients or customers. I’ve written about this in relation to Goldman Sachs, which was the most egregious (because it was the most powerful) of the lot.
Insider trading is essentially a failure of banking as a profession, with professional ethics. There is a fiduciary responsibility to shareholders (in the case of a company) and of clients (in the case of banks). Conflict-of-interest is a problem in every other work place. Why not here?
Besides conflict-of-interest, insider trading involves an explicit fraud on the client.
That’s in addition to the crime of fractional brokering, as someone cleverly puts it. (This is quite different from fractional banking. Due to the confusion of language that lets banks perform both safe holding and investing functions at once, fractional banking is legal). On the other hand, “fractional brokering,” which is what naked shorting and “fails-to-delivered” amount to, is illegal.
Unfortunately, the professional financial reporters seem too myopic to understand the gravity of the problem, our self-involved “gonzo” journalists (yes you, Matt Taibbi) are too politically-driven to explain it correctly, and right now I’m too disgusted by the intellectual dishonesty of the media to take the trouble to make the argument on the web and see it lifted by all and sundry with nary a link or footnote, let alone verbal acknowledgment.
As Cara points out correctly (and safely, since he’s in Canada), Wall Street and the American capital markets have become a joke, and a substantial part of the financial media still doesn’t seem to realize it’s the punchline.
That gives me no pleasure to say. For years, I defended American business to my foreign friends, claiming that Americans at least held to standards, regulations, and transparency requirements higher than theirs (meaning, Indian and non-Western).
Behind all the glitz “America” still operated somewhere, I argued.
The Marxists and communists who called the whole thing a charade and a lie didn’t quite get it, I was sure. The values of the American republic would prevail. Once most money-managers and businessmen were alerted to what was going on in the markets, I fully expected that their outrage would be enough to stem the rot. I saw CEOs stepping up to the plate and doing their duty, when the future of their own (rather than someone else’s) children was at stake.
That was four and a half years ago, when I first began researching the markets.
In retrospect, I see I was incredibly naive.The rot goes deep.
Those are somber thoughts to have around Christmas time. But perhaps not inappropriate. If you recall, in the Christmas story, gold (or should I say, gld?) and frankincense were only two-thirds of the offering. The other third was myrrh. Myrrh is a resin whose oil, I read here, is used for embalming and whose incense is used by penitents at funerals and cremations.
That must be the bitter scent I smell rising from the capital markets.
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Bill, I agree that the rot goes very deep. The reason why markets aren`t working to police themselves is that they`ve become too entangled with government.
I see three main strands:
-the grant of limited liability to investors in corporations, irrespective of harm done to others who have not agreed in advance to be creditors of the firm, which has generated cycles of popular pressure for regulation;
– the paternalistic regulation of the stock markets and continuing federal takeover of corporate law with respect to “public” companies; and
– the creation of the Fed and federal insurance and regulation of banks;
all of the above tending to give managers a great deal of freedom vis-a-vis investors, and to create barriers of entry, and fuelling centralization of power in DC, rent-seeking, and creating problems that more regulation is always needed to “solve”.
I`ve touched on some of these strands in a number of “rot at the core” posts at my blog:
http://bit.ly/4CKFPh
Lila,
I fully concur that if a bank commits “insider trading” via trading against their own clients, as you so describe, then this would constitute fraud and be wrong. In which case, “the libs” are not wrong on this. I don’t know any “libs” (libertarians?) who favor fraud.
Insider trading, by itself, is not fraudulent and not a crime– to trade on knowledge that other people don’t have, simply because you’re an insider, is not a crime. HOWEVER, to be an insider and sabotage a company so you can short it, or to use inside info to trade against your own clients who you have contracted with to provide financial stewardship and a beneficial service… yes, this is wrong.
I don’t think it’s fair to attack “libertarian fundamentalism” when libertarian fundamentalism is completely in agreement with your position.
Okay, so maybe to not stir up the lib fundamentalists in the future you may want to specifically turn your wrath on instances of fraud, not insider trading more broadly. To repeat, fraud, not good (according to lib fundamentalists). Insider trading, morally ambiguous but generally-speaking not a crime if we’re simply talking trading on info other people don’t have (according to lib fundamentalists).
I’m not a mouthpiece for the libertarian fundamentalist nation but I do think I understand this issue better than you do if you think libertarians suddenly through out their concerns about fraudulent contracts when it comes to insider trading. If it was a simple conflict of terms, I will accept your apology without you even needing to formally deliver it 😉
Taylor…
I am happy to apologize, if I need to.
But I wasn’t especially meaning you..
I was meaning someone who wrote an article claiming Marc Rich was a hero..
Look he might not be as much of a villain as all that..but he bribed governments.
Nothing libertarian about that,
And yes, it’s a problem to discuss things in the abstract.
Because words and terms have different implications in different contexts.
The poor in India are not the poor in America,
But words wouldn’t tell you that..
And up movement in the market is not the same as a down movement nor the exact opposite..it’s quite a different thing.
Building up a business is a good deal harder than tearing it down.
That’s reality,
Talking theory is a whole lot easier and misleading.
But I will apologize if you think I misrepresented libs..
I am not for “freedom” as some abstract ideal..
Lila,
Well, I am not sure if you do mean me after all, I wrote a book review of the recent Marc Rich bio for Robert Wenzel’s site in which I insinuated that, based off of the information contained in the book (and solely that), Rich was something of a libertarian hero in that he was a businessman relentlessly persecuted by the State. Now, I know there’s got to be more to the Marc Rich story than what was in that book, and I am quite suspicious of anyone who manages to amass a great fortune in the Age of the State because they’ve usually gone in with the govt to get some kind of legal leverage, but again, strictly speaking from the information about Rich in the book itself, he came across as a victim of the State.
I see your comment has covered a lot of ground that I don’t see how it was all related to the discussion of insider trading so, to keep things organized, my first question to you is:
1.) Can you elaborate on what is wrong with bribing governments? I am interested to understand why there is “nothing libertarian about that.” And in Marc Rich’s specific case, can you detail how it was that he bribed governments?
Next question:
2.) Is theory important to understanding reality? Without a theoretical underpinning, how does one differentiate wrong from right?
Comment: I think you did misrepresent libertarianism… I can not think of any libertarian tenet that would be supportive of fraud of any kind. Fraud is initiation of force, which libertarians oppose wholesale. It just seemed from your last couple of posts that you were pointing a finger at these villains for “insider trading” (which is not, generally speaking, a crime) when really the thing you were pointing a finger at them for was fraud (which is a crime, and which is a specific crime that can be committed in the context of “insider trading”), and then you tried to conflate libertarian defense of insider trading in the general sense, with a disconcern for fraudulent insider trading in the specific sense. I don’t think that’s fair and I am not sure what your aim in doing that was besides to try to paint yourself as some kind of unorthodox thinker.
Final question:
3.) What do you mean “I am not for ‘freedom’ as some abstract ideal”? What are you for?
I sure wish your website had the ability to notify about new comments. Okay, looking forward to your thoughts, not really interested in debating just trying to understand your viewpoint a bit better as I fully realize it IS somewhat unorthodox.
Hi Taylor –
Quickly and backward…
1. Then it probably was you…maybe I thought I saw it on Lew’s site.
2. I don’t think Rich was a cardboard villain..he was a very bright man who apparently was quite innovative..but I don’t see him as a hero
(for now, I will leave that as a personal opinion)
3. Libertarian fundamentalism: I mean people who take words and language very literally without attention to context
4. Insider trading in finance is sometimes legal..obviously what people are being arrested for is illegal insider trading.
7. Inside info is a different thing altogether. People working within a profession always have an advantage because of it over the lay person. That’s not the same as criminal insider trading.
8. Libertarians conflate the state, as an abstraction, with the government in the concrete.
Statism always tends toward greater collectivism.
Governments don’t always..
for instance, in their policing functions.
How? Example – The law bestows powers on corporations that tend to work against individualism and liberty, (limited liability for eg.); certain policing powers of the government, for eg. RICO, can work toward more liberty, by breaking up criminal collusion…
that might otherwise create monopolies..
9. That being the case, to consider any authority of the govt to be everywhere and always evil is ill considered. Bribing a policeman to look the other way is a fraud on the public that relies on the policeman to do his duty.
Same goes for the Marc Rich case. Breaking the law from self interest is quite a different thing from breaking the law as a conscientious objector, or a conscientious tax rebel. Morally speaking, that is.
Tax evasion or bribery may not be the worst kind of offense in some cases..no doubt.
On the other hand, when coca cola comes to India and tries to bribe govt officials to sign off on all sorts of shady things (passing off toxic sludge as manure to naive villagers)…that is certainly criminal and immoral.
That is not liberty of any kind I am interested in.
Capitalists and libertarians cannot curse the government for intervening in civil society functions and then ignore civil society. There are very few CEOs out there who are appropriately vocal about what’s going on. Byrne at least seems to be aware that you can’t just say you have a duty to your shareholders that comes before anything else. No. You have a duty also as a citizen, and in this critical moment, that might trump your other duties.
Thank you Lila
So do you throw your hands up in disgust and move to the nearest forest? Do you try to change the way things are? Or do you acknowledge the flaws and fraud in your plans so that you can still come out ahead?
I’m kind of hoping for the second, but leaning towards the third.
It´s an individual thing I suppose…
I´d say all of the above
You can go to the forest…..work at changing things long distance (via net and local activisim and joining up with larger group efforts…and then take a look at your trading positions and place bets accordingly)
from we 3 kings xmas carol
Myrrh is mine, its bitter perfume
Breathes a life of gathering gloom;
Sorrowing, sighing, bleeding, dying,
Sealed in the stone cold tomb.