It looks like insider trading is the rule rather than the exception on Wall Street, most recently illustrated by the SEC case against SAC involving its head, Steven Cohen. It probably extends to anywhere there is insider information to trade on, the entertainment industry in Los Angeles, for example. Charlie Gasparino of Fox Business News says that insider trading is a victimless crime. But the victims are potentially every other stock trader, who because they don’t have insider information sell or buy at a price that hurts them and benefits the person with insider information, who knows that the stock is going to go up or down. In essence, the insider is stealing money from those without inside information. It’s like selling fake Rolex watches while claiming they are genuine and charging the full retail price of a real Rolex. You think you are buying a good stock, based on all the information available to you, but it’s not a good stock and the man selling it to you knows that it’s not, because he has nonpublic, inside information.
Martha Stewart went to jail for what seemed to be a common practice among high-level business people. Another story in the Wall Street Journal about executives who routinely made money trading in their own companies’ stock illustrates that problem.
It only reinforces the terrible impression created by Wall Street in the great subprime housing derivative fiasco that created the worst recession since the depression. These guys are crooks. They are mafioso in suits who will destroy America for a buck. And it all the big shots who run the financial industry, which Warren Buffet said on the Daily Show last night is responsible for about 20% of the US GDP. This is basically the figure presented by the government Bureau of Economic Analysis. And Michael Lewis says that one reason the Germans got suckered into the housing mess was that they thought the derivative salesmen from Goldman Sachs and the other big American banks were honest, when in fact the salemen were lying through their teeth.
In a Vanity Fair article, Lewis says, quoting a German banker:
“For 40 years we didn’t lose a penny on anything with a triple-A rating,” he says. “We stopped building the portfolio in subprime in 2006. I had the idea that there was something wrong with your market.” He pauses. “I was in the belief that the best supervised of all banking systems was in New York. To me the Fed and the S.E.C. were second to none. I did not believe that there would be e-mail traffic between investment bankers saying that they were selling … ” He pauses and decides he shouldn’t say “shit.” “Dirt,” he says instead. “This is by far my biggest professional disappointment. I was in a much too positive way U.S.-biased. I had a set of beliefs about U.S. values.”
The global financial system may exist to bring borrowers and lenders together, but it has become over the past few decades something else too: a tool for maximizing the number of encounters between the strong and the weak, so that one might exploit the other. Extremely smart traders inside Wall Street investment banks devise deeply unfair, diabolically complicated bets, and then send their sales forces out to scour the world for some idiot who will take the other side of those bets. During the boom years a wildly disproportionate number of those idiots were in Germany. As a reporter for Bloomberg News in Frankfurt, named Aaron Kirchfeld, put it to me, “You’d talk to a New York investment banker, and they’d say, ‘No one is going to buy this crap. Oh. Wait. The Landesbanks will!’ ” When Morgan Stanley designed extremely complicated credit-default swaps all but certain to fail so that their own proprietary traders could bet against them, the main buyers were German. When Goldman Sachs helped the New York hedge-fund manager John Paulson design a bond to bet against—a bond that Paulson hoped would fail—the buyer on the other side was a German bank called IKB. IKB, along with another famous fool at the Wall Street poker table called WestLB, is based in Düsseldorf—which is why, when you asked a smart Wall Street bond trader who was buying all this crap during the boom, he might well say, simply, “Stupid Germans in Düsseldorf.”