[Genesis Of The Financial Meltdown]
To understand how things can go so bad on Wall Street, on must know how the system works; that’s the reason why I write my "genesis" of financial meltdown series.
In his book, "King Of The Club; Richard Grasso And The Survival of The New York Stock Exchange," Charles Gasparino massaged the truth concerning the Oakford trading Scandal.
Well, massage is not the appropriate word. Gasparino regurgitated what Grasso wanted Gasparino to write-just like an eagle regurgitates food to its fledglings. Or as an infant regurgitates its food. There is no resemblance between what went in and what came out- that is there is no semblance of the truth in Gasparino’s words.
The Oakford affair involved an illegal trading scandal by floor brokers of the New York Stock Exchange. This scandal resulted in the indictment of approximately 10 New York Stock Exchange floor brokers by the United States Attorney.
In a previous article, "How Mediocrity Rises On Wall Street," I explaind that floor brokers do not trade for an account; floor brokers merely execute orders. The Oakford Scandal involved NYSE floor brokers who illegally traded for Oakford Securities. On page 137 of his tome, Gasparino stated: "They created dummy accounts with the Oakford firm to hide their profits."
Yes and no.
Yes; dummy accounts were created at the Oakford firm. But Spear Leeds and Kellogg, a firm that was very friendly to Grasso, was the clearing firm for Oakford. It was Spear Leeds that set up the illegal dummy accounts for Oakford. It was Spear Leeds that made the checks payable to floor brokers at the NYSE.
It was Spear Leeds that determined the net capital requirements for each account. Net capital, ratio of debt to equity, was 12:1 in 1998, not the 30:1 that later made possible the implosion of Bear Stearns. It was Spear Leeds that claimed it had no responsibility to inform the Internal Revenue Service of the tens of millions of dollars earned by Oakford.
Due to the high volume of trading, Oakford frequently was required to borrow tens of millions of dollars from Spear Leeds and Kellogg overnight to finance its positions-so that Oakford could meet its capital requirements.
First and foremost, I must state that I investigated the Oakford illegal trading scandal for Gary Weiss. My tape-recorded sessions with Bill Killeen, the mastermind of the Oakford trading scandal, were made at the insistence of Weiss. These tapes served as the basis of the BusinessWeek article, "A Street Scandal That May Not Die." Killeen later served a two-year prison term. But even that article did not go far enough; this is a discussion for another article.
Gasparino quotes Grasso as stating: "Whoever breaks the rules will be out of the building immediately." A strange statement from a friend of Bill Killeen.
Gasparino makes no mention of the friendship between Killeen and Grasso. You might say with horror: What, Grasso knew Killeen? Of course. Killeen claimed he was friends with Grasso. Moreover, Grasso took Killeen to lunch at the NYSE dining club. Grasso signed Killeen onto the floor of the NYSE- and even accompanied Killeen during his stroll of the NYSE where Killeen spoke to those NYSE floor brokers who illegally traded for Oakford. According to Killeen he and Grasso discussed the trading of NYSE floor brokers for Oakford.
But Grasso had an even closer relationship with his good friend, Edward Muegger. Muegger lived in the same upscale neighborhood as Grasso- and years earlier, before Grasso had become Chairman of the NYSE, they had commuted together.
Other NYSE members were indicted, including Angelo Meneghello, Michael Frayler, John Savarese, Mark Savarese and Tom Cavallino- all of whom pleaded guilty to illegal trading. They will be discussed in a future article.
When Killeen and Muegger were indicted, they offered Mary Jo White, then United States Attorney for the Southern District of New York, some tantallizing information-not only about Spear Leeds and Kellogg, Goldman Sachs, William Johnston, then President of the NYSE and a personal friend of Grasso,- but information about Richard Grasso himself. Killeen and Muegger wanted a deal for the information.
According to Killeen and Muegger, Grasso knew of the illegal trading at Oakford and approved of it. Killeen personally told me that Grasso was aware of the illegal trading of Oakford and that he had discussed it with Grasso. This was the information that Killeen and Muegger had offered to Mary Jo White-but she declined.
This is what both Muegger and Killeen told me; and more.
But Gasparino did not write of this. Gasparino wrote that Grasso demanded that Harvey Pitt, the former SEC Commissioner, investigate the illegal trading of Oakford and that Grasso wanted to be told the unvarnished truth. Yes, and there is a bridge in Brooklyn that I can sell you.
The report by Pitt stated that the bad stuff was confined to traders involved with Oakford. But Pitt and Gasparino, that paradigm of the honest reporter, did not state that Oakford had illegally employed over 100 NYSE floor brokers.
And the trading was not confined to Oakford. That was a lie. Grasso himself knew that there were hundreds of NYSE floor members illegally trading. And one of his good friends had traded illegally.
If Gasparino wrote the truth, he would not be a commentator for CNBC. He would be writing obituaries in a small town newspaper- because it is not the truth that determines what is published in the New York City press.
It is the money, which determines what is published.
