Wall Street Corruption: Easy As A-B-C

[Policing Wall Street]


There have been media reports over the last few days that two Securities and Exchange Commission (SEC) attorneys have been linked to trading on inside information. 

The inside information apparently was that these attorneys knew that the SEC was beginning an investigation into certain companies.  These two attorneys then sold the stocks of the companies, which were being investigated.

Milton Allimadi, the Publisher of The Black Star News and a graduate of Syracuse University and the Columbia School of Journalism, believes that this is an uncommon practice—or at least that’s the sense I got when we discussed the matter.  Perhaps he’s right; but I doubt it. Then again, if Allimadi believes that this is an uncommon practice, he should have matriculated in a Divinity School.

So let me set Allimadi, and the readers of The Black Star News, on the straight and narrow.  And provide a true insight into the biggest insider trading that was permitted by the Federal Reserve and that earned investment banks hundreds of millions of dollars.

Because of the length of this explanation and the number of different participants, this article will be published as a series.  Some parts may be more difficult to understand than other sections; but this article is essential commentary for an understanding of what was the largest manipulation of the bond market ever.

From 1979 to 1987 Paul Volcker was Chairman of the Federal Reserve. He is universally respected as the man who saved the American economy from an inflationary spiral in the 1980s. 

Volcker and the Federal Reserve System accomplished this by raising interest rates sky high to choke off inflation. The Federal Reserve controls the Federal Reserve Rate, the rate at which member banks of the Federal Reserve lend money to each other- it is the rate at which banks charge each other for loans.

To give you an idea of what is high, Volcker raised the Fed Funds Rate to 20%, which drove the Prime Rate, the rate at which banks lend to their best customers, to 21.5%- the highest ever. The Fed Funds rate is currently .25% that is ¼ of one percent- under Volcker it was 80 times higher. Yes you read that correctly.
I do not respect Paul Volcker.  Far from it. 

Volcker was a member of the Board of the American Stock Exchange (AMEX) when members of the Board were assaulting women, smuggling drugs, laundering drug money, involved in stock frauds and consorting with the Italian Mafia. 

Volcker did nothing to halt these crimes.

During the 1980s it was reported in such august publications as The New York Times that it was strongly suspected that a member of the Board of the Federal Reserve was leaking information concerning interest rate movements. 

Paul Volcker was the Chairman of the Federal Reserve during this period; and I believe that Volcker covered up the identity of the leaker, just as he covered up money laundering and narcotics smuggling by members of the Board of the American Stock Exchange (AMEX).

Reductions in the Federal Funds Rate are the most important information that could be leaked because bond prices have a far more important impact on the economy than stock prices; billions of dollars could be made on this information.  Billions of dollars were made. 

When interest rates go down, bond prices go up. When interest rates go down, mortgage rates go down.  When interest rates go down, stock prices usually go up. 
That is why President Barack Obama made it his first duty to drive interest rates lower, so that mortgage rates would go lower and the stock market would recover. 
Also bonds held by banks would go up in price because these bonds had a higher rate of interest. This made the banks more solvent; that is, the bonds, which the banks owned, increased in value because they had a higher rate of interest.

How would I, a mere market maker on the floor of the American Stock Exchange in the 1980s and early 1990s, know that information was being leaked by a member of the Board of the Federal Reserve?

Simple. I was told this by the scions of senior executives at two of the firms involved. Now, I do not believe everything that I am told; far from it. And I will explicate how I confirmed that the information had been leaked.

First I define two terms. A “put” gives the purchaser the right to sell a stock, or in the instance of a stock index the underlying index such as the Dow Jones Industrial Average, at a specific price.  A “call” gives a purchaser the right to buy a stock or stock index, such as the Dow Jones Industrial Average, at a specific price.
If interest rates decrease, specifically the Fed Funds Rate decreases, the price of a call on a stock index increases because the stock market rises when the Federal Reserve lowers interest rates. Conversely the price of a put will decrease because as interest rates are lowered stocks increase in price –usually—and the stock index increases in value thus lowering the price of the put.

One day I was standing in the XMI pit, which was a small amphitheatre where the XMI stock index was traded.  A Bear Stearns broker, 352-XX, came in and sold hundreds of puts in the XMI. 

Suddenly news came out that the Federal Reserve was lowering the interest rate.  352 was the clearing number of Bear Stearns Clearing and it was followed by a letter. The letter specified the identity of the broker, who executed the trade. What is important to note is that Bear Stearns had their own broker execute the trade in the XMI.
I knew that the information had been leaked because this had occurred several times before.  And since the first instance of this “front running” as the practice is called, I had been investigating the trading sheets.  

Trading sheets in the mid 1980s were printed sheets and not available on a computer as they are now.  Every morning every clearing house printed the clearing sheets for all trades that had occurred the previous day at the American Stock Exchange. 

This was done so that the clerks could verify the trades and rectify any trades that did not clear or match.  Also every day members of the Amex, trading firms and specialists, had their own sheets which listed the trades with the identifying broker and clearing house.

As a clerk, I had to deal with trading sheets every day. I remembered that the brokers treated clerks like dog poop. I resolved never to treat a clerk badly.  So, when I wanted to investigate these suspicious Bear Stearns trades I asked the clerk if I could examine the trading sheets. 

The clerk always assented and I examined the trades.  I guess that he liked those Chinese pork buns I would bring to the DK (Don’t Know) room where trades were matched.

The trading sheets used a universal code to denote certain transactions.  There were different columns.  For stocks one column gave the position in the stock.  L meant that the stock was long. S meant that the stock was short; that is, that the stock had been sold without the seller owning the shares.  Another column described whether the stock was bought (B) or sold (S).

In this discussion we are interested specifically in index options.

One column described whether it was a firm or customer that had engaged in the transaction:  “C” meant customer.  “F” meant firm; that is the clearing firm itself and in this instance it would be Bear Stearns trading for its own account. 

One column gave the position for the options- and this is important.

“O” meant opening; that is, that the position was a new position or an increase in your current position.  If you had no position and you were to sell puts, the column would read “O” meaning that you had sold puts, which you did not own. 

“C” meant closing; that is, the position was already established and that this trade would reduce the position. Thus, if you had owned 90 XMI puts with a strike price of 1000 and you had sold 50 of these puts, the column showing your trade would read “C” for closing- because you were reducing your position.

Every time that I examined the trading sheets when Bear Stearns sold hundreds of puts and after the trade had occurred, the Federal Reserve would announce a reduction in the Fed Funds Rate; the sheets would bear the same notation:

“C,” which meant that the sale was done by a customer of Bear Stearns Clearing Corporation. “O,” which meant that the sale was an opening transaction.
This was no coincidence. 

Then one day after this had occurred, a relative of one of the most senior executives at Bear Stearns said that the information, about a reduction in the Fed Funds Rate, had been leaked by a member of the Board of the Federal Reserve. 

This individual did not identify the miscreant; but this individual stated that this Board member regularly leaked information on decreases in the Fed Funds Rate to Bear Stearns- and Bear Stearns provided this information to favored clients.

Please remember that I had witnessed a Bear Stearns firm broker execute these trades. Even he stated that Bear Stearns had a source at the Federal Reserve.  
(There are other instances where a member of the Board of the Federal Reserve leaked information on reductions in the Federal Funds rate as we will show in a subsequent article).

As for SEC staff attorneys, they are paid perhaps $100,000 per annum; and they are underpaid for their knowledge.

SEC staff attorneys trading during the day on inside information is nothing new.  They are just stupid to have traded for their own account.

Where is Paul Volcker now? Volcker is Chairman of the Economic Recovery Advisory Board and a personal advisor to President Barack Obama.

Anyone who has verifiable information about Wall Street malfeasance please submit it to Edward@blackstarnews.om or Milton@blackstarnews.com

Post your comments online or submit them for publication to Milton@blackstarnews.com

“Speaking Truth To Empower.”