A story was published by Bloomberg last week that said then Treasury Secretary Henry Paulson told a small group of hedge fund managers Fannie Mae and Freddie Mac were doomed. This information, which was not public, was essentially insider information. The hedge funds could then use the info in their trading decisions. Here’s a link to the story if you wish to read it, but I’ll summarize it here.
On July 21, 2008, then Treasury Secretary Henry Paulson meet with a group of hedge fund managers in NY (several of which were Goldman alum) and told them it was possible (wink wink) Fannie Mae and Freddie Mac would be placed in “conservatorship” – this would allow the firms to continue running even though they were effectively bankrupt. If indeed this scenario played out, the common stock and various classes of preferred stock would be wiped out. This of course gave the fund managers an opportunity to profit from information not available to the public. And to make matters worse, prior to this little gathering, Paulson gave an interview to the New York Times where he said he expected an inspection of Fannie and Freddie’s books to give a signal of confidence to the market. Hmmm. Paulson lies to the New York Times to relax the public and then hours later tells the truth to a few of his buddies.
According to the report, Paulson did not break any laws by disclosing the insider information. And there is no evidence those in attendance at the meeting traded off the information. But nobody seems to be denying that the meeting took place.
Your first reaction is probably one of disgust and outrage. It’s one of the reasons these Occupy Wall Street protests are taking place. A high level government official with access to very important information (and who has the ability to follow through) shares it with a couple of his buddies. The reason you go to Harvard or the University of Chicago isn’t to get a great education (you can get the same education at any of the top 25 MBA schools), it’s to network. It’s to initiate the process of becoming a member of an elite group that has access to things and people very few others do.
Not only did Paulson share this information with a select group of people, he did it at the same time he was sending positive signals (Fannie nearly doubled in four days). It’s one thing to share insider info with your buddies. It’s another to be publically saying the opposite thereby helping your buddies get in at better prices.
This news is not something that should outrage the 99%. It should outrage the 99.99%.
But there’s a flip side to this. A trading side. The fact that this goes on is exactly why technical analysis works so well. I’ve always said trading is a big game of follow the leader, and I’m not the leader. When the big boys with their billion-dollar accounts, million-dollar research budgets and diamond-studded rolodexes buy and sell, they leave foot prints in the charts. Our job is to find those foot prints and follow them. I’ll bet there were many foot prints in the Fannie and Freddie charts – foot prints that told us to get short.
You’ve seen it hundreds or thousands of times (depending on how long you been trading). A stock starts to move, and then a few days or weeks later news comes out to support the move. Of course the news often marks the end of the move (buy the rumor, sell the news) because those in-the-know already had exposure when the news hit. They use the news to take profits and move on to the next trade.It happens constantly. It’s understandable to be pissed, but unless you plan on running for office or hounding your Congressmen or setting up a tent in a nearby park (not sure what good this does), it’s probably best to funnel that anger in a positive way and make money. Admit this stuff happens. Accept it. Come to grips with it. And then go look for some charts with foot prints.
This is what I do every day. I look for foot prints. Then I follow them. It’s a game. Play it. Insider trading makes our job as traders much easier.
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“Insider trading makes our job as traders much easier. ”
— To clarify, “Insiders” do not trade … they cash in their “contacts”.
We the traders, make money the hard way ….. we “earn” it 🙂
Seems like you are condoning this type of corruption. As far as I am concerned it is all corruption and all involved should be in Jail for 50 years to life. The market would be better off for it. At least there would be integrity brought back to the system. Right now it’s just a rigged casino. Alan
Not condoning it…just know it happens (it’s been happening for hundreds of years).
Alan,let me ask you a question. Are you secretly employed by the U.S. government assigned
to the supercommittee that investigates websites on the internet dedicated to stock market analysis? HW/nyc (gheez..I hope you’re not investigating me too while you’re at it!)
a 100 ton gorilla always leaves footprints
follow the gorilla
atm they are still distributing but close to accumulating
but when the gorilla goes bust in 5 days become a pirana or even a pirate
the writing is on the wall —ooops charts
This conduct is reprehensible, but in the world of traders this is only playing the press while riding his book. A clean out of Washington is due and over due. But not the Occupy Crowd who can find their butt with two hands and a few hints.
Eric Holder (AG) lied to Congress and sold guns to Mexican drug gangs (not that Congress would disapprove, the split is the issue), EPA is shutting down 24% of US generating capacity and Congress is concerned but not enough to do a damned thing (I own a few utilities not coal fired), The President has campaigned more in the 2011 that he had by the election in 2008, and Iran smells weakness? They must be mad.
Like Jason, I play what I see cause I am powerless to do otherwise.
Frankly I like muni bonds for half of my stash (6.0%) and half in equities once Europe figures out whether its just a gang on the make or a economic block.
Follow the trend. If reallity starts with the guy at the top, follow it.
Price X Time X Volume (relative) answer all questions.
Not only did Paulson share this information with a select group of people, he did it at the same time he was sending positive signals (Fannie nearly doubled in four days).
While there will always be others with “insider knowledge” it is dishonest ot tell one group what you are going to do while sending a different message to another group. That behavior allows one side, in this case, to sell into buyers and get a larger position off then they might be able to otherwise do.
That is the same thing that GS did with the mortages while buying CDS against them because they knew what they were selling was all crap.
If a CEO did this, he’d be in jail. But as Treasury Secretary, I guess Paulson can do or say whatever he wants.
but if you miss to fill out an IRS form they will prosecute you even though the IRS is against the american constitution. Self incrimination is forbitten by the american constitution it protects my fundamental rights. Since 1913 the people in the US are paying taxes on they labor but the IRS is not able to show a federal law to prove that this tax is mandatory because it,s only voluntary. When uses the congress their power in favor of the american people to dismantle the federal reserve system ? As Mr. Rockefeller stated war is a good business and so corruption is a big problem it affects the entire society. But i agree with you that you will see the marks in the chart so i don,t care and can make my own personal trading decisions. What america needs is a fourth public authority (monetative power) which cares about the money creation process, why should have a privat owned bank the right to print money and charge interest for that service ? Most of the sovereign USA debt is due to the exponential function of interest and compound interest rates. If you risk control fails you are out of business if their risk control fails they get a special bonus for that. That is not the way i conceive fair markets.
Although this was not so in this example, these market footprints can only be seen on EXCHANGE TRADED products. When these sociopath psychotic crooks pull their crap in the OTC markets (AIG selling trillions in insurance they could not cover) we remain oblivious until their exchange listed common stock reflects the reality. Just something to remember if you think the charts are presenting a clear picture of reality.
Can anyone show me a footprint? Like BigFoot, I’ve heard about them, but have never seen one.