{"id":5093,"date":"2011-12-04T09:57:25","date_gmt":"2011-12-04T14:57:25","guid":{"rendered":"http:\/\/leavittbrothers.com\/blog\/?p=5093"},"modified":"2011-12-04T09:57:25","modified_gmt":"2011-12-04T14:57:25","slug":"a-case-for-insider-trading","status":"publish","type":"post","link":"https:\/\/blog.leavittbrothers.com\/?p=5093","title":{"rendered":"A Case For Insider Trading"},"content":{"rendered":"

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<\/a> to the story if you wish to read it, but I’ll summarize it here.<\/span>
\nOn 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.<\/span>
\nAccording 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.<\/span>
\nYour 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.<\/span>
\nNot 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.<\/span>
\nThis news is not something that should outrage the 99%. It should outrage the 99.99%.<\/span>
\nBut 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.<\/span>
\nYou’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.<\/span>
\nThis 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. <\/span>
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