”On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.
But what's even crazier is that the bet paid.
At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.
The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…”
As I am not blessed with large amounts of cash (or even modest amounts), I can’t really judge what is, or is not, a prudent, high end, financial transaction; I would, however, speculate that dumping 1.7 million on the chance that one of the top 5 banks in the US would go from $63 bucks a share to $2 bucks in 9 days to be, to say the least, gutsy. One might even suspect that someone knew more than what the common wisdom indicated.
“Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode”.
Mike Taibbi in his latest article in Rolling Stone magazine [http://www.rollingstone.com/politics/story/30481512/wall_streets_na...]
relates these stories as an illustration of the blatant corruption that exists in the current state of capitalism, aided and abetted by the political establishment.
The instrument of this corruption is the naked short selling of stocks that the seller does not own and the subsequent “counterfeiting” of stock, thus lowering the value of legitimate stock holdings.
This type of short selling isn’t legal but lax enforcement and “liberal” interpretation of the regulations have allowed a highly destructive practice to bring the US (and world) economy to its knees.
"Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling"
Anyone that has any interest in how our economy went into the toilet and a view of what the future of this practice holds for the US must read Taibbi’s essay.
The article is fairly long (8 pages) but is well worth the time to read.
"To the rest of the world, the brazenness of the theft — coupled with the conspicuousness of the government's inaction — clearly demonstrates that the American capital markets are a crime in progress. To those of us who actually live here, however, the news is even worse. We're in a place we haven't been since the Depression: Our economy is so completely fucked; the rich are running out of things to steal."