Bank Insiders Made Out Like Bandits 33 comments
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We like a good trade just as much as any investor, but the ProShares Ultra-Short Financials (SKF) has been quite productive at our trading desk. Playing the short/inverse ETFs isn’t something we do often, but with financials, it’s akin to shooting a sitting duck.
Not very sportsman-like, but shorting financials has been easy money for obvious reasons.
During a phone chat with my assistant Luis last week, we discussed our mutual unease with bank stocks. Yes, financials had rallied off the July lows, but we could not explain why and our conversation deteriorated into pointless babble.
Alas, Luis snapped us out of our groveling by suggesting we examine insider trading histories for several of the big banks involved in this mess. Perhaps this would return our joviality and provide an alibi to justify our short-selling debauchery.
Our anecdotal research yielded some rather disturbing trends in insider sentiment during a period of huge profitability for these companies and their stocks.
click to enlarge images
Insiders at WaMu (WM) don’t show much conviction during the glory years.
Insider selling at BofA (BAC) outgunned buyers by 98%.
Net Wachovia (WB) insider sales were modestly higher than buys.
Wells Fargo (WFC) insiders didn’t inspire confidence either.
But, what the hell were the folks at Countrywide (CFC) thinking? Ouch! Let go my arm! I don’t know about you, but this is looks like a massive hemorrhage or a blood bath.
Disgraced former CEO Angelo Monzilo accounts for a lion’s share of this selling spree and we note much of his liquidations were tied to the exercise of options. However, many CFC insiders were dumping shares and as quickly as possible.
Although we prepared this riposte of red as humor therapy for ourselves, we can only hope lawmakers and regulators (or their aides) will take this more seriously than we do.
You don’t need an abacus to realize that banks have been spilling the gruel for many years. Thus, our public note to Barney Frank and the House Financial Services Committee: Do you catch our drift?
Disclosure: I do not currently own any of the stocks mentioned in this article.
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This article has 33 comments:
The correct adage is ;
" The rich get rich and the poor have babies .. "
Stock option plans are front-running, stock-watering and insider trading all wrapped-up in one and legitimized by the guardians of our capital markets.
Millions of Americans are foolishly placing their retirement funds in index funds, ETFs and the like. Managers of these funds are "forced" to invest in these stock option disasters. Hundreds of millions of dollars of hard-earned wages are deftly transferred from the middle-class to a handful of executives.
This inequitable wealth-distribution (legitimized theft) is bad for the social fabric. It’s a stain on our capital markets. Articles like this educate the public. Hopefully one day, legislators and regulators with a conscience will step in and remedy the situation.
All of those "insiders" from the above banks should be fleeced from all the money that they robbed from there own companies...
We an employee exercises in the money stock options, they incur a tax obligation. Employees will therefore exercise their options and immediately sell shares to generate the cash to cover the tax obligation. They often hold the remainder of the shares.
To call these sell transactions is flat out wrong. Employees are actually acquiring as many shares as they can without dipping into their pocket to pay the taxman. This was especially true for Monzilo. I think we can all agree that he profited while other shareholders got nailed, but your analysis is far from the correct way to demonstrate the point.
Doesn't it look like the insiders are now buying? The thing about them selling doesing tell me much since there can be many reasons, raising cash to meet personal needs, other investments, pay debt etc.
But the only reason they buy is because they think the stock is priced right and is likely to rise!!
It might explain a few things...
In response to those who feel the article is misleading or late to the party, your points are well taken. Our intent was only to get some humor from the irony of situation (exploding bank earnings and bailing insiders).
We could care less about tax consequences, speculating on motive or whether they were net-share transactions. Only thing we can say with any certainty is that bank insiders were less than sanguine in putting their money where their mouths were. These charts illustrate that point.
The best recent example is Thornburg Mortgage. Garrett Thornburg, founder, put in more than $25 million to buy TMA common stock on the open market last year, half at about $10 per share and half at about $25 per share. Today it closed at $0.33.
During the Revolution, once the war kicked off, the first thing that every Sons of Liberty in their respective towns was to burn down the County Clerk's offices. That's where the mortgages were recorded. In 2008, the first thing we do is write on our blogs. Then again, they were drunk all of the time, but maybe that means we're too inhibited or "civilized".
Let me tell you something: insiders at WFC aren't selling much at all, at least a lot less than those insiders at railroad companies, which were heavily pumped by Barron's a couple of weeks ago.
Of course, AEO boss Schottenstein bought a bunch in Sep 2007. Look how deep under water he already is.
The guy at CWTR has better timing, sold a lot at 30 and bought back a lot at 5. The stock is at 6 right now.
GOOG insiders have been selling like there is no tomorrow ever since Jan 2005. Should you ignore the stock or even go short it back then?
Why would an insider want to buy shares, except at a discount through and employee purchase plan, when he is being awarded shares/options every year as part of his compensation? A reasonable rule of them for portfolio diversification is to limit holding of a single stock to less than 5% of the total portfolio. Insider portfolios typically far exceed this limit in company stock due to the use of the stock as compensation, so further purchases are imprudent.
On the flip side, why wouldn't an insider sell as much stock as possible to reduce his company specific risk?
This is basic portolio management 101. I would have thought that a financial blogger would exhibit greater understanding of finance.
Insider selling will occur at a great pace at companies where much of the executive compensation is in the form of stock options. As User 1 points out, that's basic portfolio management. I would add that stock option compensation blinds investors to insider sentiment and losing that tool should justify a discounted price.
Then again, I'm sure that many of these execs, especially Monzilo, knew that their companies were running at an unsustainable pace and taking on huge risk. It was in their interest to boost earnings that way, which boosted the stock price, which allowed them to get very rich exercising options. Of course, taking on all that unsustainable risk doomed their companies, but not before the execs could cash in their options. They'll retire just fine. Shareholders - not so much.
My conclusion is that options cause a conflict of interest between management and shareholders because management will try to boost earnings short term, even if doing so causes greater damage later. Just paying a steady cash salary, on the other hand, would give management incentive to pursue the long term interests of the company.
Therefore, we should avoid companies that use this type of compensation. History shows they underperform long-term - and not just financials.