אורי פרייס, משרד עורכי דין
Uri Praiss, Law Offices
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April 26, 2011 U r g e n t!!
Re: Wall Street's "Robber Barons & Huns" (Part 1) Rearmed by Advanced Speed Trade, Hi - Tech & Algorithms, Manipulating All Markets by Abusing M. Spence's "Signaling" & "Games Theory" - An Urgent Danger to The Wealth of Nations - Investigate and Stop HFT "Short" & Fear Sellers Now!!!
Author: Uri Praiss, Law and Economics lecturer,
Attorney at law (since 1990, Israel)
- The first two weeks of Wall Street Firms' Quarterly reports season, have just ended. They started on April 11th, with manipulated unjustified fears. The real (good) results helped a positive end before the Holidays. Not for long. Just for Today. The Danger is written on the wall: "The King is Naked" – Economy suffers an Insane Greed's Mix of Billions, Egos, Politics.
- On Monday morning, 18, April, 4:02 am, "The New York Times" published a nice article, by Louise Story and Graham Bowley named "Seeking Clues in Goldman's Succession Plan" - a detailed and "hot" report on famous CEO, Mr. Lloyd C. Blankfein of the No. 1 Investment Bank (and trader) Goldman Sachs (here and after –"Mr. B." ;"GS").
A. They Call It "Stormy ("Selling Short") Monday"
- A few hours later, this important Wall Street's trade week started by a paralyzing "Knock – Out" - a "Short" "Selling Effort" (and cheap buy back, slow collecting later). That was an unexpected shock. Futures were green. Within few minutes, Dow – Jones dropped sharply 2 %, from less than 12,350 (last Friday, 15th,"finish" effort) to 12,100. That "peak surprise" opened the 2nd week of a well - concerted fearful uncertainty.
- I know some of you would say "Hey, that was the morning the bomb dropped by S&P, about considering a lower rate than AAA to the U.S. T – Bills, due to the national debt, deficit, etc.? " Indeed. But have you noticed the timing? Shakespeare couldn't have done it better.
B. Senator Carl Levin's Committee Report, Goldman's and S & P's Reactions
- A few days before, Senators' Carl Levin - Tom Coburn Committee Filed their 635 pages comprehensive final report and thousands of attached documents, Testimonies etc., of 2007 Financial disaster, where GS and Mr. B. are leading actors. The respectable Committee recommends many examinations (and investigations) of events and conclusions, as follows:
"The Report concludes that the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury bills. The result was a collapse in the value of mortgage related securities that devastated investors. Internal emails show that credit rating agency personnel knew their ratings would not “hold” and delayed imposing tougher ratings criteria to “massage the … numbers to preserve market share.” Even after they finally adjusted their risk models to reflect the higher risk mortgages being issued, the firms often failed to apply the revised models to existing securities, and helped investment banks rush risky investments to market before tougher rating criteria took effect. They also continued to pull in lucrative fees of up to $135,000 to rate a mortgage backed security and up to $750,000 to rate a collateralized debt obligation (CDO) – fees that might have been lost if they angered issuers by providing lower ratings. The mass rating downgrades they finally initiated were not an effort to come clean, but were necessitated by skyrocketing mortgage delinquencies and securities plummeting in value. In the end, over 90% of the AAA ratings given to mortgage-backed securities in 2006 and 2007 were downgraded to junk status, including 75 out of 75 AAA-rated Long Beach securities issued in 2006. When sound credit ratings conflicted with collecting profitable fees, credit rating agencies chose the fees."
- Let us go back, a few days after the report, to 18, April, "short" sellers, riding all the way to greed, on S & P's AAA undergrade's warning to the U.S. as a whole, the Government and everyone.
- A Manager explained that he assumes the other firm, Moody, would announce the same soon (!!) Wow. Correct me if I am mistaken, but if it walks like a threat, and talks like a threat: "Take Levin and the Authorities out of my hair". Scary. How would Tony react in such a movie? ("Make my day."? No.) Levin Committee's Report Sounds to me like S&P's (Gross) Negligence. What about S&P's and Moody's insurance?
- Timing. The next morning, Tuesday, April 19th, Mr. B.'s GS filed Quarterly Reports. They are smart: "Don't Lead with the Chin". Just spin and move. So exactly the day before, they had returned 5.5 Billions' Loan to good old Warren Buffett, who rescued them at the crisis, when they couldn't breathe, like the late Lehman Bros. That is why G.S.'s Revenues and Profit in their updated report, dropped half, but are still much higher than the Analists' expectations. Have we already said, not to lead with the chin? It is not Japan, where managers commit Hara-kiri, or at least resign, after such Levin's committee report.
C. The Huns' Signaling "Game"
- Let us go back to 18, April. Markets felt like a funeral, but S&P were satisfied. The "Short" sellers were happy, making a fortune, Riding on (or above) this S&P's Storm. They should be paid a nice bonus. Some buyers moved to 12,150. The Huns hit again, "Ascertaining Defeat" back to 12,100. Then started Huns' cheap buy back, with a careful foot on the gas. Their Gains - at least 0.5 % over half total one day's volume plus their Bets / Options on market rates.
- At Monday's trade end, the Huns' "buy back" "allowed" Dow – Jones to reach exactly 12,200 (!!) Nasdaq was an easier target – a drop at once from 2,760 to 2,710 approximately, and allow buy back up to 2,735. That avoided 2,750 for another trade day. Where do they buy those "market bets" – like this 2,750 "signaling"?
- Even the daily plan is clearly signaled. The main selling effort usually start with one of either - Nasdaq or Dow – the one they can push to the closest line downward – 2,750 , 12,250, whatever. Huns listen and channel some negative learned excuse in the updated news. Remember – the name of the game is fear and Panic selling. Huns check and feel the volume and adapt, all along the trade time, showing everyone who is the Boss. It is rarely some big buyer object and push "buying effort". It is irrational and a waste of money. Buy cheaper, the cheapest you can. Or you'd better back off. The sooner you feel the market, and see the manipulation and the results – you lose interest.
- Relatively, the Huns build a very criminal "stable" market / Game Equilibrium, controlled by Huns downward. That is Economics' Game Theory, at its best (or worst, socially). John Nash got Nobel Prize 1994, but that was his 1950's PH.D at Princeton.
- The two markets (Dow, Nasdaq) are coordinated, even dependant naturally. So after Huns achieve the first target, reach the first signal rate, their "selling effort" moves to the next target downward, either on Dow Jones (more frequent) or Nasdaq. When is the next effort, heavy or light – it depend continuously on the volume and the news. Just watch the game. It's like sports, but the game is usually "sold". "Our team" usually loses, and reacts as a disoriented lost rag, unless you are big and rich enough to join the gang. Very frustrating. A dead end. Just resistance – no support (!!)
- Take for example this Monday, 25, April. A typical nice day for the Huns. A Bad day for U.S. Economy and the Globe, firms and households. The Huns pushed down, Dow dropped below 12,500. They felt some buyers' volume, but pushed lower.
- 10:00 brought amazing news: New (!!) Home Sales rise unbelievably on March to 300K (!!) – Prior 270K, Market Expects 280K, Brief Forecast 265K, Revised from 250K. Millions of cheap empty "2nd hand" homes are waiting – and Americans buy New Homes.
- No response. Just silly pessimist worries (see below) and Huns push down. At 11:30 Huns calculate that they'd rather not cross the Dow's 12,400, neither Nasdaq's 2,800, even though they were very close. Remember they have to buy back cheaply. So they release slowly up, stop "selling effort". Huns made daily nice profits, kept the "Signaling lines" down and gave the next buyers some hope. I wonder if and what additional profit Huns gained from bets/options to drop Dow from 12,500. Not like the big 18 April.
- Back to last Friday before that, 15, April, the end of the week trade was smooth, positive, light, even boring and "Complacent", as some articles and interviews claimed lately. We'll be back for this strange definition later. Lately it reminds me a victim hypnotized by a snake before attack.
- There were no clouds in the skies on Friday. As you can see, volume was low, like most Fridays, even though this 15th was the monthly date of Options' Expiration for most firms. Lately, Fridays were used by the Huns, as well as other days, to drop those low volume markets by selling "short" efforts, and buy back later - huge Illegal Daily gain. The Huns get better (I mean nasty & successful) all the time. Join them or leave. Obey daily Borders (2,750, etc.) - Strong criminal "Signaling".
- Don't let them mislead you. Notice that these daily "Sell fast and buy back slowly" do not affect the day to day VIX ("fear", Variance, Deviation, Fluctuations, etc.) measures, but cause confusion, uncertainty, fear and powerlessness, at least more than a year.
- Actually they were always out there. Check what the Huns did in the Depression years 1929 – 1935, till fear ghosts had lost their affect.
- But lately they had became much more dangerous and powerful with new Hi – Tech, advanced Software, Electronics, Statistics, Mathematical and other tools, including the use of Mathematical Algorithms, etc. Sure you heard something.
- Speed of trade is a special threat. Remember May 2010's "Mistaken" markets' panic crash, almost 10 % drop in 1 minute (!!) Much more powerful than a nuclear attack. That was really an important red light, but nobody checked thoroughly all the implications
- Anyhow, the last 3 months those market manipulations became much more intensive and even obsessive. They "swallowed", day after day, all last 3 months' progress. Markets returns - 0 % (Zero) for no reason but those manipulations.
- Hundreds of Billions (some say dozens of Trillions!!) 50% of households', institutions', firms' market investments/ savings did not come back yet to the shares. They are waiting by the fence. They (and the economy) crave for the shares – but more than a year they are fearful and deterred, by this daily endless manipulated insanity for greed. At least a year.
- They are not complacent – they are despaired. Huge direct and indirect economic and social loss of growth and investments, unemployment and so on. Lately we see Markets' Stagnation and almost Degeneration.
- Last month the only light (for me) came from the BRIC stocks, especially China, Brazil, and other foreign markets. China's Internet companies rallied, and others, are raising billions at U.S. markets, instead of American firms (!!). I am afraid that soon the Huns will start manipulating them too. I've already heard some slander. GS hurried to under grade ("Sell"?) SINA. Last week they hit the Coal firms with some opinionated review. They have too many hats.
- I should emphasize that it takes just a few millions and this "Hi – Tech Speed of Trade", to cause this Chaos, sabotage the trade and the economy as a whole, and gain huge profits every day (!!).
D. LAW & ECONOMICS BRIEF
- Of course these are secrets. It's Illegal. In most civilized Securities Laws, those are much "heavier" offences than famous and juicy "Insider Trading". The Anti - social and economic damages as well as risks (!!) are much heavier. So is the "Mens Rea" and the punishment is more severe.
- Sorry. "You can(not) say that I'm Young, you can(not) say I'm Unlearned" (Bob Dylan, "Masters of War")
- These Securities' Offences are named "Securities' Fraud", Manipulation", Influence the rates of Securities", "Run", etc. It is every act of buying or selling (or Soliciting, Causing, etc, Directly or Indirectly!!) with intent to attempt such influence, or assist or participate with such attempt influence on the rate or other participants.
- Economists might call it Externality/ Non competitive market activity/ failure of assumptions/ Transaction costs (R. Coase, Chicago, 1991 Nobel Prize) and so.
- Legally, it is unpleasant but not so complicated to investigate and prove. Behavior proves "Mens Rea", even intention. Solely the facts by themselves, your timing, quantities, the fact that you sell fast and / or buy back that day or soon afterward – are very meaningful to prove Intent. Criminal Substantive, Procedural and Evidence Laws include some very practical presumptions: Usually people are aware of the facts and intend toward the natural outcome of their acts.
- Manipulating the rates upward was more trivial last centuries. From London to New York and China, many securities "Bubbles" crashed, usually triggering a real economic crash. Now it is just the opposite direction – downward. Same offences, but much more dangerous. Keep reading and tell me it is not Terrorism - Fears creation for Greed.
- LEGAL TOOLS EXIST. Start with SEC, Police, etc. Investigate separately and confront. Don't let them contact. Many documents, disinformation. Need a special team. Levin's Committee issued a very professional report, a compass and basic conclusions. They do not have police's and SEC tools. That is a good start. Levin deserves a medal.
- This financial greed disaster was a nightmare. Could be even much worse. Need to check also fraud soliciting to buy and sell rotten securities, anti – trust laws, and so. – Tools Exist - Just Use Them. Beside that, maybe we need sharper, detailed Inclusive Legal Definitions. – Don't count on "Ethical Codes". Check also Authorities. At least read Levin's Committee's summary on his website – conclusive and very readable few pages. I would suggest reading them at High schools. Constitutional Democracy at its best.
- I wonder why public media, any reporter or specialist have never talked about it. But many of them know it and see it. That is why you see so many frustrated and depressed bulls lately, like Jim Cramer ("CNBC", "The Street.Com.") The buyers are not "complacent". They feel powerlessness and despair. World's Train is driven by robbers to hell.
- The closest are just few "field reporters" from the trade, which are honest enough to report "Concerted (!!) heavy selling effort" - on "Yahoo Finance", "Briefing.Com" and so, without those ridiculous, as if "economic explanations"(see below). It is a good lesson what Economics really is. I hope the few real reporters won't lose their jobs or directions.
- Economics Nobel Prize winner, the brilliant Michael Spence, developed the economic theories of "Signaling". Very simple, clear and true. No need for complicated Math. So is the whole Game Theory, from John Nash to Israel Aumann, Ariel Rubinstein and many others. A broader explanation might come later, enabled by further extensive research.
- Notice also the Admirable Dr. Paul Woolley – an English Ex-Banker, from Respectable L.S.E. He explains exactly how Wall Street bankers use Institutions, Government, Academy and Economic Theories and Research, to pump most of production's profits and households' savings, in the U.S. and the world's economy. Very professional and powerful. He has his own centre, web, funds – "The Paul Woolley Centre for the Study of Capital Market Dysfunctionality" in L.S.E.
- I do not think (like Dr. Woolley) we need a totally Alternative New Economic Theory. Indeed, the basic models are selective. New Brokers theories are important. We have all Theoretic tools that we need. Just update, change Assumptions and Emphasizes. Work with Game Theory and Signaling. But don't give up Classic Monopoly and Non - Competitive Behaviors Theories, Irrationality, and check carefully Market Assumptions.
- Asymmetric Information Theories are also relevant. Check Bonuses and Incentives. Slow Greed down. Basically Woolley is very right – I wish we had many speakers and scholars like him – indeed what we need is Common Sense, Honesty, Humility and an Economic Open Mind.
E. TO BE CONTINUED
- I want to end Part 1 with the "New York Times" report we started with: "From the canyons of Wall Street to the City of London and beyond Hong Kong an intense guessing-game has begun: who will succeed Lloyd C. Blankfein, when he eventually steps aside as chief executive of GS ?"
- Immediately I'd got a bitter smile, recalling what one of our legendary and stormy leaders and fighters used to say "No matter what, just stay on the Wheel, don't leave the Scene".
- So I really don't suggest those "Candidates" would buy new suits. Easy does it. Even GS's Spokesman "declined to comment other than to note that Mr. Blankfein "says he has never felt so energetic and has no plans to retire."
- I must say I was very worried to learn from N.Y.T. Report that Mr. B is very unique, being a very successful Commodities - Trader. Former managers were Bankers, Investment Bankers, etc., but last decade the Investment Banking dropped sharply, including M & A.
- Most important, I had learned also that Mr. B. is only 56, and "assumed the top job in 2006, (and) is one of only two chief executives of major banks who were at the helm before the financial crisis and remain in charge today. Jamie Dimon of JPMorgan Chase is the other."
- Surely the most admirable, the One and Only Judge Louis Brandeis –("Other People's Money and How the Bankers Use It") Roll Over in his big seat at Heaven while reading that – especially this Jpm'S Demon, whatever (He told us at Davos to back off, didn't he?)
- Back to the Kings of Trade – GS. In the midst of the financial hell, that some greedy bankers built, they got rid somehow of old Lehman Bros., Bear, Merrill – Lynch and so, "Crowding Out"(!!) to become an unbelievable International Mega - Monopoly of Trade and Investment Banking.
- How I wish we would recall Brandeis' social, economic and legal Legacies every day. He fought the first rounds, with the original JPMorgan and the Robber Barons.
Uri Praiss, Attorney,
Law & Economics Lecturer