A Response to OWS Criticism re: Economic Knowledge

A response to today’s MSM accusations that OWS demonstrators are blind to economic issues. 

*NOTE: MSM typically polls persons they assess as being aligned with the subjective theme of their story, or persons who are too young to have been in the workforce for any duration of time.

Questions ranged from what is the SEC? to who is Elizabeth Warren?

As an OWS demonstrator, who is currently employed full-time, an active equities and commodities trader and a person who holds a seat on a Board of Directors as a Treasurer, I wish to offer some enlightenment.  I am also offended by the tactics of the MSM at targeting protesters who are clearly too young to understand the architecture of economics.   This media smear campaign will be disproved by the contents of this post.

The SEC is the Securities and Exchange Commission.  They are tasked with tracking and regulating illegal trading practices, such as insider trading—let’s say I ask my ex girlfriend for a heads up on a quarterly earnings report, or a 10K annual report on her company called XYZ.  She gives me news that her company’s earnings will “miss the street”; in other words, analysts’ estimates (provided by FAs at big banks, money management companies, ratings agencies, etc.) are higher than her firm’s numbers.  I act on the insider information she provided me with and decide to short the stock.   For individual investors as well as institutional investors, shorting is an aggressive form of capitalizing on the depreciation of a stock price.  It is perfectly legal, an integral part of the free market, bolsters liquidity, as well as overall capitalism.  Shorting a stock is also beneficial, with respect to Efficient Markets Hypothesis, because the share price (theoretically) will always incorporate all relevant information—short positions and put options do affect the underlying share price. 

(1)     So I go ahead and act on the insider information I received and short her company’s stock—her company is trading at $10/share, but I hope to sell the stock at $5/share, when this move is all said and done…risky bet, but I cheated the system and have insider information.  I setup a margin account with my broker where I borrow 1000 shares ($10,000) of XYZ and immediately sell them on the open market, for $10,000. 

(2)    As predicted, the news on the street that XYZ has missed analysts’ estimates causes the share price to tumble to $50.  My broker calls me up and says, “hey, you owe me 1,000 shares of XYZ, pay up!”  I buy back the 1,000 shares at the newly discounted price of $5, for a total of $5,000 and gladly deliver them to my broker. 

(3)     My profit is $5,000. 

(4)    The SEC, with their watchful eye, finds out that I traded on insider information, I am arrested, tried and sent to prison.

Unfortunately, the fictitious situation posited above, occurs every day on Wall Street and around the world.   The perpetrators of insider trading are rarely investigated, seldom tried and almost never wind up in prison.

The SEC showed their ineptitude at investigating securities fraud during the Bernard Madoff saga.  Madoff had been investigated by the SEC for what is known as front running.  As a market maker (a company that matches buyers with sellers of stocks and vice-versa), Madoff was in a position to see the order flow of trades.  This is high-volume order flow, vs. what is referred to as “dumb orderflow” (when you or I place a small trade on E-Trade).  This visibility affords market makers the ability to purchase the same stock in advance of executing the transaction of the large order.  When a stock is purchased in high volume, there is a brief uptick in the price and the market maker—who purchased ahead of the large order—will profit simply based on the uptick.  This is corroborated by one of the major tenets of Dow Theory: Trends are confirmed by volume. 

The Lipstick Building, where Bernard L. Madoff Securities, LLC. operated on floors 17 and 19

In fact, it has never been proven that Madoff was front running and even if he was suspected of it, this activity could not substantiate the rate of returns (upwards of 16%) that he was delivering to his investors.  It was this realization that prompted Harry Markopolos (then of Rampart Investment Management) to notify the SEC that he believed Madoff was running a ponzi scheme.  As the SEC lacked the resources and the talent to investigate large firms, such as Bernard L. Madoff, Markopolos was ignored and billions of investor's dollars evaporated.

Elizabeth Warren was a Harvard Law school professor.  I first became familiar with her work when she published “The Two Income Trap,” which was an examination into the modern American economy becoming reliant upon 2 incomes per household vs. the traditional single income household and the ramifications of this trend. 

The country became familiar with Elizabeth Warren when Barack Obama appointed her to oversee the disbursement of the TARP funds, which were funds to help banks cope with the “Toxic Assets” that the big banks were stuffed to the gills with in 2008.  These assets were primarily financial instruments, such as SIVs and mortgage backed securities—a broth of bogus loans, backed by mortgages that were issued recklessly and in a predatory fashion (lenders did not conduct due diligence regarding the borrowers).  Furthermore, insurance giants (such as AIG) bet on the repayment of said loans, via Credit Default Swaps (CDS') which also required bailout assistance.  These unregulated practices, submerged the financial and insurance sectors into their home-cooked poison soup of “toxic assets.”  Hence the TARP bailout of 2008, monitored by Elizabeth Warren. 

So Bloomberg News, 1010WINS and Michael Savage, please stop depicting OWS demonstrators as being dumb with respect to economics.  I work hard, pay my taxes, trade in my free time and—when I’m not attending Occupy Wall Street protests—can clearly write intelligently on the subjects of finance and economics. 

Ciao.