Post by jeffolie on Apr 23, 2009 11:12:34 GMT -6
pump-and-dump game
This is a thoughtful piece about how a historic scam is being repeated today.
"pump-and-dump game" is a classic Wall Street fraud on the investing public. In today's situation, it is the public that will be defrauded by Geithner and Wall Street acting together to give a fortune to greedy corporate elites.
I still think Geithner may be the most dangerous man in America as he continues to arrange for epic proportion thefts of taxpayer money for the benefit of Globalists and Corporate elitists. A whole generation will be deeply burdened with the consequences of the tremendous debt incurred to pass borrowed money from the investors to bad guys. This will end badly.
===========================================================
Wall Street’s 1929 Scams Return in Geithner Plan
April 23 (Bloomberg) -- What would Ferdinand Pecora do?
Thirty-seven years after his death, the name of this former assistant district attorney from New York suddenly is on a lot of politicians’ lips.
Starting in 1933, as counsel to the Senate Banking and Currency Committee, the Sicilian-born Pecora led a yearlong series of sensational hearings into the causes of the 1929 stock-market crash. The Wall Street scandals he unearthed spurred the creation of the Securities and Exchange Commission and the passage of the Glass-Steagall Act, which separated commercial and investment banking until its repeal in 1999.
Now, House Speaker Nancy Pelosi says she will push for the deepest congressional inquiry into Wall Street’s abuses since the 1930s, using Pecora’s investigation as a model. Before Congress proceeds, though, there’s one thing its members should do: Read the Pecora Commission’s 1934 report.
Some of the abusive practices Pecora chronicled are similar to the machinations at the heart of the Treasury Department’s plan to revive the nation’s hobbled financial-services industry. To see how, let’s look at a 1920s-era scheme called a pool, which in those days was a common device for manipulating prices on the New York Stock Exchange.
A pool referred to an agreement between several people, usually more than three, to actively trade in a single security. The purpose, the Pecora Commission wrote, was “to raise the price of a security by concerted activity on the part of the pool members,” enabling them “to unload their holdings at a profit upon the public attracted by the activity or by information disseminated about the stock.”
Pool Sharks
Some bankers claimed there was a difference between “beneficent” and “nefarious” pools. The good kind supposedly helped stabilize market prices, while the bad kind let swindlers make a quick buck.
Pecora didn’t buy the distinction. Either way, these were not free, uncontrolled markets. “In all cases fictitious activity is intentionally created, and the purchaser is deceived by an appearance of genuine demand for the security,” the commission’s report said. “Motive furnishes no justification for the employment of manipulative devices.”
Compare that with Treasury Secretary Timothy Geithner’s latest proposal to help financial institutions remove unwanted loans and mortgage-backed securities from their balance sheets.
Under the Treasury’s Public-Private Investment Program, the size of which could hit $1 trillion, the government plans to invest side-by-side with private investors who place bids on toxic assets that have plummeted in value. Those buyers, lured by federal loans and guarantees, might include affiliates of the same struggling banks and insurance companies the program is designed to assist.
Pricing Power
The Treasury program’s goal is to drive up prices and stimulate trading, so the financial institutions can minimize their losses and replenish their capital. Should the prices later collapse, taxpayers could end up with the vast majority of any losses.
As with an old-fashioned pool, one of the public-private program’s biggest vulnerabilities is that it invites collusion. That was one of the points made in a report this week by the Troubled Asset Relief Program’s inspector general.
“In both the Legacy Loans Program and the Legacy Securities Program, the significant government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit,” the report said.
Profit Sharing
One example from the report: Say a bank and a private- equity firm both agree that a group of the bank’s loans is worth $600 million. The private-equity firm, however, agrees to overpay for the loans and bid $840 million at auction. The private-equity firm invests $60 million, which the government matches with $60 million of TARP money, and which is leveraged by a $720 million loan guaranteed by the Federal Deposit Insurance Corp.
After the auction, the bank secretly pays the investor a $120 million kickback, or half the difference between the auction price and the real value. Even if the private-equity firm’s $60 million investment is wiped out, it still would get a $60 million profit because of the kickback. Meanwhile, the bank would make a $120 million profit, at taxpayer expense.
“Of course, in practice, the collusive scheme would be far more complex and would likely involve a series of affiliates and offsetting transactions, but the principle would be the same,” the inspector general’s report said.
No Controls
Similar collusion could occur in the program for mortgage- backed securities. Fund managers might agree to overpay for each other’s holdings, leaving taxpayers to bear the losses. So far, the report said, the Treasury Department hasn’t set up the systems it needs to ensure proper oversight, such as basic conflict-of-interest rules or disclosure requirements for the private-equity firms’ owners.
The main premise of Geithner’s plan is that the banks’ toxic assets are now priced at artificially low levels. As the federal bailout program’s Congressional Oversight Panel wrote in an April 7 report, “Treasury has not explained its assumption that the proper values for these assets are their book values,” rather than the prices unsubsidized investors would pay for them.
If Treasury’s premise proves false, we may end up looking back on the Public-Private Investment Program as an elaborate pump-and-dump game. Only this time, unlike with the pools that sucked in gullible investors during the 1920s, the big losers would be taxpayers -- who never had the choice of not playing.
It’s hard to imagine that Pecora would think any of this is a good idea.
www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=a1REWwf8EPxI
This is a thoughtful piece about how a historic scam is being repeated today.
"pump-and-dump game" is a classic Wall Street fraud on the investing public. In today's situation, it is the public that will be defrauded by Geithner and Wall Street acting together to give a fortune to greedy corporate elites.
I still think Geithner may be the most dangerous man in America as he continues to arrange for epic proportion thefts of taxpayer money for the benefit of Globalists and Corporate elitists. A whole generation will be deeply burdened with the consequences of the tremendous debt incurred to pass borrowed money from the investors to bad guys. This will end badly.
===========================================================
Wall Street’s 1929 Scams Return in Geithner Plan
April 23 (Bloomberg) -- What would Ferdinand Pecora do?
Thirty-seven years after his death, the name of this former assistant district attorney from New York suddenly is on a lot of politicians’ lips.
Starting in 1933, as counsel to the Senate Banking and Currency Committee, the Sicilian-born Pecora led a yearlong series of sensational hearings into the causes of the 1929 stock-market crash. The Wall Street scandals he unearthed spurred the creation of the Securities and Exchange Commission and the passage of the Glass-Steagall Act, which separated commercial and investment banking until its repeal in 1999.
Now, House Speaker Nancy Pelosi says she will push for the deepest congressional inquiry into Wall Street’s abuses since the 1930s, using Pecora’s investigation as a model. Before Congress proceeds, though, there’s one thing its members should do: Read the Pecora Commission’s 1934 report.
Some of the abusive practices Pecora chronicled are similar to the machinations at the heart of the Treasury Department’s plan to revive the nation’s hobbled financial-services industry. To see how, let’s look at a 1920s-era scheme called a pool, which in those days was a common device for manipulating prices on the New York Stock Exchange.
A pool referred to an agreement between several people, usually more than three, to actively trade in a single security. The purpose, the Pecora Commission wrote, was “to raise the price of a security by concerted activity on the part of the pool members,” enabling them “to unload their holdings at a profit upon the public attracted by the activity or by information disseminated about the stock.”
Pool Sharks
Some bankers claimed there was a difference between “beneficent” and “nefarious” pools. The good kind supposedly helped stabilize market prices, while the bad kind let swindlers make a quick buck.
Pecora didn’t buy the distinction. Either way, these were not free, uncontrolled markets. “In all cases fictitious activity is intentionally created, and the purchaser is deceived by an appearance of genuine demand for the security,” the commission’s report said. “Motive furnishes no justification for the employment of manipulative devices.”
Compare that with Treasury Secretary Timothy Geithner’s latest proposal to help financial institutions remove unwanted loans and mortgage-backed securities from their balance sheets.
Under the Treasury’s Public-Private Investment Program, the size of which could hit $1 trillion, the government plans to invest side-by-side with private investors who place bids on toxic assets that have plummeted in value. Those buyers, lured by federal loans and guarantees, might include affiliates of the same struggling banks and insurance companies the program is designed to assist.
Pricing Power
The Treasury program’s goal is to drive up prices and stimulate trading, so the financial institutions can minimize their losses and replenish their capital. Should the prices later collapse, taxpayers could end up with the vast majority of any losses.
As with an old-fashioned pool, one of the public-private program’s biggest vulnerabilities is that it invites collusion. That was one of the points made in a report this week by the Troubled Asset Relief Program’s inspector general.
“In both the Legacy Loans Program and the Legacy Securities Program, the significant government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit,” the report said.
Profit Sharing
One example from the report: Say a bank and a private- equity firm both agree that a group of the bank’s loans is worth $600 million. The private-equity firm, however, agrees to overpay for the loans and bid $840 million at auction. The private-equity firm invests $60 million, which the government matches with $60 million of TARP money, and which is leveraged by a $720 million loan guaranteed by the Federal Deposit Insurance Corp.
After the auction, the bank secretly pays the investor a $120 million kickback, or half the difference between the auction price and the real value. Even if the private-equity firm’s $60 million investment is wiped out, it still would get a $60 million profit because of the kickback. Meanwhile, the bank would make a $120 million profit, at taxpayer expense.
“Of course, in practice, the collusive scheme would be far more complex and would likely involve a series of affiliates and offsetting transactions, but the principle would be the same,” the inspector general’s report said.
No Controls
Similar collusion could occur in the program for mortgage- backed securities. Fund managers might agree to overpay for each other’s holdings, leaving taxpayers to bear the losses. So far, the report said, the Treasury Department hasn’t set up the systems it needs to ensure proper oversight, such as basic conflict-of-interest rules or disclosure requirements for the private-equity firms’ owners.
The main premise of Geithner’s plan is that the banks’ toxic assets are now priced at artificially low levels. As the federal bailout program’s Congressional Oversight Panel wrote in an April 7 report, “Treasury has not explained its assumption that the proper values for these assets are their book values,” rather than the prices unsubsidized investors would pay for them.
If Treasury’s premise proves false, we may end up looking back on the Public-Private Investment Program as an elaborate pump-and-dump game. Only this time, unlike with the pools that sucked in gullible investors during the 1920s, the big losers would be taxpayers -- who never had the choice of not playing.
It’s hard to imagine that Pecora would think any of this is a good idea.
www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=a1REWwf8EPxI