Preet Bharara, who isn't busting Wall Street; Time Magazine cover February 13, 2012.

So, I’m in Hood River, Oregon, at a great little coffee shop named Doppio, where I see the dead tree version of the latest Time Magazine, not available on-line. That’s the cover in the pic with this post, with an article titled “The Street Fighter”. Other people are there so I strangle a couple of obscenities and scan the article.

No surprise, it’s all about insider trading. Not a single word to disturb us little people about his cowardly failure to indict anyone over the crimes that preceded the Great Crash, as identified by the Financial Crisis Inquiry Commission, the reports of Senators Levin and Coburn, and others. Not a word about the facts alleged in dozens of civil suits over fraud in originating, packaging and selling real estate mortgage-backed securities. Not a word about assembling synthetic collateralized debt obligations so favored clients could bet against the housing market at the expense of other clients. Not a word about MERS, robo-signing, fraudulent affidavits, false filings and consumer abuse in the foreclosure business. Wimpy million dollar Insider Trading Cases qualify as “Busting Wall Street” in TimesLand.

Well, there is a mention of a recent indictment of three former “high-ranking executives” at Credit Suisse who allegedly falsified the value of $5.35 billion of the bank’s RMBSs to increase their compensation. See, that’s cheating the bank. Bad high-ranking executives. Next time, cheat your customers – Bharara won’t care.

When I was Securities Commissioner in Tennessee in the early 80s, we were working on a bunch of tax shelter fraud cases, one with an SEC guy. He sort of disappeared without a word. After a couple of weeks, we called to see what happened. We were told the SEC had decided that insider trading was more important than tax shelter fraud, and transferred the guy to that group. He quit a couple of months later. That was my introduction to the bizarre idea that insider trading is more important than anything else. The boots on the ground guys know it’s a joke. Let’s see why.

The stock market is not fair. Nobody on Wall Street will share information with you as fast as he will with a client with a ten million dollar portfolio. Only a fool thinks otherwise.

In a clean market, all information becomes available to all players at exactly the same time. Obviously we don’t have clean markets. But let’s pretend. Suppose someone gets the information about a favorable event two days before it becomes public, and starts buying. You, an Average Investor human, decide to sell that day. The insider buys your stock. How are you hurt? You got a price that reflects all lawful information, and possibly fractionally more (if a single additional buyer can affect the price). You aren’t hurt. Now suppose you decide to sell three hours after the information becomes public. The price reflects the information, so you aren’t hurt.

Or suppose you are in the restroom at Per Se, and you hear the guys at the urinal discussing the same information. You buy. That isn’t insider trading, because you aren’t an insider. It makes you wonder exactly who is injured by insider trading, doesn’t it?

So let’s assume we are in a clean market, and the information becomes available at 10:00. All the big players, and their flash trading computers, are on it like piranha on a sick fish. The price jumps to a new level by 10:01. Someone made money. Was it you, O Average Investor? Not bloody likely. It was some flash trader or some hedge fund. So, if someone gets in ahead of the market, the worst thing that can happen is that flash traders and hedge funds make slightly less money. Who cares which cheater makes the money? I mean, besides Preet Bharara and his band of piffle lawyers?

Let’s look at the numbers. The big criminal of late is Raj Rajaratnam, who is off to jail for eleven years for taking out over $60 million in proven transactions. Goldman Sachs paid off $550 million for just one of its deals. The incompetents at the SEC could only find one human to sue, the junior trader Fabrice Tourre, and didn’t indict anyone.

Was it bugging Bharara that Eric Schneiderman, New York’s Attorney General, is getting all the good press for teaming up with the Feds supposedly to chase banksters, and Bharara didn’t make the squad?



I read a lot of books.