“We Were Programmed to Crash” - Democratic Underground

McCamy Taylor

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Tue Sep-30-08 08:14 PM
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“We Were Programmed to Crash”

Here is another name they do not teach you in American history, Albert H. Wiggin. Head of Chase National Bank in the 1920s, he set up dummy companies in the name of family members so that he could short sell his own company’s stock, i.e. bet that his own bank’s stock would go down in value. This made him millions of dollars during the banking crises that rocked the nation between 1929-1232. Try to imagine how easy it would be for the guy in charge of a bank to bet that his own company’s stock would take a dive (in someone else’s name, of course) and then leak some “bad news” so that the stock would take that dive just as he predicted. And it was all legal at the time. That was before FDR was elected and Ferdinand Pecora held his public hearings which exposed the immoral, greedy practices of America’s bankers---or banksters as TIME magazine dubbed them.

When the 1929 crash occurred, Wiggin was put in charge of propping up the bank’s share price. But he used his private firms to take out loans from the bank with which to bet against the stock. During the darkest period of the crash, September through November, he made more than $4 million.

http://articles.latimes.com/2002/feb/22/news/mn-29290

More on Wiggin at

http://en.wikipedia.org/wiki/Albert_Wiggin

Note that he never paid for his crimes. Instead, the FDR administration attempted to put a stop to the practice of insiders manipulating the price of their own company’s stock, wrecking havoc with the finances of mom and pop investors and costing employees their jobs, all for the sake of a few more million dollars that they did not really need.

For those like me who do not have economic degrees, here is a link to the wiki entry for short selling .

http://en.wikipedia.org/wiki/Short_(finance)

As a result of the Pecora Commission, the SEC was created and rules were passed governing investing in this country. Here is a description of that process from Pecora’s point of view.

In a 1965 interview, Ferdinand Pecora recalled how he, Corcoran, James Landis and Benjamin Cohen had drafted Section 16 as "the anti-Wiggin section," named after Albert H. Wiggin, who headed the Chase Manhattan Bank from 1921 to 1933. Pecora recalled how Wiggin had testified that he short-sold Chase National Bank stock that he didn't own but expected to repurchase at a lower price, and thereby took a profit through six different private investment corporations he had established. One of them had taken a profitable position with Sinclair Oil and Refining Company at a time when Sinclair had a large line of credit with Chase Bank. The securities trading abuses of such people, said Pecora, "were the reason that we drafted

of the Act, as we burnt the midnight oil."(10)
Over the next five decades, the SEC promoted a securities law regime meant to ensure that all parties to stock market transactions had roughly equal access to material information about the company in which they were trading. To that end, the principal goals of the federal acts were to protect individual investors engaged in stock transactions, and to assure broad public confidence in the integrity of the stock market. Yet the common law of fraud and the soon-to-be-created theories of insider trading would conflict as the SEC developed and administered a regime of securities law meant to promote those goals in a sophisticated and growing national market.

http://www.sechistorical.org/museum/galleries/insiderTrading/fullDisclosure_a.php

I finally found a photo of Pecora! That is him on the left. If you want to know why Pecora is now my favorite Depression era reformer, please read my recent journal here:

http://journals.democraticunderground.com/McCamy%20Taylor/300

One of the regulations meant to keep insiders from driving down the prices of their own company’s stock so that they could sell short at will to make a quick million whenever they felt like it was called the “uptick rule”. The “uptick rule” is another one of the FDR Era regulations which the Heritage Foundations was talking about when they said that they wanted to roll this country back to the days of Herbert Hoover. They succeeded. The Bush administration got rid of this safeguard last year---with predictable results.

The uptick rule is fairly simple.

http://www.investopedia.com/terms/u/uptickrule.asp

A former rule established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines. The SEC eliminated the rule on July 6, 2007.

Why did the SEC do that? Maybe because it allowed for things like this:

“Short sellers have an incentive to spread bad news about companies whose shares they have sold short,” said Jay Baris a partner at the law firm of Kramer Levin Naftalis & Frankel.
Many blamed short selling and attendant rumors for the Bear Stearns collapse several months ago. After the firm first announced that two of its hedge funds were in trouble, rumors began circulating that the situation was worse than the firm had led on, and clients pulled their money out of the firm. Merrill and Lehman suffered similar fates after word got out that their numbers were starting to decline.
Soon after the Bear Stearns crisis, many executives as well as regulators said there were several rumors circulating throughout the industry and blamed short sellers for starting the rumors to drive Bear Stearns’ price down.
The SEC conducted an investigation into rumors in general and filed one case so far, which it settled in April. The Commission charged Paul Berliner, a former trader with Schottenfeld Group, a hedge fund with sending out a false rumor soon after The Blackstone Group announced its acquisition of Alliance Data Systems. The rumor stated that Blackstone was negotiating a lower price than was announced. Despite that case, the regulator has not filed any other cases in that area.
“It’s not an easy thing to go after,” Baris said. “There is no fool-proof way to deal with it.”

http://www1.cchwallstreet.com/ws-portal/content/news/container.jsp?fn=09-24-08

Recall that Bears Sterns was acquired by Morgan---with lots of financial help from us, the taxpayer. And the two financial firms which Henry Paulson seems determined to protect through the $700 bailout and the recent ban on all short selling of financial stock are Morgan (which we all know has ties to the Bush family that go all the way back to the attempted coup against FDR and their joint work for Hitler) and Paulson’s own Goldman Sachs.

If you have real power you can precipitate a real panic. Last week, John McCain and George W. Bush staged a coordinated attack on the stock market, declaring that we would see collapse, crisis, panic on Monday if Congress did not pass a massively unpopular bailout bill. Those of us who used to watch the market falter every time Independent Pornographer Ken Starr announced that he had more dirt on Clinton and then watch it rally every time Clinton’s rating held strong know that the executive branch has more effect on Wall Street than almost anything else. Yesterday, right on cue, the market dropped 777 points. Today, it regained much of that, proof that yesterday was a phony panic, all sound and fury signifying nothing, since nothing has changed except that savvy investors are snatching up stocks at bargain prices. After the real Stock Market Crash, prices did not rise again for decades. Why would Bush and McCain cause a trillion dollars (on paper) loss of money for American investors? Because their buddies at Goldman Sachs and Morgan are planning to hold their breaths and turn blue until they get their financial bailout.

You thought I was kidding yesterday, when I wrote in my journal that we were programmed to crash? No, I was quite serious. I was already gathering the documentation that I needed to write this journal. A stock market crash can be very profitable---if you plan ahead and bet that the market will crash or if you want to snatch up a rival company or if you want Congress to pass an unpopular law.

“I think as far I can remember we were programmed to crash….”
Douglas Adams The Restaurant at the End of the Universe