I must confess that I am only now reading John Brook’s classic Once in Golconda, which is a history of Wall Street from the 1920 to 1938. It’s a heady mix of lush and leisurely narrative with keen attention to financial tradecraft.
Of course, any tale that involves market manipulation, no matter how far in the past, will sound oddly modern, and I thought this section in particular might entertain readers:
The chief instrumentality through which the Wall Street insiders, with Stock Exchange approval, sheared the gullible public lambs was the stock pool…..The point of a pool manipulation was simplicity itself: it was a way of inducing the Stock Exchange ticker tape to tell a story that was essentially false, and thus to deceive the public. Then as now, the stock ticker tape….printed no news or comment – only the price and volume, along with the letters identifying the particular stock, of each transaction as it occurred…..”The tape doesn’t lie” was the sucker’s folk wisdom, but the tape could be made to lie. Even though it continued to record each transaction as faithfully and impartially as ever, the nature of those transactions themselves could be so arranged, by the people doing the transaction, as to make the watcher of the tape, in his innocence and greed, buy a gold brick.
The group of capitalists pooling their resources would first pick out a stock suitable for their purpose because it had glamour appeal to the public, and because there were comparatively few shares on the market, making for ease of manipulation. They would then accumulate a large block of shares…They would, if possible, make an ally if not an actual partner of the stock’s specialist on the Exchange floor….it was he who, holing in his had the supposedly secret book listing all outstanding orders to by or sell stock, had access, in Flynn’s metaphor, to the cards of all the players. Finally, they would hire their key man, an expert in manipulation called a pool manager….
On behalf of the pool, the pool manager, as broker, would begin buying and selling shares of the stock at frequent intervals, in no apparent pattern. Often he would buy and sell it back and forth among the members of the pool…..these essentially spurious transactions, accomplished with the sympathetic help of the specialist, would be so weighted that the price of the stock would begin to rise slightly. In speculators’ jargon, it would be “active and higher”…Thus the stock would be called to the public’s attention, and the notion of making a quick profit in it planted in the public’s mind. The eager tape-watchers would gradually begin to buy – cautiously and tentatively at first, then as the activity continued to increase and the price to rise, more and more boldly. Now the pool manager’s operations would become more delicate. On some days he would abruptly switch to the selling side, simply to create confusion; then just when the public was about to decide the picnic was over, he would come back in with a torrent of buying that would sweep all along with him. Finally, in a skillfully conducted manipulation, the thing would become self-sustaining; the public would in effect take the operation over, and in a frenzy of buying at higher and higher prices would push the stock on up and up with no help from the pool manager at all. That was the moment of the final phase….often spoken of indelicately as “pulling the plug.” With a mousiness in sharp contrast to the elaborate fanfare with which he had begun his buying, the pool manager would begin feeding stock back into the market. The price would respond by turning downward, gradually at first, then more rapidly as the pool manager’s trickle of sales mounted to a flood; and before the public could collect its senses, the retreat would have become a rout, the pool wold have unloaded its entire bundle profitably, and the public would be left holding the suddenly deflated stock….
Pool managers with some justification thought of themselves as artists…just as the best con men disdained to use violence, so the best pool manipulators disdained these artistically inelegant practices [of planting rumors or arranging for favorable research to be published]. Their medium was the tape; they took pride in their skill to make it and it alone create precisely the effect upon the public they wanted….
To repeat, for practical purposes, there was nothing illegal about the pools.
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‘On behalf of the pool, the pool manager, as broker, would begin buying and selling shares of the stock at frequent intervals, in no apparent pattern.’
This job was first automated back in the 80s, by the way.
Now, this technique has become applied to entire exchanges or classes of debt securities: bundle, jingle, mingle, don’t linger; buy at the bottom bounce, and repeat. Does anyone believe in the ‘valuation’ of most equities as of today? And those debt securities have been repeatedly exposed, in notable instances here at NC by Yves and her collaborators, as ‘manufactured’ rather than substantive in their valuations by any standard.
” . . . [F]or practical purposes, there was nothing illegal [done] . . . .”
You can get a specialist on the Exchange floor to be your partner in the pool and it’s not illegal?
It applies to everything where people attach value to: Houses, art, bottled water…
Capitalism is about getting rich. Getting rich and ‘succeeding’ against the others in the heat of competition is a core systemic property of capitalism. That people try to get rich by hook or by crook should be no surprise to anyone.
The situation is laughable. We set things up as competition over scarce resources, call ‘winners’ those who have the most money and property, then set up rules to make the game ‘fair’. After that, with 7 billion of us scrabbling around to be ‘successful’ we’re surprised and appalled when fraud is committed again and again throughout the history of this sorry system? Please. Fraudulent behaviour is demanded by capitalism. Not of all of it’s participants of course, but sufficient numbers of them to cause repeated crises of the rich having too much, and the poor too little. This is what this system does. If you don’t want this problem set, or man-made ecological disaster, or societal decay and increasing sociopathy, choose a different system. That, or lump it, and enjoy the fireworks as this brilliant system collapses under the weight of its own amazing ‘success.’
“That people try to get rich by hook or by crook should be no surprise to anyone.” Well, anyone that is, not chairing the Federal Reserve, the SEC, or US Treasury. Your point, of course, instantly reveals the blatantly self-evident lies of these crony “pool managers” —-Greenspan, Hank, Benny and Timmy.
Well said, all of it. More of us are gradually coming around to perceiving the web.
Capitalism is about getting rich. Getting rich and ’succeeding’ against the others in the heat of competition is a core systemic property of capitalism….We set things up as competition over scarce resources
Actually you are conflating the state of nature, i.e., competition for scarce resources and ‘capitalism’ — a theory (positive of free markets and open competition) or negative ( a system of exploitation ).
We always exist in a state of competition for scarce resources, just as the animals, the plants and the microbial world. And just like the animals, people do cheat, rig the game, etc., to secure an advantage. (Or just like Orchids and other plants which thrive due to specific adaptations.) Just as member of the politburo did so, and the members of the communist party in China do so.
Human nature is animal nature, life nature. To attribute to capitalism the sins of man, indeed, to believe that man is sinful and must be saved, is a common, and ultimately destructive ideological position.
PBS had a special on the crash of 1929:
http://www.pbs.org/wgbh/americanexperience/films/crash/player/
Al Capone got it right: “Those Wall Street guys are all crooks!,” he said.
“Essentially spurious transactions”…those are the key.
The pre-arranged “something for nothing/nothing for something” transactions: done for show, done for advertising.
A play, masquerading as a “market”.
ANd,NB, iy goes both ways: most times, the paper being sold is over-priced from the get-go.
But it can happen that very valuable pape – that is, paper which represents a solid, valuable business – can be way under-priced in the “market”…and then it is “taken private”.
And private business, that is, not financed in the public equity Market, is IMO where the juiciest returns on capital occur. No need to publish accounts, then: just between you and the Taxman.
I understand that in America, the words “reasonable” and “profit” are kept far away from each other – because some prefer their profits unreasonable, and do not wish it to become a matter of political debate.
aet,
A play, masquerading as a “market”.
Even though pools offer a flagrant manifestation of “free market” pathology, I believe the unhealthiness of “free markets” runs much deeper than this.
Robert L. Heilbroner gave this example of just how diseased “free markets” are in The Worldly Philosophers:
Or a final example: the founding of the United States Steel Corporation in 1901. Viewed through Veblen’s eyes, the steel combine was a vast social machine for producing steel, an assemblage of plants, furnaces, rail lines, and mines under a common management for their more efficient coordination. But this was only a minor consideration in the eyes of the men who “made” U.S. Steel. The eventual monster company had real assets of some $682 million, but against this had been sold $303 of bonds, $510 million of preferred stock, and $508 million of common stock. The financial company, in other words, was twice as “big” as the real one, and nothing more lay behind its common stock than the intangible essence of “good will.” In the process of creating these intangibiles, however, J.P. Morgan and Company had earned a fee of $12.5 million, and subscription profits to underlying promoters had come to $50 million. Altogether, it cost $150 million to float the venture. All this might have been condoned had the new monopoly been used for the purpose Veblen had in mind—-as an enormously efficient machine for the provision of steel. It was not. For thirteen years steel rails were quoted at $80 a ton, whereas it cost less than half of that to make them. In other words, the whole gain in technological unification was subverted to the end of maintaining a structure of make-believe finance.
BP offers a more recent example of “free market” pathology:
During more than a decade as chief executive, BP’s market value rose fivefold and its share price rose 250 per cent, BP said in January, despite worries in recent years about dwindling energy production.
http://www.nytimes.com/2007/05/01/business/worldbusiness/01cnd-oil.html?pagewanted=2
The company has suffered a series of accidents in recent years. Investigators have blamed lax controls and a culture that favored cost-cutting over safety.
http://www.nytimes.com/2007/05/04/business/04oil.html
The bottom line is that markets reward destructive behavior.
Free markets are not the elixir they are touted to be. They never have been. They never will be. And yet, over the past 30 years, the world got swept away in an orgy of “free market” Utopianism. We continue in this pattern of reinventing the wheel, over and over and over again. It’s as if humans are incapable of learning from their experiences.
Markets are the construct of human beings, as such they embody all of the foibles, falability and fraud that is found in the human condition. Of the foregoing, it is fraud that does the most harm.
The current theme on Wall Street is: I want to cheat; but, I don’t want to be punished. Therefore; I need a ‘free market’. I need to be a corporation so I can hide behind a corporate veil. I need to cheat because I need a new Captan Billy’s Whiz Bang.
The focus of Wall Street parctioneers is egocentric and in that egocentricity it is sociopathic. And as they say to hell with the larger society they need to consider just what it is that they are wishing for.
Nothing has changed in the Wall Street arena. Oh yes we have computers, all the better to front run; and cell phones, I wonder if anyone listens in? Yes we have all this modern stuff; but the humans who energize the theater that is the market place remain vulnerable to all of the human failings that have been with us in the march from hunting and gathering to the gridlocked expressway at the ‘rush hour’.
Nothing has changed because people have not changed.
People haven’t changed because nothing has changed – don’t you mean?
The pool managers wouldn’t believe how the con has evolved since their day.
Now the government steps in and buys after the plug is pulled. Savers and taxpayers get stuffed. And today’s pool managers get tens of million of dollars in bonuses every year no matter what.
The 1920s operators would probably consider it a crime scene. LOL.
Dark pools anyone?
Other goods book to read about this era: The Lords of Creation, Only Yesterday and its sequel Since Yesterday. The Lords of Creation is a nice overview of the growth of corporate power from 1900, and a reminder that corporations are legal, and therefore social creations (e.g. at some point it was an innovation that corporations could own shares of other corporations). Only Yesterday is a social history of the 1920s, Since Yesterday of the 1930s.
And of course, Middletown and Middletown In Transition.
Or you can just read the Pecora Commission report, which is the primary source for a lot of the discussion of stock market manipulation:
http://fraser.stlouisfed.org/publications/sensep/
The report is the last link.
“Has Much Changed on Wall Street Since the Roaring (and Ripoffsky) Twenties?”
Yes! The global scope of the scam, its co-opting of governments and the media through aggregate generational corruption and the sophistication of its macro orchestration.
All aided and abetted by diligently refining and improving the scamerican Sleeve Job …
The Blowout
Spewing Sleeve Jobs
Oh scamerica!
Scamerica!
You clucking funt,
Mother homeland,
Of the sleeve job,
The ultimate scam,
Where all that is good,
Is worn on the sleeve,
Of all that is bad,
So as to mask the bad,
Co-opt the good,
And use the deception,
For private,
Conspiratorial gain,
And so Jesus,
Yes,
That dear Jesus,
Appears on the sleeve,
Of George W. Bush,
And the media minions,
Of the ruling elite,
Become busy tailors,
Sewing on the sleeves,
Of their masters;
Free markets,
And democracy,
And the rule of law,
And public safety,
And motherhood,
And apple pie,
And finance,
And patriotism,
And honest elections,
And so all of the good,
Becomes ruse,
Used to confuse,
The Douglass lions,
Who will never awaken,
From their slumber,
As they are turned,
In their sleep,
Into ruler adoring,
Sycophantic gladiators,
Pitted one against the other,
In perpetual conflict,
In the rebirth,
Of the ever expanding,
Global Circus Maximus,
Where so many sleeve jobs,
Spewing forth,
And flopping into the outhouse of humanity,
Have rendered it useless,
And it must be moved …
Election boycotts!
No balls! No brains! No freedom!
Deception is the strongest political force on the planet.
At least SOMEHOW Wall St was reformed after the crash. Apparently, we no longer have that ability. Call it the irony of our times:
Wall St is no longer a free market (if it ever was), but our government is for sale to the highest bidder!