Courtesy of Johnlaw2012 from CNA forum
The Highly Suspicious Out-of-the-Money Puts
That was one of many questions raised by John Olagues, an authority on stock options, in a March 23 article boldly titled “Bear Stearns Buy-out . . . 100% Fraud.” Olagues maintains that the Bear Stearns collapse was artificially created to allow JPMorgan to be paid $55 billion of taxpayer money to cover its own insolvency and acquire its rival Bear Stearns, while at the same time allowing insiders to take large “short” positions in Bear Stearns stock and collect massive profits. For evidence, Olagues points to a very suspicious series of events, which will be detailed here after some definitions for anyone not familiar with stock options:
A put is an option to sell a stock at an agreed-upon price, called the strike price or exercise price, at any time up to an agreed-upon date. The option is priced and bought that day based upon the current stock price, on the presumption that the stock will decline in value. If the stock’s price falls below the strike price, the option is “in the money” and the trader has made a profit. Now here’s the evidence:
On March 10, 2008, Bear Stearns stock dropped to $70 a share -- a recent low, but not the first time the stock had reached that level in 2008, having also traded there eight weeks earlier. On or before March 10, 2008, requests were made to the Options Exchanges to open a new April series of puts with exercise prices of 20 and 22.5 and a new March series with an exercise price of 25. The March series had only eight days left to expiration, meaning the stock would have to drop by an unlikely $45 a share in eight days for the put-buyers to score. It was a very risky bet, unless the traders knew something the market didn’t; and they evidently thought they did, because after the series opened on March 11, 2008, purchases were made of massive volumes of puts controlling millions of shares.
On or before March 13, 2008, another request was made of the Options Exchanges to open additional March and April put series with very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the requests and massive amounts of puts were bought. Olagues contends that there is only one plausible explanation for “anyone in his right mind to buy puts with five days of life remaining with strike prices far below the market price”: the deal must have already been arranged by March 10 or before.
These facts were in sharp contrast to the story told by officials who testified at congressional hearings on April 4. All witnesses agreed that false rumors had undermined confidence in Bear Stearns, making the company crash despite adequate liquidity just days before. On March 10, 2008, Reuters was citing Bear Stearns sources saying there was no liquidity crisis and no truth to the speculation of liquidity problems. On March 11, the Chairman of the Securities and Exchange Commission himself expressed confidence in its “capital cushion.” Even “mad” TV investment guru Jim Cramer was proclaiming that all was well and the viewers should hold on. On March 12, official assurances continued. Olagues writes:
“The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance . . . . This was no case of a sudden development on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collapse was anticipated and prepared for. . . .
“Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns’ and other banks’ liquidity, which then starts a ‘run on the bank.’ These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al. believed that Bear Stearns balance sheet was in good shape. . . . The idea that rumors caused a ‘run on the bank’ at Bear Stearns is 100% ridiculous. Perhaps that’s the reason why every witness was so guarded and hesitant and looked so mighty strained in answering questions . . . .
“To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why.”5
Other commentators point to other issues that might be probed by investigators. Chris Cook, a British consultant and the former Compliance Director for the International Petroleum Exchange, wrote in an April 24 blog:
“As a former regulator myself, I would be crawling all over these trades. . . . One question that occurs to me is who actually sold these Put Options? And why aren’t they creating merry hell about the losses? Where is Spitzer when we need him?”6
In an April 23 article in LeMetropoleCafe.com, Rob Kirby agreed with Olagues that it was not Bear Stearns but JPMorgan that was bankrupt and needed to be “recapitalized” with massive loans from the Federal Reserve. Kirby pointed to the huge losses from derivatives (bets on the future price of assets) carried on JPMorgan’s books:
“. . . J.P. Morgan’s derivatives book is 2-3 times bigger than Citibank’s – and it was derivatives that caused losses of more than 30 billion at Citibank . . . . So, it only made common sense that J.P. Morgan had to be a little more than ‘knee deep’ in the same stuff that Citibank was – but how do you tell the market that a bank – any bank – needs to be recapitalized to the tune of 50 - 80 billion?”7
Kirby wrote in an April 30 article:
“According to the NYSE there are only 240 million shares of Bear outstanding . . . [Yet] 188 million traded on Mar. 14 alone? Doesn’t this strike you as being odd? . . . What percentage of the firm was owned by insiders that categorically did not sell their shares? . . . Bear Stearns employees held 30 % of the company’s stock . . . 30 % of 240 million is 72 million. If you subtract 72 from 240 you end up with approximately 170 million. Don’t you think it’s a stretch to believe that 186+ million real shares traded on Friday Mar. 14? Or do you believe that rank-and-file Bear employees, worried about their jobs, were pitching their stocks on the Friday before the company collapsed knowing their company was toast? But that would be insider trading – wouldn’t it? No bloody wonder the SEC does not want to probe J.P. Morgan’s ‘rescue’ of Bear Stearns . . .”8
If real shares weren’t trading, someone must have been engaging in “naked” short selling – selling stock short without first borrowing the shares or ensuring that the shares could be borrowed. Short selling, a technique used by investors to try to profit from the falling price of a stock, involves borrowing a stock from a broker and selling it, with the understanding that the stock must later be bought back and returned to the broker. Naked short selling is normally illegal; but in the interest of “liquid markets,” a truck-sized loophole exists for “market makers” (those people who match buyers with sellers, set the price, and follow through with the trade). Even market makers, however, are supposed to cover within three days by actually coming up with the stock; and where would they have gotten enough Bear Stearns stock to cover 75% of the company’s outstanding shares? In any case, naked short selling is illegal if the intent is to drive down a stock’s share price; and that was certainly the result here.9
On May 10, 2008, in weekly market commentary on FinancialSense.com, Jim Puplava observed that naked short selling has become so pervasive that the number of shares sold “short” far exceeds the shares actually issued by the underlying companies. Yet regulators are turning a blind eye, perhaps because the situation has now gotten so far out of hand that it can’t be corrected without major stock upheaval. He noted that naked short selling is basically the counterfeiting of stock, and that it has reached epidemic proportions since the “uptick” rule was revoked last summer to help the floundering hedge funds. The uptick rule allowed short selling only if the stock price were going up, preventing a cascade of short sales that would take the stock price much lower. But that brake on manipulation has been eliminated by the Securities Exchange Commission (SEC), leaving the market in unregulated chaos.
Eliot Spitzer has also been eliminated from the scene, and it may be for similar reasons. Greg Palast suggested in a March 14 article that the “sin” of the former New York governor may have been something more serious than prostitution. Spitzer made the mistake of getting in the way of a $200 billion windfall from the Federal Reserve to the banks, guaranteeing the mortgage-backed junk bonds of the same banking predators responsible for the subprime debacle. While the Federal Reserve was trying to bail the banks out, Spitzer was trying to regulate them, bringing suit on behalf of consumers.10 But he was swiftly exposed and deposed; and the Treasury has now broached a new plan that would prevent such disruptions in the future. Like the Panic of 1907 that justified a “bankers’ bank” to prevent future runs, the collapse of Bear Stearns has been used to justify a proposal giving vast new powers to the Federal Reserve to promote “financial market stability.” The plan was unveiled by Treasury Secretary Henry Paulson, former head of Goldman Sachs, two weeks after Bear Stearns fell. It would “consolidate” the state regulators (who work for the fifty states) and the SEC (which works for the U.S. government) under the Federal Reserve (which works for the banks). Paulson conceded that the result would not be to increase regulation but to actually take away authority from state regulators and the SEC. All regulation would be subsumed under the Federal Reserve, the bank-owned entity set up by J. Pierpont Morgan in 1913 specifically to preserve the banks’ own interests.
On April 29, a former top Federal Reserve official told The Wall Street Journal that by offering $30 billion in financing to JPMorgan for Bear’s assets, the Fed had “eliminated forever the possibility [that it] could serve as an honest broker.” Vincent Reinhart, formerly the Fed’s director of monetary affairs and the secretary of its policy-making panel, said the Fed’s bailout of Bear Stearns would come to be viewed as the “worst policy mistake in a generation.” He noted that there were other viable options, such as looking for other suitors or removing some assets from Bear’s portfolio, which had not been pursued by the Federal Reserve.11
Jim Puplava maintains that naked short selling has now become so pervasive that if the hedge funds were pressed to come in and cover their naked short positions, “they would actually trigger another financial crisis.” The Fed and the SEC may be looking the other way on this widespread stock counterfeiting scheme because “if they did unravel it, everything really would unravel.” Evidently “promoting market stability” means that whistle-blowers and the SEC must be silenced so that a grossly illegal situation can continue, since the crime is so pervasive that to expose it and prosecute the criminals would unravel the whole financial system. As Nathan Rothschild observed in 1838, when the issuance and control of a nation’s money are in private hands, the laws and the people who make them become irrelevant.