By Pam Martens and Russ Martens: October 20, 2015
During the recent Democratic Presidential debate that aired on CNN on October 13, Senator Bernie Sanders of Vermont said: “Let us be clear that the greed and recklessness and illegal behavior of Wall Street, where fraud is a business model, helped to destroy this economy and the lives of millions of people.”
Most Americans clearly understand that reality, and yet, Wall Street’s regulators continue to look the other way at the most outrageous conflicts of interest.
On June 2, 2014, Wall Street’s self-policing body, FINRA, disclosed for the first time details on which publicly traded companies were being traded in dark pools and the source and volume of that trading. Dark pools are effectively unregulated stock exchanges and are operated by some of the largest commercial banks on Wall Street – which are also backstopped by the taxpayer for any losses to insured depositors.
As we wrote at the time, when FINRA released its first dark pool data, we were stunned to learn that not only were affiliates of the insured banks engaging in dark pool activity but they were actually trading in shares of their own bank’s stock.
According to the Senate hearings conducted after the stock market crash of 1929, it was illegal then under the National Bank Act for commercial banks to trade in their own stock. Ferdinand Pecora, Chief Counsel to the Senate Committee that conducted an in-depth investigation of the corruption leading to the crash, told Hugh Baker, an officer of National City Bank, the precursor to today’s Citigroup: “You know that a bank under the law cannot trade in its own stock, don’t you.” Baker answered: “Yes, that is right.”
What National City Bank did instead was to form an affiliate to trade its own stock, as one of many other market manipulations. On January 11, 1928, National City Bank delisted its stock from the New York Stock Exchange. Subsequently, the stock traded over the counter with the invisible hand of the bank’s brokerage firm, the National City Company, guiding the market price ever higher. As a result, according to the Pecora report, in September 1929, the book value of National City Bank stock was $385 million. The market value was $3.2 billion.
Chase National Bank, the precursor to today’s JPMorgan Chase, also delisted its stock from the New York Stock Exchange in January 1928 and proceeded to set up pool operations to pump up its share price. When asked by Pecora what he had hoped to accomplish by delisting his shares on the New York Stock Exchange and trading them over the counter, Albert Wiggin, President of the bank, stated: “By buying when there were large fluctuations.” When pressed further by Pecora as to the real motivation, Wiggin blurted out: “Because we did not want it listed on the New York Stock Exchange and have those fluctuations quoted in every paper all over the country.”
The equivalent of today’s dark pool owned by JPMorgan Chase, JPM-X, was an affiliate known as Metpotan Securities Corporation, a wholly owned subsidiary of Chase National Bank. Metpotan entered into agreements with other Wall Street firms to actively trade in the shares of Chase National Bank.
In September 1927, Metpotan entered into an agreement with three other Wall Street firms of that day, Blair and Company, McClure, Jones and Company, and Potter and Company to buy and sell the stock of Chase National Bank for a period of 60 days. At the time the account was opened with the other three Wall Street firms, according to the Pecora hearings, Chase National Bank was trading at 575 bid, 580 asked. When the account was closed out 60 days later, the stock had risen by 100 points.
Shortly after this first pool operation ended, another one was formed between Metpotan and the same parties, lasting almost a full year into April 1929 – just six months before the onset of the greatest financial crash in history up to that time. That operation drove the price of Chase National Bank to $800 a share, according to the Pecora hearings.
When Wiggin was pressed by Pecora as to whether this was just an operation to make the stock appear active and drive its price higher, Wiggin responded that he didn’t see it that way, he thought it was a “God-driven market.” (Invoking God for market manipulations is apparently a time-honored tradition on Wall Street, e.g., Goldman Sachs’ CEO Lloyd Blankfein’s view that his firm is “doing God’s work.”) These pool operations helped to pump the price of Chase National Bank to a high of $1325 in 1929. When the market collapsed from 1929 to 1933, Chase’s share price hit a low of $88.75 according to the Pecora report.
How can it be that it was illegal for banks to trade their own stocks in 1929 and it’s not today? How could bank regulators and Congress, seven years after the greatest financial crash since the Great Depression, be allowing blatant conflicts like this to continue?
Harkening back to the syndicate pools created in the lead-up to the 1929 crash, today it’s not just that the banks are trading their own stocks, but their banking colleagues are also trading each other stocks. Is this a replay of the corruption of yesteryear? We don’t know because neither Congress nor the SEC has seen fit to engage in any broad-based investigation – even after the implosion of Wall Street in 2008 from deceptive and opaque frauds; even after the major banks have been repeatedly charged in the last few years with collusion in rigging the Libor interest rate benchmark and foreign currency trading.
Adding to this discomfort, the two main banks named in the Pecora Senate investigation for trading in their own shares, National City Bank and Chase National Bank, are the predecessors of Citigroup and JPMorgan Chase, whose subsidiaries admitted to felony charges in rigging foreign currency markets just five months ago.
We took a look at FINRA data to see if the dark pools of JPMorgan Chase and Citigroup were trading in their own stocks during the week in May when the U.S. Justice Department announced the banks were each admitting to a felony charge. Indeed they were. The dark pools of other major Wall Street banks were also trading in the shares of JPMorgan Chase and Citigroup.
One would have expected the stock price of the two banks to crater on news that for the first time in U.S. history, two of the largest U.S. banks were now admitted felons. That didn’t happen. The share prices barely budged.
On the day before the announcement, May 19, Citigroup closed at $55.33. On the day of the announcement, Citigroup closed at $54.89. On the day after the announcement, Citigroup closed at $54.84. The closing prices for JPMorgan Chase on the same dates were: $67.01, $66.48, and $66.65. Is the public to believe that a criminal charge against banks holding trillions of dollars in assets is worth less than a 1 percent move in the bank’s share price?
Or is it possible some extra buying support in the dark pools elevated the share prices? We’ll never know until Congress gets off its duff, finds itself a Ferdinand Pecora, and gets those long overdue investigative hearings underway.