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Who are the criminals here?

January 12th, 2013

I’m not a big fan of hoaxes, but the Whitehaven coal hoax (or rather, the reaction to it) has certainly provided plenty of teachable moments. Media stories are still calling it a $300 million hoax (while throwing stones at online reporting H/T Megan), and suggesting that Mums and Dads are big losers. Now we have some actual data, showing that clients of Morgan Stanley and Macquarie gained from the trades made during the hoax while those of Citigroup and UBS lost. [1]

Given the claim that hoaxes like this might destroy faith in the stock market, it’s worth looking at the track record of some of these banks. Looking just at the last few months, we have:

Morgan Stanley fined over Facebook IPO, 19/12/12
Citi fined $2 mln over Facebook IPO October 2012
Deutsche Bank, UBS Convicted by Milan Judge for Fraud Role
19/12/12

UBS in particular has a rap sheet so long that Bloomberg news recently published a call for it to be shut down

By comparison with these global titans, Macquarie Bank looks pretty good, despite being well-known as a sharp-elbowed practitioner of regulatory arbitrage
Regulator eyes millionaires factory

It’s now clear that this systematic criminality is part and parcel of modern financial markets, and that nothing can or will be done about it. After HSBC got a slap on the wrist for a long-term money laundering operation on behalf of drugdealers, dictators and terrorists, the US Department of Justice openly admitted that the big banks are not only too big to fail, but too important to be subject to the law. Modest fines are just a cost of doing business, exactly as they are for other businesses that routinely operate at the edge of, or outside the law.

Perhaps the clients of these firms are unaware of these facts. If so, this event might help to inform them. If not, they can scarcely complain about something as trivial as a hoax press release.

fn1. Apparently Morgan Stanley bought about $2.6 million of shares, which would imply a profit of around $500k, a significant sum, but several orders of magnitude below the $300 million quoted

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  1. January 12th, 2013 at 11:08 | #1

    Nice work to whoever worked out the beneficiaries.

    This raises another interesting question: Who got the “media release” and what did they do when they got it?

    The media is a cosy little closed shop of the “savvy” as Jay Rosen puts it. It wouldn’t be at all impossible for a fast mover to do well out of any information they got hold of before the general public.

    Here is the graph of WHC price over the last 6 months:

    http://hfgapps.hubb.com/asxtools/Charts.aspx?asxCode=WHC&chartType=3&volumeInd=9&TimeFrame=D6

    A proportion of sales during the small window of the hoax would have obviously resulted in a profit. Looking at the graph, that might even be the majority of them.

  2. Jim Rose
    January 12th, 2013 at 11:23 | #2

    is share market manipulation wrong?

  3. Hermit
    January 12th, 2013 at 11:25 | #3

    I also note the banks were quick to position themselves for the carbon trading market which I believe will be shown to be largely a scam. The bank that was involved in the hoax featured a carbon trading link on its main web page a few months back.

    If global net CO2e doesn’t decline in absolute terms after carbon credits are traded then they are not helping. I’ve seen estimates that some polluters spend up to 70% of their mitigation budget on these possibly bogus offsets rather than say efficiency improvements. If the credits are indeed largely bogus then the middlemen are creating a deadweight loss, seemingly with the blessing of government.

    One more kick. Remember when Wikileaks was seeking donations that the financial institutions colluded to block this. For example you couldn’t donate via Visa or PayPal. The banks are no friends of whistleblowers.

  4. Katz
    January 12th, 2013 at 11:33 | #4

    Moylan is more likely to be prosecuted for identity theft than market manipulation.

  5. zoot
    January 12th, 2013 at 13:05 | #5

    is share market manipulation wrong?

    Adam Smith thought it was a great idea. Free manipulation of markets is the foundation of his thinking; you should read him some day.

  6. Ikonoclast
    January 12th, 2013 at 15:08 | #6

    Very few neocons have actually read Adam Smith. And if they do, they find Smith’s work does not by any stretch contain automatic or implied endorsement of the many modern neocon devices, artifices and prescriptions.

  7. Ikonoclast
    January 12th, 2013 at 15:17 | #7

    Speaking of the criminal corporatocracy (or should that be kleptocracy?) read this. Note, it is rare for me to recommend a Ross Gittins article but this one is really quite good and an eye opener for the relatively naieve.

    http://www.smh.com.au/business/the-four-business-gangs-that-run-the-us-20121230-2c1e2.html

  8. rog
    January 12th, 2013 at 15:51 | #8

    Worth noting that the banks have also played a significant role in increasing the price of commodities, simply by hedging them. Food prices has been given as the tipping point in a variety of countries incl the Arab Spring. The only winners in this game have been some banks.

    http://www.wdm.org.uk/sites/default/files/hunger%20lottery%20report_6.10.pdf

  9. Bring back Birdy at Catallaxy
    January 12th, 2013 at 16:04 | #9

    Ikonoklast @6, which well-known Scottish economist advocated vegetarianism and argued that the market growth economy would inevitably be replaced by a steady-state economy?

  10. Ikonoclast
    January 12th, 2013 at 17:05 | #10

    @Bring back Birdy at Catallaxy

    Exactly, Adam Smith would modern neocons, libertarians etc., with intellectual horror and moral disgust. And he would be right to do so.

  11. Ikonoclast
    January 12th, 2013 at 17:08 | #11

    * would view

  12. kevin1
    January 12th, 2013 at 18:56 | #12

    @Jim Rose
    Is “share market manipulation” AKA deceit (be honest Jim) consistent with delivering the optimal social outcome – the raison d’etre of economic theory? Why have we setup regulators (albeit weak)?

  13. kevin1
    January 12th, 2013 at 19:05 | #13

    @Jim Rose
    BTW, never heard from you about your claim that ROK economic success resulted from “freeing up” bureaucratic control – quite contrary to the Ph D from our own polymath Clive Hamilton. Inconvenient fact?

  14. pablo
    January 12th, 2013 at 20:17 | #14

    Katz @4. I agree that Moylan will go up for impersonation. Amazing that he can ‘speak’ for an ANZ bank official via a mobile in a forest camp. I”d love to know how many media calls of inquiry he took. My feeling is not many which might leave a few media folk red faced.
    Incidently this hoax took place in a week where there were some 15 dust level exceedance notifications issued in the Hunter Valley where the issue of public health exposure to dust particles below 10 microns is very contentious. An early Senate inquiry is scheduled.
    Moylan’s actions have a strong moral basis IMO.

  15. January 12th, 2013 at 21:24 | #15

    @pablo

    Ben Cubby from SMH was the first (to my knowledge) to spot it as a hoax after he called the number listed in one of those old fashioned attempts at actual journalism.

    It was interesting that the Murdoch media (and, sadly – but predictably, Crikey) tried to have a go at Fairfax for “falling for the hoax”. Something of an own goal when you consider that Murdoch is a major shareholder and controller of AAP.

    How these things work is: AAP puts something on the “wire” (more often than not sourced to a dodgy piece of News Ltd ‘reporting’ which is most often a talking point or press release and it is then taken up by the others and attributed to AAP giving it a veneer of credibility).

    The machine works splendidly when it is simply a plausible-deniability/churning mechanism for talking points, bogus claims, press releases etc.. designed to promote a certain outlook etc…

    When it gets hoaxed the huffing-puffing “Shock! Outrage! Fury!” brigade must be called in to ensure the facade remains credible.

    Kudos to Cubby on this one and shame on News Ltd and Crikey.

  16. rog
    January 13th, 2013 at 05:41 | #16

    On a similar theme, the recent death of Aaron Swartz shows the state as a bully who fawns to big business.

    http://lessig.tumblr.com/post/40347463044/prosecutor-as-bully

  17. Jim Rose
    January 13th, 2013 at 09:09 | #17

    @Ikonoclast Adam Smith criticised joint-stock companies because the separation of ownership and management could lead to inefficient management because of agency costs. See Adam Smith’s Analysis of Joint-Stock Companies by Gary M. Anderson and Robert D. Tollison, Journal of Political Economy (1982).

    Modern analysis shows that the separation of ownership from control prospered because the gains from a division of labour in risk bearing and in management exceed the agency costs. The risks of entrusting capital to professional management teams are well-known. People keep investing in the share market because of rewards justify it.

  18. rog
    January 13th, 2013 at 09:27 | #18

    @pablo WRT to dust monitoring in the Hunter, due to quality and other issues EPA reports take ~4 years to produce. The 2008 report found dust emissions to be consistent with activity ie the more coal the more dust. All stations report excessive dust levels.

  19. Ricky
    January 13th, 2013 at 13:20 | #19

    Look at the press release. The URL quoted therein should have been enough to alert anyone to a hoax. I saw it for what it was and placed a buy order.

  20. Mel
    January 13th, 2013 at 13:28 | #20

    A key point from ASX:

    “The ASX’s chief compliance officer, Kevin Lewis, reiterates that point, saying people whose investments are guided by official ASX announcements would have escaped Monday’s losses.
    ”Markets often trade on the basis of rumour, speculation and other unofficial sources of information. Sometimes that information turns out to be correct and sometimes it doesn’t,” Lewis says. ”People who trade on the basis of information that they read online and don’t verify with official sources like the ASX market announcements platform should not expect to be able to turn around and say that the information was not correct and therefore ‘I should be able to walk away from my trade’.
    ”You have to differentiate here between investors and traders. Investors hold for the longer-term and aren’t generally going to be impacted at all by these types of short-term price spikes,” he says.
    ”The people who are affected are the day-traders and those trading in the short-term. If you are that type of trader, you need to understand the risks you are taking.”

    http://www.theage.com.au/business/whitehaven-a-siren-call-for-a-host-of-hoaxes-20130111-2clnh.html#ixzz2Hp2QDgiG

    Given the amateurish nature of the hoax, its strictly political (not profit making) nature and the failure of anyone who lost money to exercise reasonable caution (checking with the ASX for example), I’m not going to shed any tears.

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