They Messed Up Wall Street, Can We Entrust Them With Economy?

[Policing Wall Street]

In a previous article, "Wall Street Corruption: Easy As A-B-C," I explained that in the 1980s Paul Volcker in his position as Chairman of the Federal Reserve, took no action to stop a member of the Board of the Federal Reserve from leaking changes in the Fed Funds Rate-so that Bear Stearns could earn hundreds of millions of dollars on this information.

This decision not to investigate Bear Stearns later contributed to Bear Stearns failure because Bear Stearns knew that it could get away with anything--it was above the law.

Bear Stearns was not the only firm to profit from inside information of movements in the Fed Funds Rate. Another sleazy brokerage firm did the same. Remember Drexel Burnham. Yes, the firm that Michael Milken and Ivan Boesky made infamous.

So let me explain the process.

The XMI is a stock index, which is composed of 20 stocks. The options on the XMI traded on the American Stock Exchange in a huge pit.

In 1987 I noticed that before there was an announcement of a reduction in the Fed Funds Rate, a Drexel Burnham broker would enter the XMI pit and purchase hundreds of calls. This broker was an employee of Drexel Burnham and would always state that he was executing the order for a Drexel Burnham client-and thus the order was for a public customer, and that the client was closing the position, in other words that he had sold the calls and was now purchasing the calls that he had sold.

But I did not believe him. When I traded Texaco options the head broker of Drexel Burnham would enter the Texaco crowd and state that he was buying two hundred calls for a public customer of Drexel.

Invariably when I checked the clearance sheets, the order had been executed for a firm account. The reason that the broker stated that it was a customer order was that a customer order received certain advantages over an order for the firm.

I was friendly with a Drexel Burnham floor broker, one who executed orders in stock options.

I spoke to him about what I perceived to be front running in the XMI. The Drexel broker confirmed what I had stated and suggested that I examine the trading sheets to determine if the orders had been executed for the firm or for a customer.

So I went with him to the DK (Don't Know) Room where Amex option trades, which did not match, were settled.

I examined the trading sheets. And there it was laid out for me- in the columns. One column read: "O" for opening, which meant that there was no position in this account.

Another column read: "F" for firm, which meant that the trade had been done for the proprietary account of Drexel Burnham. I knew a family member of one of the top three officers of Drexel Burnham in the New York City office; Michael Milken was in California.

So the next time that Drexel Burnham purchased calls in the XMI, I stood next to her. When I said: I think Drexel knew of that reduction in the Fed Funds Rate, the individual replied: "Of course. My father is always told by a member of the Fed (Federal Reserve Board)."

To verify the individual's statement I went to the DK room the next day. I examined the clearance sheet.

Sure enough. The clearance sheets showed that Drexel had purchased calls in the XMI and that these calls were purchased for the firm's account.

No action was ever undertaken against Drexel Burnham even though several brokers complained of this front running.

Paul Volcker will do for the Economic Recovery Board what he did as Chairman of the Federal Reserve--Let Wall Street cheat and steal as much as it wants.