Courtesy of Pam Martens.
Figuring out how to write ever creative versions of headlines that say the market is hitting a new high is commanding a lot of energy in newsrooms these days. What should be commanding more energy in the newsrooms is writing about the market structure that is underpinning this “bull”.
On Friday, TheStreet.com went with the headline “S&P Books Best August Since 2000.” Bringing up the year 2000 is a bit like bringing up the Hindenburg during an air show. The year 2000 marked the peak in Wall Street’s dot.com bubble, whose bust erased 78 percent of the Nasdaq stock market over the next two and one-half years.
Wiped-out Nasdaq investors were eventually to learn that much of this so-called bull market was a highly orchestrated fraud by some of the biggest firms on Wall Street. The fraud worked like this:
Research analysts at marquee firms like Salomon Smith Barney and Merrill Lynch issued knowingly false research reports urging small investors to buy young, unproven companies while calling the same stocks “crap” or a “pig” in private emails. When new tech or dot.com companies went public, favored big clients at Wall Street firms were instructed when to buy on the opening day of trading at rising prices to make the stock appear to be in high demand. This fraud on the market is called laddering.
To allow Wall Street’s most important clients to benefit by selling out at the doubled or tripled prices, stockbrokers for the little investors were incentivized to keep their clients in the stocks by their firms imposing a system called a “penalty bid” where the stockbrokers’ commissions would be removed if their clients sold into the run-up in price.
From Nasdaq’s peak in March 2000 to its trough in October 2002, approximately $4 trillion was transferred from those who did not know the market was a fraud to those who did.
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