Market Manipulation “Bear Raid” Contributed to the 2007 Financial Crisis

Professor Yaneer Bar-Yam, President of New England Complex Systems Institute (NECSI), and his team of analysts support suspicions that a type of market manipulation called bear raids played a role in the market crash at the beginning of the financial crisis in November 2007. Any bear raid would have been prevented by a regulation that was repealed by the Securities and Exchange Commission (SEC) in July 2007. The regulation, known as the price test or the “uptick rule”, meant to prevent manipulation and promote stability was in force from 1938 as part of the government response to the 1928 market crash and its consequences.

At a critical point in the financial crisis, the stock of Citigroup was attacked by the bear raid—traders sold stock they did not own (so called “borrowed shares”) with the expectation of buying the stock cheaper when the price fell (“short-selling”) thereby getting a profit from trading in a falling market. If enough rich do this in cahoots, the glut of lower priced stock actually causes the price to fall, inducing panic selling by other price watching traders—or their price watching robots! Thus the risk can be totally eliminated by coordinated trading like this. Of course, if a single trader is wealthy enough, it might be that no co-ordination is needed!

Through its analysis of stock market data not generally available to the public, namely the “borrowing” of shares, NECSI reconstructs the chain of events. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. This decline coincided with an anomalous increase in “borrowed shares” by 100 million shares, valued at almost $6 billion, the selling of which was a large fraction of the total trading volume. The trading on November 1 was almost four times the usual volume. The newly borrowed shares represented over three-quarters of the volume on that day, driving prices down by almost 7 percent. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. By the time the shares were returned, it had dropped nearly 20 percent. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup’s stock price and achieve a profit, ie, a bear raid.

This was no coincidence. Professor Yaneer Bar-Yam maintains:

When 100 million shares are borrowed on a single day and then returned on a single day, the evidence that this is a concerted action is hard to refute. The likelihood of such an event happening by coincidence is one in a trillion.

The NECSI scholars are concerned that the incident was allowed to happen. Selling shares to deliberately cause a price drop, to induce others to buy or sell is illegal. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal even major market manipulation events. Regulations are needed to prevent intentional actions that cause markets to deviate from equilibrium and contribute to crashes. Bar-Yam said:

There used to be a rule that prevented it from happening by forbidding borrowed shares from being sold in large blocks that drive the price down. Last year, the authors of the report sent preliminary results of their study to the financial services committee of Congress, and Congressmen Barney Frank and Ed Perlmutter sent it to the SEC.

Unfortunately, the SEC has not acted to identify or prosecute those responsible or to prevent its occurring in the future. Enforcing the law after it is violated is much less effective than preventing it from happening in the first place. Enforcement actions cannot reverse severe damage to the economic system. Prevention may be achieved through improved availability of market data and the original uptick rule or other transaction limitations.

After the market crash, the SEC received thousands of requests from the public to reinstate the price test rule. Hedge funds that invest the money of wealthy individuals opposed its reinstatement. Eventually, the SEC put into place an “alternative” rule that only applies a price test when the price of a share drops more than 10 percent, but that is insufficient. Professor Bar-Yam points out:

This watered-down rule would not have stopped the bear raid on Citigroup on November 1, 2007. This is only one example of the deleterious effects of the weakened rule. The overall effect of unregulated selling of borrowed shares is surely much larger and continues today.

Media and Ruling Class Undermine Social Values by Labelling Valid Demands as Extreme

Ever wonder why the media will report a few protesters breaking windows or fighting police when a hundred times as many register their protest peacefully? Naturally, like much media focus, it distracts from the purpose of the protest, but new research shows how support for a popular cause can be cut by labeling it as “radical” or “extreme”. Thomas Nelson, co-author of the study and associate professor of political science at Ohio State University, said that is why calling political opponents extremists is so effective, and popular as a political tactic. he added:

The beauty of using this “extremism” tactic is that you don’t have to attack a popular value that you know most people support. You just have to say that its supporters are going too far or are too extreme.

And people fall for it because we mostly consider ourselves civilized, and not at all extreme, and so tend to divorce ourselves from the extreme cause or group, even though we might actually prefer it given a fair chance. Thus people supported a gender equality policy when other supporters were not mentioned, but when the proposers of the same policy were described as “radical feminists”, participants in the study supported the policy much less.

Experiments in Evidence

1. 233 undergraduate students were asked to read and comment on an essay that they were told appeared on a blog. The blog entry discussed the controversy concerning the Augusta National Golf Club’s “men only” membership policy. This policy caused a controversy in 2003 before the club hosted the Masters Tournament. Participants read one of three versions of an essay which argued that the PGA Tour should move the Masters Tournament if the club refused to change this policy:

1. One group read that the proposal to move the tournament was led by “people” or “citizens”.
2. Another group read that the proposal was led by “feminists”.
3. The third group read that the proposal was led by “radical feminists”, “militant feminists”, and “extremists”.

Additional language reinforced the extremist portrayals by describing extreme positions that the groups allegedly held on other issues, such as getting rid of separate locker room and restroom facilities for men and women.

Participants were then asked to rate how much they supported Augusta changing its membership rules to allow women members, whether they supported the Masters tournament changing its location, and whether, if they were a member, they would vote to support female membership at the club.

The findings showed that participants were more supportive of the golf club and its rules banning women, less likely to support moving the tournament, and less likely to support female membership, when the proposal to move the tournament was described in language redolent of extremism and radical feminism. Nelson explained:

All three groups in the study read the exact same policy proposals. But those who read that the policy was supported by “radical feminists” were significantly less likely to support it than those who read it was supported by “feminists” or just “citizens”.

By associating a policy with unpopular groups, opponents are able to get people to lose some respect for the value it represents, like feminism or environmentalism.

2. In another experiment, 116 participants read the same blog entry used in the previous experiment. Again, the blog entry supported proposals to allow women to join the golf club. One version simply attributed the proposal to citizens, while the other two attributed them to feminists or radical feminists.

Next, the subjects ranked four values in order of their importance as they thought about the issue of allowing women to join the club:

1. upholding the honor and prestige of the Masters golf tournament
2. freedom of private groups to set up their own rules
3. equal opportunities for both men and women
4. maintaining high standards of service for members of private clubs.

How people felt about the relative importance of these values depended on what version of the essay they read:

1. Of those participants who read the proposal attributed simply to citizens, 42 percent rated equality above the other three values. But only 32 percent who read the same proposal attributed to extremists thought equality was the top value.
2. On the other hand, 41 percent rated group freedom as the top value when they read the proposal attributed to citizens. But 52 percent gave freedom the top ranking when they read the proposal attributed to extremists.

Observations and Conclusions

Nelson commented:

Tying the proposal to feminist extremists directly affected the relative priority people put on gender equality v group freedom, which in turn affected how they felt about this specific policy. Perhaps thinking about some of the radical groups that support gender equality made some people lose respect for that value in this case.

This tactic of attacking a policy by tying it to supposedly extremist supporters goes on all the time in politics. Opponents of President Obama’s health care reform initiative attacked the policy by calling Obama a “socialist” and comparing the president to Adolf Hitler. Nelson explained:

These tactics can work when people are faced with competing values and are unsure what their priorities should be.

Environmental values, for example, may sometimes conflict with economic values if clean air or clean water laws make it more difficult for companies to earn a profit.

If you want to fight against a proposed environmental law, you can’t publicly say you’re against protecting the environment, because that puts you in the position of fighting a popular value. So instead, you say that proponents of the proposed law are going to extremes, and are taking the value too far.

The problem with this tactic for society is that it damages support of the underlying values, as well as the specific policy. Nelson:

If you use this extremism language, it can make people place less of a priority on the underlying value. People may become less likely to think environmentalism or gender equality are important values.

Maybe that is why supporters of the Republican Party in the USA seem to be utterly immoral and obnoxious in general, although large numbers of them profess Christianity. As their bibles say, if they ever got round to reading them, you cannot serve God and Mammon. They serve Mammon, and so their Christian values, if they had them in the first place, evaporate.

When the media run down anyone whose policies seem fair and right, remember these studies. Even civilized people might have to protest violently to stop the propagation of obnoxious and selfish ones by the 1% and their media and academic lackeys. So look carefully at what extremists are extreme about. You might agree with them.

Antisemitism, a Convenient Hatred

The Huffington Post invites authors to publish articles about antisemitism but suppresses any critical responses. Antisemitism, a Convenient Hatred was one such written by Phyllis Goldstein and published a few days ago. It is a plug for her book, A Convenient Hatred: A History of Antisemitism. It is a short article with little that is not accepted in it, such as the role of Christianity in antisemitism, and the behavior of the church and European aristocracy. The real question is whose aims today is this hatred convenient for? Goldstein begins thus:

Many people thought antisemitism would disappear after the Holocaust, but it did not. Nor did it disappear when many Christian churches acknowledged that Jews were not responsible for the crucifixion. And antisemitism and other hatreds have persisted despite tough laws against discrimination, hate crimes and hate speech. To understand why hatreds endure, we have to confront history. Histories that are not confronted can never be reconciled and yet most people—including many Jews—know very little about the history of antisemitism.

Thereafter she goes back to those ancient histories mention above. What she does not address, and perhaps it was because the article was too short to do so, is the most relevant explanation today. It is that antisemitism is a valued tool of Zionism. I therefore pointed it out. The comment never got published! I wrote:

Modern antisemitism is being studiously promoted by Zionists and the Zionist state of Israel as the recent adverts calling upon Jews to return to Israel show. The notion of the fear of a future holocaust however goes right back to the Jewish scriptures. It is the fear generated by the strictures of the Mosaic law and emphasized by the Deuteronomic Historian. "Obey the law or be reduced to a remnant." The threat of such a destruction strengthens a community by emphasizing the bonds that unite it and distinguish it.

Zionists have made the most of this idea since the war, using the millions of Jewish dead to promote their own racialist and elitist, neo-fascist politics. Uri Avnery cites Yehayahu Leibowitz as having said to him, "The Jewish religion died 200 years ago. Now there is nothing that unifies the Jews around the world apart from the Holocaust." It defines goyim as potentially irrational mass murderers of Jews, generating distrust in the diaspora while promoting antisemitism and emigration to the Zionist state, and making "vengeance into an acceptable western value", according to Gilad Atzmon.

"The Jew" is the new God of the Zionist religion, Atzmon, a Jew himself, tells us, the idealized image of the suffering, innocent Jews of the Nazi death camps, they use for their political ends, though the Zionist Jews of Israel are the bullies of the Middle east today, backed by the world's big bully, the pro-Zionist leadership of the USA.