|
|
Bucket shop
(Wikipedia)
Bucket
shop (stock market)
Bucket shop is a brokerage firm that “books" (i.e.,
takes the opposite side of) retail customer orders without actually
having them executed on an exchange. These brokerages are also often
called boiler rooms. The term is a defined term under the criminal law of
many states in the United States which make it a crime to operate a bucket
shop. Typically the criminal law definition refers to an operation in which the
customer is sold what is supposed to be a derivative interest in a security
or commodity future, but there is no transaction made on any exchange. The
transaction goes 'in the bucket' and is never executed. Without an
actual underlying transaction, the customer is betting against the bucket
shop operator, not participating in the market. Alternatively, the bucket
shop operator "literally 'plays the bank,' as in a gambling house,
against the customer." Operating a bucket shop in the United
States would also likely involve violations of several provisions of federal
securities or commodity futures laws.
A person who engages in the practice is referred to as a bucketeer and the
practice is sometimes referred to as bucketeering.
History in the United States
Bucket shops specializing in stocks and commodity futures flourished in
the United States from the 1870s until the 1920s. Edwin Lefèvre, who
is believed to have been writing on behalf of Jesse Lauriston Livermore,
describes the operations of bucket shops in the 1890s in detail. In
the United States, the traditional pseudo-brokerage bucket shops came
under increasing legal assault in the early 1900s, and were effectively
eliminated before the 1920s. However, the term came to apply to other
types of scams, some of which are still practiced. They were typically small
store front operations that catered to the small investor, where speculators
could bet on price fluctuations during market hours. However, no actual
shares were bought or sold: all trading was between the bucket shop and its
clients. The bucket shop made its profit from commissions, and also
profited when share prices went against the client.
The terms of trade were different for each bucket shop, but bucket shops
typically catered to customers who traded on thin margins, even as low as 1%.
Most bucket shops refused to make margin calls, so that if the stock price
fell even momentarily to the limit of the client's margin, the client would
lose his entire investment
The highly leveraged use of margins theoretically gave the
speculators equally large upside potential. However, if a bucket shop held a
large position on a stock, it might sell the stock on the real stock
exchange, causing the price on the ticker tape to momentarily move down
enough to wipe out its client's margins, and the bucket shop could
take 100% of their investments.
…
This
section is from the book "Money And Investments",
by Montgomery Rollins.
Bucket
Shops
2 (See " Margin," which read first.) " Bucket shops " are
run by irresponsible brokers, not members of any stock exchange, and who do a
marginal business upon one dollar a share and upwards.3 As a matter of fact, in
the case of a " bucket shop," the stock itself is usually not
purchased or sold for the customer. If the
order is actually executed upon a bona fida exchange, then the "bucket
shop" puts in a contrary order for a like amount. For example, a
" bucket shop " would sell an amount equivalent to the customer's
purchase, or, likewise, purchase an equivalent amount to his sale, thus in no
event carrying stocks. It amounts to the customer wagering his
money upon a given stock either going up or down, and the "bucket
shop," accepting his wager, gambles the other way; and, in the
long run, they, like most other gambling establishments, come out winners. A
specific example would be for a person having about $10 to go into a place
and buy, say, ten shares of stock, with the anticipation of a rise. He will
be charged the buying and selling commission, and interest on the account,
the same as in a legitimate broker's office, although no stock will be
actually purchased or sold. …
Inasmuch as legitimate stock exchange brokers have been known to
"bucket" their orders - accepting the customer's loss or
paying him the profit upon the settlement of the account - it may be
sometimes desirable for a customer to know as to whether his orders are
actually being executed. This may be done by his demanding the name
of the broker on the opposite side of the transaction; that is, the one to
whom his security has been sold or from whom it was purchased. The rules of
the stock exchange entitle him to this information.[not anymore. The DTCC
does not provide this information]
…
The curse of this sort of business is that it attracts men and women of very
small means, often office boys and the like. It is one of the worst forms of
stock gambling known and has done untold injury. The majority of "bucket
shops" will advertise that stock can be actually delivered, but as
nobody calls for delivery, except in rare cases, they can afford to purchase
the stock through genuine brokers to fill the demand of such rare occasions.
"Bucket shops" thrive best on a declining market, for it is natural
for the average person to buy stocks in anticipation of their advance in
value; or, in other words, the majority of customers wager that stocks will
go up. Therefore, a falling market causes the "bucket shop" to
win more of its wagers than a rising market.
The magnitude and power of this unwholesome business, centering in New
York, is emphasized by the knowledge that at times the daily transactions are
almost as large as that reported on the New York Exchange itself. The
impression is growing that a large percentage of this business is in the
control of a few unscrupulous men commanding enormous financial resources.
Under their management the tentacles of this business are reaching out over
the country in the shape of branch offices, from which points orders are
received at the common centre. Suppose, for example, one of these heavily
financially backed concerns finds that it has "orders to buy" a
very large number of shares of a given stock. Technically, they are
"short" of that stock. It is perfectly feasible for them to
go into the market and offer a large block of the same stock for sale, and break
the price sufficiently to wipe out all the margins on orders in hand.
Stratagems of this kind must be done by the "bucket shop"
indirectly, as legitimate stock exchanges do not countenance members
accepting orders directly from "bucket shops."
Options (puts and
calls) are not recent financial innovations
Bucket shops have
been defrauding investors using puts and calls for over three centuries.
…
The movement to eliminate trading in futures, short sales, and marginal
trading, is no new thing In the United States, nor in any other country where
there are organized marts of exchange. One may go
back a century end three-quarters to 1734, when the British
Parliament passed a law that was known as “Sir John Barnard’s
act.” It was amended in 1737, and made perpetual. This law did not
mince language either in its title or its subsequent phrase-ology. “An
act to prevent the infamous practice of stock jobbing [speculating],”
It was entitled, and its preamble recited:
“Whereas, Great Inconveniences have arisen and do daily arise, by the
wicked, destructive, and pernicious practice of stock jobbing, whereby many
of his Majesty’s good subjects have been and are diverted from pursuing
their lawful trades and avocations to the utter ruin of themselves and their
families, to the great discouragement of Industry, and to the manifest
detriment of trade and commerce.”
… The agitators of that day, so history relates, held that they had
achieved a brilliant victory In the cause of business morality.
…
But theirs was a cold comfort. Sir John Barnard’s act became a dead
letter within a few months after Its enactment, for the reason that the
dealers in puts and calls and other speculators against whom it was directed
carried on their business as before, …
In the United States the agitation dates back to Revolutionary days.
... After the Revolution … a distinct class of stock brokers developed,
and for twenty years there was heavy speculation in Continental money and in
bank stocks. To such lengths did this speculation go that the State of New
York In 1812 passed a law specifically voiding contracts for future delivery
in the shares of banks or of companies organized in any State, or in bonds of
the United States, or of the individual States…
This act, like that of Sir John Barnard’s, provided for a recovery
of losses and in the same manner was disregarded by the speculative element…
Bucket shops men have driven commission
men into bankruptcy and out of the business
TO PUT
DOWN BUCKET SHOPS
February 17, 1887
The New York Times
St. Louis, Feb. 16.—The Board of Directors of the Merchant’s
Exchange held a meeting this afternoon and put the finishing touches on a
bill which will be introduced in the Legislature this week, declaring the
setting up of a bucket shop or the conducting of a bucket shop business a
misdemeanor, punishable by a fine not less than $500 nor more than $1,500.
The bucket shop business has thrived and developed rapidly in the city during
the past year, and this at the expense of what 18 called legitimate trading
on the floor of the Exchange. The bucket shop men have driven
commission men into bankruptcy and out of the business, and are now
making a red-hot fight for country orders. The regular board resolved
to clean them out, and as similar laws are in force in several States they
may succeed. The bucket shop keepers are not inactive, and are getting up
arguments to show that the only difference between them and the board. Is
that the latter is a big bucket shop. The trouble will be transferred to
Jefferson City to-morrow.
THE BUCKET SHOPS RUNNING WILD IN CHICAGO
PUTS
AND CALLS
THE BUCKET SHOPS STILL CAUSING TROUBLE IN CHICAGO
February 28, 1890, Wednesday
CHICAGO, Feb. 27.— Secretary Stone of the Board of Trade announced
during the session yesterday a resolution adopted by the Directors of the
board that in their opinion “dealing in privileges on the floor of
the Exchange is uncommercial and dishonorable conduct, and contrary to the
good name and dignity of the association.”
The resolution provoked only smiles, but it lead an ex-President of the
board to say:
“It looks to me as though we are approaching a crisis. Look at
memberships, down to $00. There are the bucket shops. A year or two ago we
had them almost wiped out. In pressing the battle the courts went against us.
Now the bucket shops are powerful enough to send brokers in on the
floor arid control the market whenever they have enough outside
traders on their list to make it an object. Just now this question of
puts and calls is threatening to disrupture this business. Two months
ago, when we had increased elevator charges, B. W. Dunham exploded a bomb In
a big meeting by a resolution asking the officials to either enforce their
rule against trading in puts and calls or else throw the thing wide upon so
that all might do business that way.
This struck the nail on the head. The association avoided going on record
as allowing puts and calls, but from that day to this they have ruled the
market. From $10,000 to $50,000 change hands in an afternoon in the settling
room down stairs, where the trading in privileges is more exalting than the
business in the pit. A few have hart the nerve to deal in puts and calls on
the floor. The resolution will prevent it about as much as the Directors can
stop it raining. The truth is we are demoralized. The bars have
been let down and we are running wild. What is to be the end?”
"OPTION TRADING"
"OPTION
TRADING."
Chicago Tribune - ProQuest Archiver - Feb 11, 1892
... It has opened the eyes of many members of the Board of Trade of this
and other cities to the fact that the buying and selling of
privileges, otherwise defined as options or puts and calls, cannot be
defended before the as legitimate trading. ...
DOOM OF THE BUCKET SHOPS IN MANY STATES
IS SEALED
DOOM
OF THE BUCKET SHOPS IN MANY STATES IS SEALED
Stringent
Laws Recently Enacted and Local Board's Campaign Are Driving Them Out of
Existence.
Date: May 7, 1907
“Brokers” Alarmed Over
Enforcement of Anti-Bucket Shop Law
PITTSBURG
RAIDS TODAY
Brokers Alarmed Over Enforcement of Anti-Bucket Shop Law
Special to The New York Times
August 24, 1907
PLTTSBURG, Aug 23.—Chief of County Detectives George H. Waggoner said
this afternoon that he would tomorrow raid every bucket-shop in Pittsburg
that is open in defiance of the recently passed Mesta Anti-bucket-shop bill. There
are scores of brokers’ offices in the city which Waggoner declares are
bucket-shops, and all of them, big and little, will be treated alike, he
says. There is consternation among the brokers here to-night in consequence
of the threat of Waggoner. Waggoner classes the bucket-shops just the same as
poker or faro rooms.
“The only difference between the bucket-shops and the poker and faro
rooms is that the latter are a little more on the square. In them the player
has some little chance for his money, but in the bucket-shop he has
absolutely none. My detectives have visited a number of the bucket-shops
lately and transacted business in all of them. In not one Single
instance did they win a penny. The Mesta law provides that
there shall be no bucket-shops in the State of Pennsylvania, and I am going
to see that there are none in Allegheny County.”
…
FEDERAL RAIDS ON BUCKET SHOPS
FEDERAL
RAIDS ON BUCKET SHOPS
April 3, 1910, Sunday
Prisoners Taken Here and in Philadelphia, Baltimore, and Washington Others
Indicted.
THE TWO CELLAS SURRENDER
Richard Preusser, Slayer of Myles McDonnell, Also in the Government Net.
CONSPIRACY IS ALLEGED
In Violation of Bucket Shop Law of 1909—All Released on $5,000 Bail of
Hearings.
For the first time that anyone can remember the Government of the United
States has begun in earnest a campaign against bucket shops.
As a result of preparations secretly made for ten weeks past by Attorney
General Vickersharn, simultaneous raids were made at the stroke of 11
o’clock yesterday morning In four of the largest cities of the East on
the offices of what are alleged to be the three largest bucket shop concerns
in the country. The Secret Service men had warrants for the arrest of
twenty-nine brokers and one telegraph operator, some or which were not
served.
…
Detectives Tap Leased Wires.
The evidence as to the character of the firms was collected in part by wire
tapping. Unknown to them or to the telegraph companies agents of the
Government have been persistently tapping the wires leased by the companies.
Of these there are a great quantity, it being estimated that the Boggs
Company has been paying $100,000 a year to the Western Union Telegraph
Company for them, and the others nearly as much.
By finding out the messages which passed between the head offices of the
companies and the Consolidated Philadelphia Exchange the United States
authorities gathered what they consider to be conclusive evidence that the
purchases made by the customers of these concerns were never executed.
One of the agents of the Department, of Justice who has had much to do with
the working up of the case told yesterday of what the Government has
discovered of the method used by the defendants. When the alleged bucket
shops opened up the first thing they did was to establish relations with a
stock broking firm which had a real membership in one of the two big New York
stock exchanges. From it they received bona fide quotations and could also
buy quickly any stock which their own customers were supposed to have
purchased and on the delivery of which they insisted. Then they installed in
their offices a regulation ticker and also a fast wire from their friends,
the legitimate brokers.
The trading, the Government believes, was regulated by the quotations set up
on the board in the customers’ room, but these were received over the
ticker and came in slowly. The men in charge had their own information
over the fast wire fifteen minutes ahead of the customers. In this
way they could determine what transactions they would handle. If they saw
that the market was going in their customer’s favor they, would tell
him that they were sorry, but there was no market at the price he bid. If
they saw that In a few minutes the customer trading as he did on a 2 percent
margin would he wiped out they would take orders as fast as he could give
them.
Ostensibly on every order thus received the firm would have to borrow from a
bank the 98 percent of the market price, which the customer did not put up,
as any reputable brokerage firm doing a margin business would do. It Is
asserted, however, that they did not intend to ever buy the stork thus
ordered and dispensed with raising the capital, but did not neglect to charge
interest for it. Consequently, according to this view, they were making a
handsome profit by pocketing all the margins which their customers were
putting up and losing, and by taking unearned payments of interest.
Exchange of Philadelphia
Nominally all the orders placed with any of these firms were attended to on
the consolidated Exchange of Philadelphia. This is the picture which the
Government draws of this institution. It was chartered under the laws of
Pennsylvania in 1902 with the original purpose of furnishing a market for
certain mining concerns. The lambs are said to have been fleeced there to
the extent of hundreds of thousands of dollars. …
… Yet, say the Government officials, these men have not seemed nearly
so rushed its their brethren on the large Stock Exchanges. A peaceful quiet
reigned over the hall, broken only by the noise of the cards as they were
shuffled for a game of pinochle. What trading there was was carried on in
conversational tones when a game had been finished, and even the tel- egraph
operators found plenty of time to leave their keys and take a hand in the
game.
If a stranger entered the room the pinochle deck was thrown down,
telegraph instruments begin to click, and the brokers loudly shouted across
to each other, “Ten Reading for sale” and other orthodox
expressions till the stranger retired impressed with the stress of their
business.
Offices Saved the Exchange
The way the Government explains the peaceful manner in which the brokers on
the floor in Philadelphia could deal with such an immense and complicated
business is by telling of the organization of the head offices of the alleged
bucket shops into the offices of Boggs & Co. and of the Standard Stock
and Grain Dealers’ Association in Jersey City and of Price & Co. in
Baltimore have led leased wires from their branch offices all over the
country. There from twenty to eighty telegranh operators have been working
as fast as they could during Exchange hours, but of the resuits of their
iabors only enough has been left after the heads of the concern have handled
them to occupy one single wire between the head office and the Exchange.
Before the Exchange opened for the day, the Government alleges, a list of
purchasers would be written out and for- warded to Philadelphia. Purely
fictitious transactions would afterward be concocted to be placed against
these names, and often these would be sent on long after the Exchange
was supposed to have closed its doors. Clearing House sheets in all due form
would then be filled out so as to give a certain air of legitimacy to the
proceedings, but merely a fraction of the business that had really poured
into the head offices would be represented.
The profits to alleged bucket shops were supposed to have run up to $3,000 to
$5,000 a day.
…
Members of the Boggs Firm
…
This is not the first time that Preusser, who is a one-armed man, has been in
trouble. Six years ago lie walked up to the room of Myles B. 2IcDonnell, a
gambler, in the Ten Eyck Hotel, Albany, and shot him dead [not
your typical broker…]. He was tried in Albany and the jury stood 11 to
1 for conviction. The solitary juror refused to be convinced [bribed?] and
the jury was dismissed.
McDonnell had been a well-known sporting man, and it was thought that there
would he a better chance of getting a conviction with a change of venue. The
next trial took place in Oneida County In June, 1906. A defense of insanity
was put up and the jury believed in it. Preusser was sent to Matteawan,
and in five weeks’ time was released as cured. After a short trip
abroad Preusser came back and starteG in at stock dealing again. He organized
the Manhattan Stock and Grain Dealers’ Company, with offices at 77
Montgomery Street, Jersey City. The police raided it on Jan. 30, 1907, and
discovered in a waste paper basket a scrap of paper which stated that two of
the best-known east side politicians had subscribed $12,500 of its $200,000
capital. It was impossible, however, to prove their connection with the
concern, and they strenuously denied it.
…
The news of the raid on Boggs & Co. was received with much
pleasure by the legitimate stock brokers of the city. They have long
tried to drive out the bucket shops as brining discredit on the big
exchanges, but have despaired of being successful. The Cassidy law, passed
two years ago, has never yet been put in effectual operation, and they are
convinced that their best chance of stamping out these parasites is by action
by the Federal authorities. The three concerns now attacked are
declared to cover practically all the big bucket shops in the country, and if
they are wiped out it is believed that the evil will, fora time at any rate,
be abated.
…
options are nothing but a fancy name for
bucket shops
BACKROUND
Options: Nothing But a Fancy Name For Bucket Shops
[NASSAU
AND SUFFOLK Edition]
Newsday - Long
Island, N.Y.
By Robert Sobel
Aug 28, 1988
In
the United States, establishments masquerading as brokerages where
speculators supposedly purchased stock on margin were dubbed bucket shops. A
speculator might place an order for 100 shares of a $100 stock, which would
come to $10,000. He would buy on 10-percent margin, meaning that he would put
up $1,000, supposedly borrowing the rest from the broker. But oftentimes the
broker would not bother with this. All involved knew that the stock
would not be purchased. Rather, the speculator had placed a bet on
the shares with the equivalent of a bookie.
Many of the bucket shops transacted whatever actual buys and sells they
placed at the Consolidated Stock Exchange on lower Broadway. For a while, it
was a thriving concern - there were years during which volume at the CSE was
larger than that at the New York Stock Exchange, galling because the CSE
traded many of the same stocks as the older market. Both the bucket
shops and the CSE were killed by state investigations - supported by
the NYSE - and by the late 1920s both were no longer there.
Bucket Shops are
resurrected
In 1976,
Tuscaloosa News reports about Swindlers invading commodities.
Swindlers
invading commodities
By JACK ANDERSON
Jan 3, 1978
WASHINGTON The stock market has operated under the stern eye of the federaL
watchdogs ever since the 1929 crash ruined millions 01 small investors UuL
today the commodity market is In greater need of watching.
For a new breed of swindler has grown up around the commodity exchange. These
modern Samuel Insulls are known in the trade as “bucket shop
operators” and they are making a killing in commodity
options — at the expense, of course, of the unwary investors.
A commodity option allows the investor to buy a commodity such as sugar or
silver at a set price. He gambles that the price will go up. Then he can
make a fortune by unloading his commodity at the higher, future price. The
catch-22 is that he can also lose his entire Investment It the price should
drop.
Many investors, trusting the federal regulators to protect them from being fleeced,
purchase their options from sleazy firms which not only charge too much but
never complete the transaction. The firms simply pocket the custuniors’
money and toss the options into a trash bucket. That’s
why these outfits are called “bucket shops.”
The bucket system pays off because eight out of 10 buyers lose money on
their options. For the rare customers who hit it lucky, the bucket
shops make good out of their fabulous profits. In other words, the odds are
heavily stacked against the customers.
The Commodities Futures Trading Commission, which Is supposed to police
the market, concedes in a devastatingly frank internal memo that the problem
Is too much to handle. …
…
So far, the options trading accounts for only 2.2 percent of the $1.1
trillion in commodity transactions each year. The total take from the sale of
options is estimated to be between $200 million and $1 billion. But the
commodities option market is growing by leaps and bounds.
In an attempt to keep up with the frenetic market, the Commodity Futures
Trading Commission has stumbled badly. A House Appropriations
subcommittee has concluded tentatively, according to a draft report, that the
commission “has not been able to deal with the fraud-ridden
commodity options industry”
Indeed, the agency has acknowledged Its own failings in an Internal memo,
which we have obtained. According to the memo, staff assigned to
get repayments for cheated customers has been “overwhelmed.”
…
This candid document, dated Dec 22, claims “virtually every section
of the CFTC is clogged because of the options problems.” This has
forced the agency to shunt experts from other fields into the options area.
…
Footnote: The House Appropriations subcommittee and the
General Accounting Office refused to discuss their secret reports on the
scandalous situation. …
A Brief History of Derivatives
A
Brief History of Derivatives
…
The early twentieth century was a dark period for derivatives trading as
bucket shops were rampant. Bucket shops are small operators in options and
securities that typically lure customers into transactions and then
flee with the money, setting up shop elsewhere.
In 1922 the federal government made its first effort to regulate the futures
market with the Grain Futures Act. In 1936 options on futures were
banned in the United States. All the while options, futures and
various derivatives continued to be banned from time to time in other
countries.
…
History of Options Trading - CBOE and OCC
formed in 1973
History
of Options Trading - A Timeline
History of Options Trading - CBOE and OCC formed in 1973
About 100 years following the introduction of options trading to the US
market by Russell Sage, the most important event in modern options trading
history took place with the formation of the Chicago Board of Exchange (CBOE)
and the Options Clearing Corporation (OCC) in 1973. The formation of both
institutions truly is a milestone in the history of options trading and have
defined how options are traded over a public exchange the way it is traded
today.
The most important function of the CBOE is in the standardisation of stock options to be
publicly traded. Yes, prior to the formation of the CBOE, options were traded
over the counter and are highly unstandardized, leading to an illiquid and
inefficient options trading market. In order for options to be openly traded,
all options contracts need to be standardized with the same terms across the
board. That was what the CBOE did for call options back in 1973. For the
first time, the general public is able to trade call options under the
performance guarantee of the OCC and the liquidity provided by the market
maker system. This structure continues to be used today. By 1977, put options
were introduced by the CBOE, creating the options trading market that we know
today. Since then, more and more exchanges were set up for options trading
and better computational models for the pricing of
options were introduced.
Regulators turn
Wall Street into a giant bucket shop
Congress preempting state laws.
Uncle
Sam Knows Best about the Economy – Except When He Doesn’t
By jmalmberg
14 months ago
March 5, 2009 – Most people are familiar with the Great Depression,
but many don’t realize that this was not the only financial calamity
the US went through in the early 1900’s. By the time of the market
crash in 1929, the federal government had already made a number of regulatory
decisions that were designed to promote market stability. When these
didn’t work, the government assumed an even greater role in regulating
the economy. What is remarkable about this period is the fact that federal
regulations – as many of them as there were – appear to have had
much less impact on economic stability than regulations that were imposed at
the state level. In fact, it can be argued that state regulatory authority
was largely responsible for providing businesses and consumers a stable
economic environment for roughly 50 years. But beginning in the
1970’s Congress decided that it would preempt certain state laws, and
by the beginning of this decade they had pretty well decimated state
authority to regulate businesses in the financial sector. We’re
going to take a little time to examine why now is the time to return to a
period of state’s rights and limited federal regulation.
…
State’s Rights and the Economy
To understand how preemption of state’s rights undermined the US
economy, you don’t have to look far. A great example comes from state
Bucket Shop laws.
If you have never heard of a bucket shop, don’t feel left out.
Bucket shops sprang up all around the country in the late 1800’s. They
were essentially betting parlors that allowed you to bet on stock prices. You
could walk into a bucket shop and place a bet that a particular stock would
go up or down without every buying the stock.
By 1929, bucket shops were illegal in virtually every state in the
country. The states had outlawed them for two reasons. One was that bucket
shops could buy or sell large blocks of stock and manipulate stock prices.
This meant that if a lot of their clients were betting on a stock going up in
price, they could sell a large block of stock in that company. This would
cause the stock price to fall and allow them to keep all of their
investors’ money. In other words, they were fraudsters.
They could do the same thing if investors were betting a stock would fall in
price.
Secondly, the market manipulation that bucket shops were responsible for had
been blamed for destabilizing the markets, and had caused many investors to
lose large sums of money. Simply put, the only people that benefited from
bucket shops were the people that ran them.
What the bucket shops were selling are what we commonly refer to as
derivatives. Another phrase for them is Credit Default Swaps – just
like the mortgage credit default swaps that started the market meltdown last
year. These are the worthless securities that have caused banks to go
broke, and made the US government the largest stockholder in AIG.
So how is that even though bucket shops are against the law in most states
that companies like AIG were able to sell Credit Default Swaps? The answer is
one simple word. Congress.
Nine years ago, Congress passed a law called the Commodity Futures
Modernization Act of 2000. On December 21, 2000, then President Bill Clinton
signed the law which contained a preemption of state enforcement of bucket
shop laws by including a line that reads, “This Act shall supersede and
preempt the application of any state or local law that prohibits or
regulates gaming or the operation of bucket shops.”
But that was not enough for Congress. They wanted to make sure that everyone
understood their intent. So they also added language that amended the
Securities and Exchange Acts of 1933 and 1934 to make sure that the
definition of a “security” didn’t include “credit
default swaps” or certain other swap agreements, and they forbid the
SEC from any such regulation.
With the stroke of a pen, President Clinton and Congress used their
regulatory authority to completely deregulate a large market. In fact, it
was a market that had been considered so important to financial stability
that a century earlier it had been regulated out of existence entirely.
Ahh, but those who don’t study history are doomed to repeat it!
Had Congress simply allowed the states to continue to regulate this area of
the market, it’s a fairly safe bet that the economy would still be
humming along quite nicely.
Investing vs. "Bucket Shops"
Investing
vs. "Bucket Shops"
Published:
Thursday, September 03, 2009, 11:51 AM Updated: Friday, September 04, 2009,
11:58 AM
I saw another wonderful piece of "balanced journalism" on CBS' 60
Minutes last Sunday. You know 60 Minutes - the television news
program that epitomizes the principle of fairness, especially towards
conservatives and businessmen - right? The piece that caught my eye was one comparing
certain types of investing, specifically hedging with derivative investments,
to casino gambling and bookmaking.
More specifically, CBS correspondent Steve Kroft was up in arms about a type
of derivative investment called credit default swaps, which the program
defined as (quoting from the 60 Minutes website transcript), "essentially
side bets on the performance of the U.S. mortgage markets and some of the
biggest financial institutions in the world - a form of legalized gambling
that allows you to wager on financial outcomes without ever having to
actually buy the stocks and bonds and mortgages." This is, at best, a
half-truth, and it maligns a whole industry based on the mistakes of a few
investors.
…
Kroft interviewed Eric Dinallo, former insurance superintendent for the state
of New York, who said, "It's legalized gambling. It was illegal
gambling. And we made it legal gambling...with absolutely no regulatory
controls. Zero, as far as I can tell." Well, it's true there
wasn't much regulation of derivatives, because the financial wizards of Wall
Street were supposed to know how to use them. (If you don't like that, you
can thank Bill Clinton, who signed the measure to reduce regulation of
derivatives into law instead of vetoing it. But I, for one, don't blame
Clinton. He's not responsible for any foolish investments.) Kroft offered his
opinion that "it sounds a little like a bookie operation," to which
Dinallo replied, "Yes, and it used to be illegal. It was very
illegal 100 years ago." …
Depressing, no?
Eric de Carbonnel
Market Skeptics
Support Market Skeptics with a donation :
please click
here
|
|
