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Market abuse.

Market Abuse

Market abuse appears to be the characteristic crime of the 1980s, the felony of choice for an age of economic miracles. Like drug abuse, which plagued the 1960s, and spouse abuse in the 1970s, this latest form of individual malfeasance has roots in systemic failure. Wretched excess is built into the structure of speculation: too much is never enough. The several young arbitragers, investment bankers, merger lawyers and stock speculators indicted in the past month for profiting from inside information were hopelessly hooked on the money and privilege they came to expect as their natural entitlements in this historic moment. They lived in $2,000-a-month apartments on New York's Upper East Side, drove finely tuned European cars, worked out in classy, glassy health clubs and acted as if they owned the world they made every morning on Wall Street.

One of their breed, who went weird and ended up, at 28, poor in publishing, said recently that his investment banker buddies believe they are the "true creative artists of their generation,' designing new financial instruments with the same aesthetic elan that inspired Cubists to dash off new canvases, or rock musicians to run new riffs. If indictment has turned their art slightly sour, it has not yet subverted the ideal of success, which drove their genius, or shattered the goal of greed. The daily Dow is still the index of national achievement and personal best.

Dennis B. Levine, 33, a "merger specialist' at Drexel Burnham Lambert, has been charged by the Securities and Exchange Commission with trading in stock and options of companies about which he had inside information. He knew when they were about to be taken over by other corporations, and thus had a fair idea of what their stock would fetch on the market after the deals were made. Five others arrested in a separate case--Michael David, Morton Shapiro, Andrew Solomon, Daniel Silverman and Robert Salisbury --have been charged with participating in a complicated scheme in which David, a lawyer, let the others in on details of deals handled by his office, the high-powered New York firm of Paul, Weiss, Rifkind, Wharton & Garrison. The five are all in their mid-20s; they exercised, socialized and made money together, and they were speeding along the fast track when they collided with the S.E.C. All of them allegedly crossed the legal line separating sanctioned inside information from expertise so exclusive as to deny competitors a sporting chance at making an honest buck on their speculations.

Edward Arlen Marks, a much more marginal figure in the brokerage world, was arrested for a much more inventive scheme. According to the F.B.I., he sought to create his own inside information by destroying the reputation of the giant SmithKline Beckman Corporation--specifically, by putting rat poison in the capsules of their patent medicines Contac, Dietac and Teldrin. Marks allegedly bought Smith-Kline options that would net him a profit if the company's stocks fell, then laced the capsules with poison and notified the media. Unfortunately for him, the public did not panic, as it had after the Tylenol case in 1982; SmithKline stock remained strong, and Marks never made his killing in the market. As they say on the Street, some days the bear eats you.

The fabulous stock market of the Reaganomic boom is not only susceptible to abuse; it in large measure founded on it. It is a system about speculation, not productive enterprise. The options market in particular is nothing more than a gambling game based on fractional adjustments in quoted stock prices. Nothing is built; nothing usable, edible or wearable is made. A few people on the inside--it hardly matters whether they are technically within the law--make a great deal of money by betting, manipulating and trading the elegant financial instruments they invent. The money shows up in their bank balances and in the G.N.P. figures the Administration publishes to prove its economic prowess. But hardly any of it goes into solid structural growth. There's no trickle-down in this country from the $80,000 Dennis Levine paid for his Ferrari. The fortunes the hot-shots spend on the inflated real estate market are similarly squandered in paper profits and illusionary investments.

The unindicted in the investment industry have called for new rules to prohibit abuses of information, but the problem they address is conceptual rather than managerial in nature, and to solve it requires the kind of changes in economic practice and behavior that few on the Street or any other street in America are willing to contemplate. The Wall Street Journal argues, editorially, that inside information is central and crucial to the market and that any new curbs would stifle its profitable operation. Everyone dreams of making a killing in the market. And the rat poison for some is the arbitrage for others.
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Title Annotation:stock market
Publication:The Nation
Article Type:editorial
Date:Jun 14, 1986
Words:809
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