Great Leap Forward

Jasmine and Complicity in Wall Street’s Criminal Enterprise

John Fullerton has written a scathing indictment of Wall Street’s morals. He uses Woody Allen’s new film, Jasmine as an analogy to understand the scandal surrounding Steven Cohen’s SAC Capital. The problem is not really that Cohen ran a crooked shop, but rather that he was (and still is) aided and even worshipped by the rest of Wall Street. They all know SAC engaged in insider trading and book cooking. They all know that Cohen’s claimed returns are as phony as Bernie Madoff’s. It doesn’t matter, because Cohen helps them to make money, too.

Fullerton appears to be mad as hell. He’s always good reading, as he has an insider’s understanding of what goes on, but an outsider’s fury that these guys get away with it. Read his piece: Are We Not All Jasmines Now? at John has set up the Capital Institute and it is worth following. Here are snippets from his piece. He makes it clear: either you are with them, or you must stand up against them.

I don’t recall when I first heard of SAC Capital, perhaps fifteen years ago. I do recall the impression. SAC, I understood, was run by a short, pudgy, “aggressive” trader named “Stevie” Cohen. He was not particularly nice, but was putting up spectacular and consistent returns over many years (flashing red) for his investors including himself, which is all that mattered. He was also one of Wall Street’s most profitable trading counterparties, paying a reported $150 million per annum in commissions to the street, no doubt a large multiple of even mutual fund giant Fidelity.

Rather than press the street for commission breaks, Cohen had a reputation for getting what he paid for – the first call on stock moving information that he could trade on. And he was charging his investors “3 and 50” (a 3 percent management fee plus 50 percent of the profits) for the privilege to invest in his fund. Fees of “2 and 20” are typical among large hedge funds, so the fee structure is highly noteworthy, and absurd. If you read the July 2003 Bloomberg Businessweek article about Cohen, “The Most Powerful Trader On Wall Street You’ve Never Heard Of,” you would conclude that SAC made money speculating in two ways: trading illegally on inside information paid for with the massive trading commissions strategically deployed, and by manipulating markets through its aggressive trading style. That was their “edge,” to use the SAC terminology. My impression, without any direct knowledge or proof, but consistent with the Businessweek article, was that SAC was a snake pit of money grubbing, brazen amorality, even by modern Wall Street standards.

In the fifteen or so years since I first heard of Stevie Cohen, Wall Street banks that financed and traded with SAC, all of its sophisticated investors, street smart competitors, and everyone who knew about SAC, turned a blind eye even as SEC investigations were underway and indictments were piling up. As industry leader Blackstone debated whether to redeem a portion (a portion?) of its investment in SAC on a June 3 deadline this year, other investors were staying put. The New York Times reported in May that Ed Butowsky, managing partner of Chapwood Investments in Dallas and regular media commentator, summoning his inner Colonel Klink, summed up their thinking this way: “All I know is that the returns are coming in nice, and my clients are happy.”

2 Responses to “Jasmine and Complicity in Wall Street’s Criminal Enterprise”

shawnkc33August 21st, 2013 at 2:59 pm

"…, paying a reported $150 million per annum in commissions to the street,… "

Can someone explain the process of how a trading company pays commission to Wall Street. What are they "paying for", what source do the funds go to, and what determines the amount?