by Ira Glass
People who trade stocks, trade based on what they feel will move and they can trade for profit. Nobody makes investment decisions based on reading financial filings. Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisors, Internet traders, or the companies, everybody is manipulating the market. If it wasn’t for everybody manipulating the market, there wouldn’t be a stock market at all. . . .
As it happens, those last two sentences stand for something like the opposite of the founding principle of the United States Securities and Exchange Commission. To a very great extent, the world’s financial markets are premised on a black-and-white mental snapshot of the American investor that was taken back in 1929. The SEC was created in 1934, and the big question in 1934 was, How do you reassure the public that the stock market is not rigged? From mid-1929 to mid-1932, the value of the stocks listed on the New York Stock Exchange had fallen 83 percent, from ninety billion dollars to about sixteen billion. Capitalism, with reason, was not feeling terribly secure.
To the greater public in 1934, the numbers on the stock-market ticker no longer seemed to represent anything “real,” but rather the result of manipulation by financial pros. So, how to make the market seem “real”? The answer was to make new stringent laws against stock-market manipulation—aimed not at ordinary Americans, who were assumed to be the potential victims of any manipulation and the ones who needed to be persuaded that it was not some elaborate web of perceptions, but at the Wall Street elite. The American financial elite acquired its own police force, whose job it was to make sure their machinations did not ever again unnerve the great sweaty rabble. That’s not how the SEC put it, of course. The catch phrase used by the policy-making elites when describing the SEC’s mission was “to restore public confidence in the securities markets.” But it amounted to the same thing. Keep up appearances, so that the public did not become too cautious. It occurred to no one that the public might one day be as sophisticated in these matters as financial professionals.
Anyone who paid attention to the money culture could see its foundation had long lay exposed, and it was just a matter of time before the termites got to it. From the moment the Internet went boom back in 1996, Web sites popped up in the middle of nowhere—Jackson, Missouri; Carmel, California—and began to give away precisely what Wall Street sold for a living: earning forecasts, stock recommendations, market color. By the summer of 1998, Xerox or AT&T or some such opaque American corporation would announce earnings of twenty-two cents a share, and even though all of Wall Street had predicted a mere twenty cents and the company had exceeded all expectations, the stock would collapse. The amateur Web sites had been saying twenty-three cents.
Eventually, the Bloomberg News Service commissioned a study to explore the phenomenon of what were now being called “whisper numbers.” The study showed the whisper numbers, the numbers put out by the amateur Web sites, were mistaken, on average, by 21 percent. The professional Wall Street forecasts were mistaken, on average, by 44 percent. The reason the amateurs now held the balance of power in the market was that they were, on average, more than twice as accurate as the pros—this in spite of the fact that the entire financial system was rigged in favor of the pros. The big companies spoon-fed their scoops directly to the pros; the amateurs were flying by radar.
Even a fourteen-year-old boy could see how it all worked, why some guy working for free out of his basement in Jackson, Missouri, was more reliable than the most highly paid analyst on Wall Street. The companies that financial pros were paid to analyze were also the financial pros’ biggest customers. Xerox and AT&T and the rest needed to put the right spin on their quarterly earnings. The goal at the end of every quarter was for the newspapers and the cable television shows and the rest to announce that they had “exceeded analysts’ expectations.” The easiest way to exceed analysts’ expectations was to have the analysts lower them. And that’s just what they did, and had been doing for years. The guy in Carmel, California, confessed to Bloomberg that all he had to do to be more accurate on the earnings estimates than Wall Street analysts was to raise all of them 10 percent.
A year later, when the Internet bubble burst, the hollowness of the pros only became clearer. The most famous analysts on Wall Street, who just a few weeks before had done whatever they could to cadge an appearance on CNBC or a quote in the Wall Street Journal to promote their favorite dot-com, went into hiding. Morgan Stanley’s Mary Meeker, who made fifteen million dollars in 1999 while telling people to buy Priceline when it was at $165 a share and Healtheon/WebMD when it reached $105 a share, went silent as they collapsed toward zero.
Financial professionals had entered some weird, new head space. They simply took it for granted that a “financial market” was a collection of people doing their best to get onto CNBC and CNNfn and into the Heard on the Street column of the Wall Street Journal and the Lex column of the Financial Times, where they could advance their narrow self-interests.
To anyone who wandered into the money culture after, say, January 1996, it would have seemed absurd to take anything said by putative financial experts at face value. There was no reason to get worked up about it. The stock market was not an abstraction whose integrity needed to be preserved for the sake of democracy. It was a game people played to make money. Who cared if anything anyone said or believed was “real”? Capitalism could now afford for money to be viewed as no different from anything else you might buy or sell.
Or, as Jonathan Lebed wrote to his lawyer:Every morning I watch Shop at Home, a show on cable television that sells such products as baseball cards, coins and electronics. Don West, the host of the show, always says things like, “This is one of the best deals in the history of Shop at Home! “This is a no brainer folks! This is absolutely unbelievable, congratulations to everybody who got in on this! Folks, you got to get in on the line, this is a gift, I just can’t believe this!” There is absolutely nothing wrong with him making quotes such as those. As long as he isn’t lying about the condition of a baseball card or lying about how large a television is, he isn’t committing any kind of a crime. The same thing applies to people who discuss stocks.
Right from the start, the SEC treated the publicity surrounding the case of Jonathan Lebed at least as seriously as the case itself. Maybe even more seriously. The Philadelphia office had brought the case, and so when the producer from 60 Minutes called to say he wanted to do a big segment about the world’s first teenage stock-market manipulator, he called the Philadelphia office. “Normally we call the top and get bumped down to some flack,” says Trevor Nelson, the 60 Minutes producer in question. “This time I left a message at the SEC’s Philadelphia office, and Arthur Levitt’s office called me right back.” Levitt, being the SEC chairman, flew right up from Washington to be on the show.
To the SEC, it wasn’t enough that Jonathan Lebed hand over his winnings: he had to be vilified; people had to be made to understand that what he had done was a crime, with real victims. “The SEC kept saying that they were going to give us the name of one of the kid’s victims so we could interview him,” Nelson says. “But they never did.”
I waited a couple of months for things to cool off before heading down to Washington to see Arthur Levitt. He was just then finishing up being the longest-serving chairman of the SEC and was taking a victory lap in the media for a job well done. He was now sixty-nine, but as a youth, back in the 1950s and 1960s, he had made a lot of money on Wall Street. At the age of sixty-two, he landed his job at the SEC—in part, because he had raised a lot of money on the street for Bill Clinton—where he set himself up to defend the interests of the ordinary investor. He had declared war on the financial elite and pushed through rules that stripped it of its natural market advantages. His single bravest act was Regulation FD, which required corporations to release significant information about themselves to everyone at once rather than through the Wall Street analysts.
Having first determined I was the sort of journalist likely to see the world exactly as he did, he set out to explain to me the new forces corrupting the financial markets. “The Internet has speeded up everything,” he said, “and we’re seeing more people in the markets who shouldn’t be there. A lot of these new investors don’t have the experience or the resources of a professional trader. These are the ones who bought that [expletive] that Lebed was pushing.”
“Do you think he is a sign of a bigger problem?”
“Yes, I do. And I find his case very disturbing . . . more serious than the guy who holds up the candy store. . . . I think there’s a considerable risk of an antibusiness backlash in this country. The era of the twenty-five-year-old billionaire represents a kind of symbol which is different from the Horatio Alger symbol. The twenty-five-year-old billionaire looks lucky, feels lucky. And investors who lose money buying stock in the company of the twenty-five-year-old billionaire . . .”
He trailed off, leaving me to finish the thought.
“You think it’s a moral issue.”
“I do.”
“You think Jonathan Lebed is a bad kid?”
“Yes, I do.”
“Can you explain to me what he did?”
He looked at me long and hard. I could see that this must be his meaningful stare. His eyes were light blue bottomless pits. “He’d go into these chat rooms and use twenty fictitious names and post messages. . . .”
“By fictitious names, do you mean e-mail addresses?”
“I don’t know the details.”
Don’t know the details? He’d been all over the airwaves decrying the behavior of Jonathan Lebed.
“Put it this way,” he said. “He’d buy, lie and sell high.” The chairman’s voice had deepened unnaturally. He hadn’t spoken the line; he had acted it. It was exactly the same line he had spoken on 60 Minutes when his interviewer, Steve Kroft, asked him to explain Jonathan Lebed’s crime. He must have caught me gaping in wonder because, once again, he looked at me long and hard. I glanced away.
“What do you think?” he asked.
Well, I had my opinions. In the first place, I had been surprised to learn that it was legal for, say, an author to write phony glowing reviews of his book on Amazon but illegal for him to plug a stock on Yahoo! just because he happened to own it. I thought it was—to put it kindly—misleading to tell reporters that Jonathan Lebed had used “twenty fictitious names” when he had used four AOL e-mail addresses and posted exactly the same message under each of them so that no one who read them could possibly mistake him for more than one person. I further thought that without quite realizing what had happened to them, the people at the SEC were now lighting out after the very people—the average American with a bit of money to play with—whom they were meant to protect.
Finally, I thought that by talking to me or any other journalist about Jonathan Lebed when he didn’t really understand himself what Jonathan Lebed had done, the chairman of the SEC displayed a disturbing faith in the media to buy whatever he was selling.
But when he asked me what I thought, all I said was, “I think it’s more complicated than you think.”
“Richard—call Richard!” Levitt was shouting out the door of his vast office. “Tell Richard to come in here!”
Richard was Richard Walker, the SEC’s director of enforcement. He entered with a smile, but mislaid it before he even sat down. His mind went from a standing start to deeply distressed inside of ten seconds. “This kid was making predictions about the prices of stocks,” he said testily. “He had no basis for making these predictions.” Before I could tell him that sounds a lot like what happens every day on Wall Street, he said, “And don’t tell me that’s standard practice on Wall Street,” so I didn’t. But it is. It is still OK for the analysts to lowball their estimates of corporate earnings and plug the stocks of the companies they take public so that they remain in the good graces of those companies. The SEC would protest that the analysts don’t actually own the stocks they plug, but that is a distinction without a difference: they profit mightily and directly from its rise.
“Jonathan Lebed was seeking to manipulate the market,” said Walker.
But that only begs the question, If Wall Street analysts and fund managers and corporate CEOs who appear on CNBC and CNNfn to plug stocks are not guilty of seeking to manipulate the market, what on earth does it mean to manipulate the market?
“It’s when you promote a stock for the purpose of artificially raising its price.”
But when a Wall Street analyst can send the price of a stock of a company that is losing billions of dollars up fifty points in a day, what does it mean to “artificially raise” the price of a stock? The law sounded perfectly circular. Actually, this point had been well made in a recent article in Business Crimes Bulletin by a pair of securities law experts, Lawrence S. Bader and Daniel B. Kosove. “The casebooks are filled with opinions that describe manipulation as causing an ‘artificial’ price,” the experts wrote. “Unfortunately, the casebooks are short on opinions defining the word ‘artificial’ in this context. . . . By using the word ‘artificial,’ the courts have avoided coming to grips with the problem of defining ‘manipulation’; they have simply substituted one undefined term for another.”
Walker recited, “The price of a stock is artificially raised when subjected to something other than ordinary market forces.”
But what are “ordinary market forces”?
An ordinary market force, it turned out, is one that does not cause the stock to rise artificially. In short, an ordinary market force is whatever the SEC says it is, or what it can persuade the courts it is. And the SEC does not view teenagers’ broadcasting their opinions as “an ordinary market force.” It can’t. If it did, it would be compelled to face the deep complexity of the modern market—and all of the strange new creatures who have become, with the help of the Internet, ordinary market forces. When the Internet collided with the stock market, Jonathan Lebed became a market force. Adolescence became a market force.
I finally came clean with a thought: the SEC let Jonathan Lebed walk away with five hundred grand in his pocket because it feared that if it didn’t, it would wind up in court and it would lose. And if the law ever declared formally that Jonathan Lebed didn’t break it, the SEC would be faced with an impossible situation: millions of small investors plugging their portfolios with abandon, becoming in essence professional financial analysts, generating embarrassing little explosions of unreality in every corner of the capital markets. No central authority could sustain the illusion that stock prices were somehow “real” or that the market wasn’t, for most people, a site of not terribly productive leisure activity. The red dog would be off his leash.
I might as well have strolled into the office of the drug czar and lit up a joint.
“The kid himself said he set out to manipulate the market,” Walker virtually shrieked. But, of course, that is not all the kid said. The kid said everybody in the market was out to manipulate the market.
“Then why did you let him keep five hundred grand of his profits?” I asked.
“We determined that those profits were different from the profits he made on the eleven trades we defined as illegal,” he said.
This, I already knew, was a pleasant fiction. The amount Jonathan Lebed handed over to the government was determined by haggling between Kevin Marino and the SEC’s Philadelphia office. The SEC initially demanded the eight hundred thousand dollars Jonathan had made, plus interest. Marino had countered with 125 grand. They haggled a bit and then settled at 285.
“Can you explain how you distinguished the illegal trades from the legal ones?”
“I’m not going to go through the case point by point.”
“Why not?”
“It wouldn’t be appropriate.”
At which point, Arthur Levitt, who had been trying to stare into my eyes as intently as a man can stare, said in his deep voice, “This kid has no basis
for making these predictions.”
“But how do you know that?”
And the chairman of the SEC, the embodiment of investor confidence, the keeper of the notion that the numbers gyrating at the bottom of the CNBC screen are “real,” drew himself up and said, “I worked on Wall Street.”
Well. What do you say to that? He had indeed worked on Wall Street—in 1968.
“So did I,” I said.
“I worked there longer than you.”
Walker leapt back in. “This kid’s father said he was going to rip the [expletive] computer out of the wall.”
I realized that it was my turn to stare. I stared at Richard Walker. “Have you met Jonathan Lebed’s father?” I said.
“No, I haven’t,” he said curtly. “But look, we talked to this kid two years ago, when he was fourteen years old. If I’m a kid and I’m pulled in by some scary government agency, I’d back off.”
That’s the trouble with fourteen-year-old boys—from the point of view of the social order.
They haven’t yet learned the more sophisticated forms of dishonesty. It can take years of slogging to learn how to feign respect for hollow authority.
Still! That a fourteen-year-old boy, operating essentially in a vacuum, would walk away from a severe grilling by six hostile bureaucrats and jump right back into the market—how did that happen? It occurred to me, as it had occurred to Jonathan’s lawyer, that I had taken entirely the wrong approach to getting the answer. The whole point of Jonathan Lebed was that he had invented himself on the Internet. The Internet had taught him how hazy the line was between perception and reality. When people could see him, they treated him as they would treat a fourteen-year-old boy. When all they saw were his thoughts on financial matters, they treated him as if he were a serious trader. On the Internet, where no one could see who he was, he became who he was. I left the SEC and went back to my hotel and sent him an e-mail message, asking him the same question I asked the first time we met: why hadn’t he been scared off?
