A year after the government sought to avert a market meltdown by rescuing some of the country's biggest financial firms, speculative traders are feasting on these companies' remains. Shares of two government wards, mortgage giants Fannie Mae and Freddie Mac, bounced between about 60 cents and $2 in August. Shares of Lehman Brothers, left to fail by the government and currently in bankruptcy proceedings, rose from five cents to 20 cents in recent weeks.
AIG, arguably, has been the biggest casino of all. In the past seven weeks, its common shares have careened between $13 and $55, surging past $54 on Tuesday before closing at $45.80.
The extraordinary price action is a dramatic display of an unintended consequence of the U.S. bailout of AIG. Last Sept. 16, the government propped up the faltering company by trading $85 billion in loans for an 80% stake in AIG in the form of preferred shares, which don't trade on the market. It allowed the other 20% of the company's equity -- its millions of common shares -- to continue to trade publicly.
Some analysts declared the deeply indebted company's common shares basically dead money. Many buy-and-hold investors bailed out. That has left AIG's common shares -- $6.2 billion worth, as of Tuesday -- trading most actively between short-term traders, who buy and sell based on market momentum and bet against each other in risky options trades. Often they use borrowed funds, amplifying their gains and losses.
Dominating the recent move in AIG stock were professional day traders like those at T3. But Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. also owned AIG shares during the run-up, according to people familiar with the matter. Fund managers including AllianceBernstein LP and Davis Selected Advisers also held the shares during a portion of the run-up, according to fund documents.
The internet can be a great tool because it allows people to access a large amount of information. I use it regularly for that purpose. In fact, the internet has opened up an entire world of information to many people.
However, this also means that a lot of people who don't know much about certain topics say really stupid and uninformed things which then become common knowledge. Case in point: sometime over the last few months there was an internet "fact" going around that there was mysterious trading in financial stocks. It must be a scheme by the government to manipulate the stock. It's a sign that the market is topping out -- the reasons and conclusions were everywhere.
When I first read this series of posts my trading and economic radar said "bullshit". The reason for the trading for anyone who knows well, anything about the markets, was simple: speculators were moving into the shares. And now we have the above story from the WSJ about that very topic.
Now, I'm sure there are some people who are saying "the WSJ is a propaganda tool of the government and corporate elite..." at which point we should just tune them out. These people are the economic equivalent of the "birther" movement -- people who just aren't that bright who now have a forum to demonstrate they just aren't that bright.