Wall Street Hits the Sell Button

by John M. Curtis
(310) 204-8700

Copyright May 7, 2010
All Rights Reserved.                                

               Pension funds, retirement accounts and the U.S. treasury took another tailspin as Wall Street’s programmed traders decided to take profits.  Funny how all of Wall Street’s major traders sell on the same day at the same time.  Wall Street insists it’s purely coincidental how everyone hits the sell button at once.  When Goldman Sachs CEO Andrew Blankfein and other Goldman executives faced Sen. Carl Levin’s (D-Mich.) Senate Permanent Subcommittee on Investigations April 27, they all denied any wrongdoing in selling “junk” securities or tanking the real estate market in 2008.  Goldman’s denials tell a lot about Wall Street.  Now, after an unprecedented yearlong run-up since hitting rock bottom in March 2008 at 6,500, the Dow Jones Industrials swooned 1,000 points before ending the day some 347 points down at 10,520, over 500 points below its April 28 close.

            CNBC, NBC’s financial news network, reported a trading mistake at Citibank was responsible for the colossal sell-off, that took the Dow down midday more than 1,000 points.  Today’s midday point drop was the biggest one-day drop in the history of the Dow Jones Industrials Average.  If CNBC’s correct, then markets remain too treacherous for even savvy investors.  Despite CNBC’s explanation, it’s far more likely that carefully orchestrated and coordinated profit-taking took place by Wall Street’s biggest traders.  While accidents do happen in offshore oil drilling or nuclear power plants, they don’t happen on Wall Street.  Wall Street’s public relations department likes to tag buying or selling frenzies to real-life events, like today’s Greek debt crisis.  Insiders know when its time to take profits, Wall Street finds any excuse.  After nearly doubling its value in 14 month, profits were in order.

            Cracks in the European Union raise more doubts about the future of the euro, the EU’s common currency.  Since launching in 1999, the euro faired very well against the U.S. dollar and Japanese yen, hitting an all-time high against the dollar April 28, 2007 at $1.367.  Based on many factors, including sluggish GDP growth, the EU sold the euro as the world’s currency of choice, until the façade unraveled with the Greek crisis.  EU’s insisted that member states maintain a debt-to-GDP ratio of 3%.  When Greece went over 15%, Standard & Poors downgraded Greece’s debt to junk, prompting the current bailout moves designed to reassure foreign investors.  But with rioting taking place in Athens and the EU expecting Greece to slash government salaries and pensions, it’s no wonder that there are protests.  Neither Germany nor France, two of the EU’s more prosperous economies, asked its citizens to take cuts.

            Expecting Greece to adopt the EU’s extreme austerity measures prompted the kind of anarchy on Greek streets likely to topple the Papaendreou government.  While the Greek parliament rubber-stamped the EU’s demands to collect $46 billion in loans, Greece’s problems haven’t been solved.  No austerity measure short of defaulting on all of the government’s obligations would fix an economy that failed precisely because of the euro.  Most of Europe’s less industrialized economies, including Italy, Spain, Portugal and Ireland, face soaring deficits because the euro.  While there was much euphoria at the EU in 1999, there’s only misery left now.  European Central Bank president Jean-Claude Trichet confirmed that while Spain and Portugal were not in the same boat as Greece, they’re not far behind.  Wall Street recognizes severe financial strain at the Brussels-based EU.

            Small investors outside Wall Street have little to do with today’s record sell-off.   Unlike Wall Street, long-term investors must hold on and accept the abuse to their portfolios and net worth.  Only Wall Street’s insiders, like Goldman Sachs and other proprietary hedge and private equity funds get to profit from a drop in share prices.  Decliners outnumbered advancers 17-to-1 on the New York Stock Exchange today.  Why NYSE President Duncan L. Niederaurer didn’t invoke “circuit breakers,” put into place after the Dow dropped 506 points or 22.6% Oct. 19, 1987 on so-called “Black Monday,” is unclear.  While the percentage drop ended today at 3.2%, the initial plunge of 1,000 points amounted to 8.5%.  Like the oil disaster in the Gulf of Mexico, the Dow must also have emergency plans for programmed profit-taking.  Allowing panic selling to tank the markets harms the economy.

            Officials at the Federal Reserve Board and Treasury Dept. now considering financial reform must deal with Wall Street’s carefully planned programmed selling.  Whether short sellers, like hedge funds or investment banks, profit or not, the markets must have “circuit breakers” in place to prevent the kind of widespread panic that harms the U.S. economy.  Wall Street’s sudden nosedive locks in profits for big funds but it exposes too much chaos to average investors, especially long-term mutual fund investors.  Government-funded pension funds and private retirement accounts simply can’t take the kind of losses that wreak havoc on local, state and federal governments.  Before sucking unchecked profits from bull markets, Wall Street must consider the long-term effects of programmed profit-taking on public and private investors, including local, state and federal governments.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.