John Olagues, a leading authority on options trading, recounts deeds concerning Bear Stearns and the mystery surrounding its demise.
"On or prior to March 10," he wrote, "2008 requests were made to the options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25. Between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.
"Since there was very little subsequent trading in the call with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts. The exchanges accommodated their requests, knowing that the intentions of the requesters were to buy puts. They indeed bought massive amounts of puts."
Looking at these activities, Olagues assumes insiders collapsed the stock and he recounts the machinations requiring oversight from those who should have been attentive.
Summarised, "if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make five-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts. And that is why the illegal inside traders requested the exchanges to introduce the far out-of-the-moneys just days before the crash."
But, Olagues adds, this scenario has serious implications. "This means that the deal was already arranged on March 10 or before. That contradicts the scenario that is promoted by SEC chairman Cox, Fed boss Bernanke, Bear CEO Schwartz, Jamie Dimon of JPMorgan (who sits on the board of directors for the New York Federal Reserve Bank) and others that false rumours undermined the confidence in Bear Stearns, making the company crash, notwithstanding their adequate liquidity days before."
"Did," Olagues wonders, "the exchanges aid and abet the insider-trading scheme?"
David Hirst is a journalist, documentary maker, financial consultant and investor.
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