single balloon payment at maturity.nInvestor yen for high yields fuels thenraider’s desire for arbitrage profits madenon the takeover. And if you want tonknow who buys junk bonds, just asknthose bankers who are so fond of ThirdnWorld debt—they have to make moneynsomehow! By turning greed into anfinancing weapon, investment bankersncan put their own targets into play andnreap arbitrage profits through insiderntrading in advance.nBut that’s not the only innovationnwhich makes the greed machine run sonwell. Since SEC disclosure requirementsnmean revealing an investmentnstake greater than 5 percent, a bignposition taken in advance could benexposed. Parking is what solves thatnproblem. An investment-bankerbackednarbitrage-style takeover artistndoesn’t have to ask his brother-in-lawnto buy stock for him, though some stillndo. He uses his connections to have anfriendly broker hold his stake in Streetnname. Since brokers frequently worknwith large blocks of stock, who’ll noticena few million shares parked temporarilynwith Jeffries Group Inc., whose chairmannpleaded guilty to aiding Boesky innhis trading schemes?nJust as junk bonds help the arbs getnstarted in the first place. Wall Streetnhas another new technique for helpingnturn ill-gotten millions into really seriousnmoney. Don’t buy shares—buyncalls instead! How can you lose whennyou know a planned-in-advance takeovernwill be attempted? The answer isnby not winning big enough. And a callnis the difference between a winner andna big winner. That’s because a call is annoption which grants you the right tonpurchase stock at a fixed price. Let’snsay GM is selling for $80 a share. Younthink it’s going to $85. So you buy fivencalls costing $2 each, which allow younto buy five shares of GM for $80 each.nThe investor selling the calls expectsnGM to stay at $80 or less. But if GMngoes up to $85 each of the calls younbought for $2 will be worth $5 becausenyou can use them to buy somethingnthat’s selling for $85 for only $80 each.nSo you make a $3 profit on each ofnyour five calls.nYou paid $10 for them and soldnthem for $25. That’s a profit of 150npercent. And notice that you can buy anlot of $2 calls for the price of a singlenshare of GM. Options mean big lever­nage, and the lever is sure to movenmountains when you know in advancenthat many investors are planning onnmaking a lot with a littie.nBoesky and the boys had it allnrigged. They created the deals theyntook advantage of using the very gamesnthat greed itself has created. More thannfixing the race, they stacked the oddsnand sold themselves the only winningnticket. Why didn’t the SEC get ontonLevine until it received an anonymousnletter about his Caracas connection?nThe operation run by Boesky et al.nindicts the morality of how the WallnStreet game is being played today.nProgram trading is the newest BignBoard sport. And arbs like Boesky,nas well as institutional traders andnmutual fund managers, are out to winnbig with it.nYou’ve probably heard about thenDow Jones Industrial Average becausenthe Dow is what tells Americansnwhether the stock market is up orndown. The average is no more than anstatistical indicator of the state of thenmarket, and you can pick and choosenamong a handful of other indices thatndo the same, like the Standard &nPoor’s 500, which measures the marketnby indexing the prices of 500 stocks.nThese statistical tools were once inviolate,nand traders made their moneynbuying and selling the shares of individualncompanies. That was before thenrelatively recent arrival of index options.nThese give investors a chance tonbet on the average itself Instead ofninvesting in 100 shares of IBM becausenyou think the company is going to donwell, you can buy a call on the S&Pn500 index, speculating that the marketnwill rise. That’s the difference betweenninvesting and gambling, because thenIBM stock conveys a piece of the rock,nwhile the index option must eventuallynexpire.nNow here’s the catch. Since it’snstock prices that move the index, antrader with enough money can influencenthe index by purchasing or sellingnmillion-dollar baskets of the stocks usednto compute the index. It’s currentlynlegal to bet on the index and then tradenstocks large-scale to make your indexnbet come true. That’s what programntrading is all about; it’s another sophisticatednarbitrage scheme designed tonreward the appetites of the biggest andnthe most powerful traders. It makes thennntail (or index) wag the dog (or market);nwhich means program trading canncause big swings in stock prices. Thatnvolatility can cream small investors andntrigger a market collapse — so, restrictionsnare in store for program trading.nBut there’s a littie talk from regulatorsnabout the actual morality of programntrading itself, or about junk bonds andnother greed machine mechanisms.nBut the U.S. Supreme Court didn’tnpass the buck on insider trading whennit upheld the conviction of R. FosternWinans. Winans is another hustiernwho was quick to grasp the operatingnprinciple of the new greed machine.nYou can make money by trading onninsider information, but you can makena great deal more by creating theninformation yourself Boesky et al. hadnthe money to generate their own deals.nBut Winans was only a poor reporternwhose homosexual lover needed dentalnwork. So he used his Wall Street Journalnstock market column to create theninformation which only he could tradenon in advance. Winans’ boyfriend didnthe trading, but the game was mastermindednby superstar Kidder Peabodynstockbroker Peter Brant along with anlawyer pal and another Kidder associate.nJust who seduced whom isn’t verynclear in Winans’ own account of hisncrime, but what’s more important isnwhy the scheme produced more than anmillion. Since Winans knew whatnwould be puffed in his column, Brantncould get his orders in ahead of time.nBut even then the effect of the Heardnon the Street column isn’t a lastingnone. To make money Winans needed anmarket as greedy as he was, one readynto blow up stocks on the slightest shrednof media hype. And because the pricenblips caused by the column weren’tngreat, Brant wouldn’t have made bignbucks without stock option leverage.nThe market’s own greed helped Brantnand Winans make out. And Winans isnstill pulling the machine’s levers — hisnown book puffs his own crime to makenmore money. That’s why the State ofnNew York is after the book’s profits.nThe greed machine exposed by toonfew SEC insider trading prosecutionsnhelped inflate the speculative bubblenwhich burst in the market crash ofnOctober ’87. The House addition ofnantitakeover proposals to its tax billnstuck a pin in the ballooning market.nAUGUST J988 / 31n