Real Ugly Insider Trading

I have always contended that real ugly insider trading can only be done by government officials who are in a position to influence government escapades, and also take positions to profit from such.

Many years ago, before I knew to take such information seriously, a very beautiful senorita tipped me off to a Mexican devaluation of the peso, a week in advance. She knew because she worked in the Mexican Misson to the United Nations and got wind of the short-sales being put on the peso by various Mexican officials.

Devaluations,though, are minor league compared to some of the other stuff that is pulled off. In the United States of the 1950's the Cabots and Dulleses had a series of top-secret meetings in which they decided that Guatemalan President Jacobo Árbenz Gúzmanhad had to go and sponsored a coup that drove Árbenz from office in 1954.

Economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu have discovered that those in on the planning process also profited from the overthrow.

Dube, Kaplan, and Naidu pulled trading data on the Guatemalan episode, and others, and discovered that stocks sensitive to overthrows climbed, for no apparent public reason, in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran.

The researchers provide evidence that someone—perhaps one of the Dulleses, Cabots, or others in the know—was trading the stocks based on classified information of these coups-in-the-making.

There is a new science developing around the study of such trading patterns. It is called forensic economics. This is important research that will help the public understand the dirty deeds surrounding many government doings.

Ray Fisman has a great story on the research to date.

(HT2 Bob Murphy)