How markets are rigged against you

Stories of powerful people rigging the financial system are getting harder to ignore, and they threaten the integrity of the real-world economy, Amanda Lang says.

Amanda Lang looks at ways the financial system is rigged in some people's favour

Market Manipulation

10 years ago
Duration 18:42
Are the world's stock markets rigged? Amanda Lang takes a closer look at the system that's supposed to benefit many, but actually enriches a few.

Every day, trillions of dollars are exchanged by buyers and sellers on trading floors across the world. The places where that happens are colloquially known by the faceless moniker of “the markets" but every time somebody buys a barrel of oil, a shipment of potash, a Royal Bank share or a Japanese yen, there’s a real person behind that transaction.

Historically, the system works because people have confidence in the rules and believe they are treated the same as anybody else.

But it’s getting harder and harder to ignore the stories of powerful people cheating the system for their own gain. As the bad apples add up, it gets harder and harder to ignore a troubling realization — “everything is rigged.”

That’s what financial journalist Matt Taibbi says in an interview with Amanda Lang airing on Monday night's The National. After years of reporting on some of the best examples of Wall Street stacking the deck in its favour, Taibbi has concluded that the entire system underpinning the global economy is rigged in some form or another. And it’s not just financial markets that are at stake. The real economy, with factories, services, goods and jobs for real people, is under threat.

Certain people always win and certain people always lose.- Matt Taibbi, financial journalist

“There’s a few smaller, inside actors who always seem to win,” he told Lang. “They have more information than anyone else.”

Everything from the price of food, to currencies, financial transactions known as “swaps” and interest rates are implicated, he says.

“We’ve got a lot of work to get it back to some place where it’s at least close to fair. [Right now] it seems certain people always win and certain people always lose.”

Case study: Detroit

Detroit’s best known today as a case study in what happens to a declining manufacturing base. But the city was also home to a type of financial fakery that’s becoming all too common.

Investment bank Goldman Sachs has been accused of creating an artificial shortage of aluminum by buying warehouses in the city to store the metal, and then intentionally causing delivery delays to create artificial profits.

Through a subsidiary, Goldman owns 27 warehouses around the city, housing 1.5 million tons of aluminum, for customers who pay to store it there.

The longer it’s there, the longer Goldman can charge its customers. But some started to complain that Goldman was making money by shuffling the metal between its warehouses — instead of out to its owners — and charging them more rent in the process.

The story drew the eye of New York Times journalist David Kocieniewski.

Galleon founder Raj Rajaratnam is accused of earning $63 million on illegal stock tips. (Kathy Willens/AP) (The Associated Press)
“It used to be a six-week wait for metal and now it’s 16 months, what happened?” Kocieniewski asks.

“You hear their explanations — ‘there aren’t enough trucks [and] forklift drivers’ but Detroit’s unemployment rate is 25 per cent, so that seems kind of implausible. It was clear it was something that they were doing,” he says of the sudden scarcity.

The bank claimed it was working “feverishly” to deliver the metal to its eager customers. But in one video posted online by a warehouse worker, all you could see was aluminum stacked to the rafters, but not a single employee working to move it anywhere.

“One of the drivers who moved the metal said ‘well we just move it from one place to another, once we get one warehouse filled up we close it down and it’s a merry-go-round,’” Kocieniewski said. Every hour that metal is sitting there Goldman is just collecting money on it.

And that gets passed on to consumers by increasing the price of real goods like aluminum foil, pop cans and the siding on your house.

Goldman Sachs declined to make anyone available for an interview, but emailed CBC News a statement saying they deny the allegations.

Case study: inside information

New York’s Wall Street is a place where rigging has become sadly too commonplace.

One of the biggest recent examples was at New York hedge fund Galleon, run by a man named Raj Rajaratnam. Insider trading is one of the oldest and least sophisticated ways of rigging a market, and Galleon is one of the most egregious recent examples. Under Rajaratnam’s watch, Galleon would routinely pay corporate insiders for information about their companies ahead of when they were disclosed to others. (That way the fund could trade in advance on any good news or bad news to come.)

What was so shocking about Galleon was the brazenness — how employees were caught on tape rigging the system, and not seeming to care. Rajaratnam was eventually found guilty of insider trading and sentenced to 11 years in prison but even today, some people involved still don’t seem to quite see the problem.

“The bottom line was to make money … and if you weren’t adding to the end goal you were kind of useless,” says Turney Duff, a former trader at Galleon who’s written a book about his experiences there.

I didn’t feel like we were going to get caught. You know, it felt like jaywalking- Former hedge fund employee Turney Duff

“I’m not making excuses for my behaviour,” he says in the piece. “I made a lot of mistakes and a lot of the decisions that I made … [weren't] based on right or wrong it was based on [lack of] consequences.

“I didn’t feel like we were going to get caught. You know, it felt like jaywalking.”

That mentality may be part of the problem — that there’s insiders at the top of a pyramid who feel they have the right to set prices and profit wherever they see fit, Taibbi and others say.

“The basis of all these problems that we’ve had in the last decade or so is that it’s a very insular community, this financial community. It’s a very small group of people making very, very weighty decisions and I think these guys, to them, it’s not real. It’s just a bunch of numbers on a paper,” Taibbi said.

Case study: rigging LIBOR

One of the most serious examples of rigging might be the London Interbank Overnight Rate or LIBOR which has apparently been manipulated by a handful of trading firms for their own profit. Trillions of dollars of real things like mortgage rates and student loans payments are priced off LIBOR.

LIBOR is set today the same way it has been for more than a century — via phone calls between traders, telling each other what rates they were giving out and taking in that day. In retrospect, it was gapingly open to abuse.

In a series of wiretapped phone calls unearthed by British regulators, traders could be heard doing favours for each other, lying to officials about the rate in order to meet their targets. It was a game to them, but one where people in the real world economy were the losers.

Conclusion: new tools needed

There’s a sense among the general public that nobody seems to be maintaining the integrity of the system. Bart Chilton, the head of U.S. regulator the Commodities and Future Trading Commission, says his office is committed to maintaining the system’s integrity. But, he says his office isn’t given the tools he needs to properly do the job.

Goldman Sachs has been accused of stockpiling aluminum in its warehouses in order to charge more rent for storing it. (Ilya Naymushin/Reuters) (REUTERS)
“They don’t have enough people to do this stuff,” Chilton says. “[Washington] doesn’t care about about this, and unfortunately Congress and government is very reactive.”

He notes that his office has 158 agents to police more than $5 trillion worth of financial contracts per year.

In contrast, the more well-known Securities and Exchange Commission has more than 100 agents assigned to its investigation of baseball pitcher Roger Clemens alone.

Until the powers that be make levelling the playing field a priority, the system is likely to remain skewed. And the people doing the rigging getting caught will be the exception, not the rule.