Two companies have become central figures in charges of insider trading, according to Bloomberg. The FBI executed search warrants at the offices of Level Global and Diamondback Capital Management, and both companies are thus far cooperating. Analysts believe warrants were issued after witnesses confirmed illegal activities were going on in both firms.
This action by federal authorities comes weeks after a third firm, FrontPoint, decided to close after allegations of insider trading. The health care hedge fund was accused of getting insider information about a drug trial in one of the companies in which it invests.
In wake of the economic recession, this news doesn’t come as a surprise, as the embattled financial industry has taken many large hits in the past two years. So far, this latest action seems paltry by comparison.
The term “too big to fail” became synonymous with the government’s high-profile loans made to AIG in order to prevent a cascade of financial collapse. Had AIG gone under, analysts predicted another Great Depression.
ProPublica reported AIG had amassed nearly $61 billion in assets regarding subprime mortgages by the end of 2007. The problem became greater when other financial firms, insuring their financial products through AIG, needed to make claims based upon their own losses in the mortgage crisis. When AIG feared it wouldn’t be able to pay up, it would collapse, and the entire financial industry would go with it because AIG was too large. The government had little choice but save the company.
Lehman Brothers wasn’t rescued because of a tense political situation. Henry Paulson wasn’t going to be bullied by CEOs at Lehman brothers when they had a tense meeting in the spring of 2008, according to NPR.
In the end, Lehman Brothers’ collapse was because of their pay structure. The investment firm was using debt to pay higher commissions and bonuses to its highest-paid employees. When banks began to rein in credit, the bonuses stopped.
Bank of America
When Bank of America bought Merrill Lynch, it was because the government speedily accepted the merger. Instead of pumping more taxpayers money into Merrill Lynch, it let Bank of America purchase the company to become the largest bank in the United States, according to the Wall Street Journal.
Shares in both companies plummeted, even though the government loaned the giants $20 billion to prop up their balance sheets. Despite taking on a huge amount of troubled assets, Bank of America’s buyout of Merrill Lynch was seen as a key facet of the government’s need for creative fixes to the financial crisis.
Simply seeking information regarding insider trading is small compared to the imminent collapse of the entire financial sector. In light of the economic recession and subprime mortgages, these two firms accused of insider trading will probably get a slap on the wrist by comparison to AIG, Lehman Brothers, and Bank of America/Merrill Lynch.
Hurtado, Patricia, “FBI Searches Offices of Level Global, Diamondback Funds”, Bloomberg.com.
Kiel, Paul, “AIG’s Downward Spiral: A Timeline”, ProPublica.org.
NPR, “Former Insider’s New Book Details Lehman Brothers’ Collapse.”
Moore, Heidi N. “A $50 Billion Deal from Hell”, Wall Street Journal.