How to Steal from Wall Street
The way people here think about high finance is both too cynical, and not cynical enough. People will say all Wall St. money is stolen, but only explain that as literal embezzlement or insider trading. (If you want to insider trade and not get caught, it's very very hard to make more than six figures.) No, it's nothing that blunt and obviously criminal.
... it still is stupid easy though, and our entire financial system relies on people just deciding not to be criminals to get some easy money. Because regulators and auditors don't really pay attention, and financial engineering is fun.
Here's one common method:
Buy an asset at a low price.
Spend money to inflate it's value.
Borrow money against your asset.
Note, don't sell the asset, because once you start selling off, then the price goes back down, and you can't keep selling it as much.
But banks will happily give you loans, even just for personal spending. This is how most CEO's afford anything. As CEO you can't sell your company stock, that would look terrible, and have all sorts of insider trading difficulties. But you can just tell your bank "I have a million dollars of stock I can't sell. Please lend me money, and I'll back it with the stock.|" This is very common, and even billionaires like Musk use it. It's not selling your stock, just using it as collateral, like your house.
Here's a famous crypto example of just this. https://www.soliduslabs.com/post/mango-hack
But crypto is the Wild West. Surely this can't work in the boring world of stock markets, with real regulators and reputations and long institutional knowledge to draw in.
And here is where the cynicism is correct: the regulators aren't paying attention and no one wants to look too hard at billionaires because they are the most valuable customers.
And in that environment, you can get even more wild. Here's the story of Archegos, which you can do at home.
Borrow from Bank A some leverage to use a little money (millions) to buy some CBS stock. This may mean if CBS ever goes down, the bank will sell off all your collateral, but otherwise your money is working at a 20X multiplier. This will have the nice effect of raising the price of CBS stock, so your new holdings go up in value. But if you try to sell it? The price will go back down.
Then use that stock as collateral to borrow money, which you then use to get leverage from Bank B to buy even more CBS stock.
Repeat. CBS stock goes up whenever you buy more. Now your stock is worth more as collateral, so go to another bank and use that to buy more CBS stock. It will keep going up and up, entirely because of your actions.
Here is the important part: At the peak of the market, when CBS is looking like the most valuable company the world has ever seen, borrow money from Bank N... to buy a lot of gold bars, take them overnight to a country with no extradition treaty, and watch all your loans and stock collapse behind you.
Bill Hwang really did this!... except he missed Step 4. So once any bad news knocked down CBS stock a little, it triggered banks calling in his loans, which led to them automatically selling off his collateral stock, which caused the price to tumble more, which called in more loans which... you get the idea, it was basically an uncontrolled demolition of a proud looking tower. All of Hwangs gains were wiped out, AND every bank that leant to him lost money. This killed the 150 year old European bank "Credit Suisse," or at least was it's death blow.
Guess on this chart when Hwang made his move.
Now, you may be thinking "Bill must have cleverly used a different shell company each time to prevent the banks from knowing he was just multiplying all this leverage together, and how risky his tower of tortoises was."
Nope! The banks all knew this was Hwang doing all the borrowing, and how much he had borrowed total. There were two problems:
Bill Hwang was a very rich customer, and no bank wanted to annoy him into going to a different bank that was "more of a team player." (As the collapse was beginning, one bank officer called Bill to say "we may need to call in your margin loans because this is looking bad: let's talk" and Bill just didn't answer so they... waited to talk to him the next day instead of selling off without giving him time to explain himself. They didn't want to be RUDE, did they? Yeah, they lost all their money.)
Hwang is a pretty smart guy who had already built fortunes for others. They presumed he must know what he is doing, and he would not actually build a tower of cards that will collapse leaving him bankrupt.
Now, Hwang lost all his money. But if he had been greedier he could have just bought a billion of gold bars at the end there, bury them in his backyard, dealt with all the legal cases and responsibility, then dig up the gold bars and run away. It's really quite shocking that he DIDN'T do this. Still, no one knows what his endgame was.
I'm not saying none of this is illegal. But all of it - until the last step - is the sort of thing you can do, and no one will look askance at you, as long as you are part of their establishment. Just swindle it all at the end, right before they are suspicious enough to actually act on their suspicions.
The controls on the machine to stop it from getting scammed aren't actually enforced by bankers who are also responsible for hiring more clients. And leverage is crazy technology so long as you play it nimbly.
