>The regulators were so successful that pump and dumps are largely unheard of in large-cap U.S. equities.
Wasn't the 2008 stock market crash caused by the housing market being "pumped and dumped"?
Wasn't the 2008 stock market crash caused by the housing market being "pumped and dumped"?
>a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements.
Is that not exactly what the ratings agencies and co were doing by giving trash securities AAA ratings?
This is an astute observation. In a pump and dump, someone lies to sell securities they own with the intention of selling into the inflated price. It's special because it requires no assessment of intent to prove. If you own a security, make false or misleading positive statements about it and then sell into the resulting rise, you pumped and dumped.
In 2008, ratings agencies expressed their opinion about a security in exchange for a fee from the issuer. The issuer pointed to those ratings to sell the securities. Everyone knew about the conflicts of interest involved. Selling a stupid product to informed investors isn't illegal. Selling a product you fail to disclose material facts about, or which you knowingly structure to fail, is. Determining whether someone "knowingly" did something is harder than showing they did it.
Side note: many complex, structured securities–like CLOs and CDOs–which lost value in the crisis ended up performing as expected, if one held on to them [1]. The ratings agencies were still very wrong about a lot of things. But fewer than we give them credit for.
[1] https://www.wsj.com/articles/hunt-for-yield-fuels-boom-in-cl...
I got you. Ratings agencies are the affiliate scammers in this case. You're right, they didn't buy the scammy products or sell them, but they were paid by the product owners to represent the products as legitimate, which they did and made a ton of money. When the products turned out to hurt a lot of people, the ratings agencies/affiliate scammers threw up their hands with a "how could we have known?" while everyone who got hurt was saying "that is literally exactly what you said you were being paid to do, so if you didn't do that, then WTF were you getting paid for..."
Oh.
Pump and dumps by contrast have a much shorter time frame.
Right, it wasn't "a guy", it was banks like Goldman Sachs.
My question remains: if a pump and dump scales up to where "a large number of groups" benefit, rather than just "a guy on wall street", is it no longer considered a "pump and dump"?
Not every fraud is a pump and dump, and not every stupid investment sale and purchase is a fraud. Most of 2008 was stupidity, not fraud. (Some was plain fraud.)
In any case, the pump and dump rules worked. Pump and dumps are trivial to organize. Draconian punishments raise the bar of minimum competence from script kiddies on a message board to LIBOR traders co-ordinating across banks. The complexity of the latter over the former means (a) it's harder to do (b) it's even harder to get away with it and (c) when you get caught, you can be found and fined and jailed.
Post-crisis, rules surrounding swaps and securitisations were modernized and re-written. Our financial system has changed in response. (Banks are, largely, more boring.)
The group doing the pumping knows what's coming.
In 2008 banks didn't want it to happen. They would have happily kept doing what they were doing forever. Home buyers would have been happy buying more houses, real estate agents would have been making commission, mortgage lenders getting interest. Happy days!
There was negligence all round and the situation was unsustainable. Do you think the banks wanted it? Some foresaw the collapse and made money out of it but it cost the banks billions, ruined reputations, people lots their jobs. Yes, they got bailed out but they would have preferred to have not needed it in the first place.
Ugh, kill me.
But this doesn't line up to me, unless there were real estate companies and banks eager to unload their houses? I didn't think there was an excess of housing built that needed to be sold, but I could be wrong, because that would have pushed prices down. I thought the key failure was people being unable to pay their mortgages, and a bunch of financial products built off of expecting people to pay their mortgages, and ratings agencies giving incorrect ratings for those subprime mortgages.
The only connection I can see is people making dumb financial decisions, which is why a rubber stamp for subprime led to a ton of people defaulting. Houses don't really have the same faults as PT Cruisers.
"Pump and dump" requires both a "pump" and a "dump". I'm no expert on the housing market crash, but there doesn't seem anything close to a singularish entity that "dumped" after the housing market had been "pumped".