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Diane Francis

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Market Manipulation Amid the Mayhem

Posted: 08/15/11 12:42 PM ET

It's been a week of thuggery on London streets, Syria's cities and on stock markets.
By far, the worst mugging took place on Wednesday against French bank Société Générale when rumors swirled that the bank was "on the brink of disaster." The origin of this rumor was odd. Just when we assumed Britain's last incompetent editor had been arrested for phone hacking, the source was none other than British tabloid the Daily Mail. The Mail wrote that the bank was on the "brink of disaster," quoting an unnamed source. Hardly a credible source of business news, it took a few days for this unsubstantiated tripe to become viral, undoubtedly spurred along profitably by gleeful bank short sellers. The news incident gave new meaning to the term in Britain of a "down market daily."

The bank's stock plummeted 22.% on Wednesday and was briefly suspended. There were gains after it reopened and after the Daily Mail groveled its apology: "In an article that appeared in the print edition and online version of the Mail on Sunday on 7 August 2011, it was suggested that according to Mail on Sunday sources, Société Générale , one of Europe's largest banks, was in a `perilous' state and possibly on the `brink of disaster'. We now accept that this was not true and we unreservedly apologise to Société Générale for any embarrassment caused."

What is the Mail going to do about the damage caused to its shareholders, or to the other Euro banks dragged down by this?

Lousy newspapers
Shorting of banks in four European countries was banned by Thursday, but not before Societe's rumors hit France itself with rumors it was going to lose its Triple A credit rating. The Cac 40 fell 5.45% that day before it recovered after a terse denial by the government.
French regulators are investigating these incidents. And their American counterparts are looking into complaints about another alleged market mugging, or high frequency trading, that has dramatically contributed to the volatile pounding that markets took. This week's value shifts and volumes set records and some believe the "machines" are using techniques to game the system for profit.

Stock market guru Jim Cramer voice concerns all week because stocks moved in lockstep, distorted the market and represented a "repulsive anti-individual investor edifice."

For instance, he said gold stocks which benefit from higher bullion prices, or stocks which benefit from lower oil prices, were both drowned with everyone else in a tsunami of trading even though bullion increased and oil decreased.

These concerns go to the heart of capitalism: The market system is supposed to be a valid price-setting mechanism. So probes and punishments must be swift. The other thugs this week did not affect markets. Britain's violence is not political, but football hooliganism 2.0 with BlackBerry texting. It's not coincidental that scheduled football matches were canceled this weekend, lest the "boys" continue their hijinks on the sidelines of games. Let's remember that the last generation of "yabos", as they were also nicknamed, were banned from attending games in Europe.

Middle East muggers
Likewise, Syria's Assad family are gangsters whose best-before date has expired. They head a tribe, which includes only 12% of Syria's population, which lords over the Sunnis with 88% so the demographics dictates their demise.

But the France and Societe rumors, on top of the Italy and Spain news, made market indices resemble the blood pressure readings of an impending heart attack victim. But there are two overhangs to markets that are unappreciated. The United States is in the process of being "marked down" in terms of living standards forever. So is Europe's. Unemployment will remain high because aging populations don't consume as much and because well-paying American or European jobs are going to be increasingly filled by robots or, alternatively, five workers in Asia. The US downgrade is just an arithmetic warning that public borrowing to artificially stimulate demand where there isn't any is simply not on.

Worse yet, is the European Union, with its 32 hour work weeks outside Germany. The continent's 27 members have also crossed the economic Rubicon. Continental credit cards are maxxed too, and whether the Germans, Dutch or Finns like it or not, they are part of a joint and several Eurozone agreement. This means they are on the hook. To think otherwise, makes them thugs too along with the Tea Party. As one wag put it this week, their solution in dealing with the collapse of their economic "houses" is to just stop making mortgage payments and that's not honorable and suicidal.