Here's a quick story for discussion, since I've written about the topic of the gray line of insider trading before. In November, 2008, I was minding my own business, driving around the Berkshires looking for a house to buy, when I got a call from an old headhunter we used to deal with on my trading desk. This time, she had a job she thought I'd be good for, and she was right - it was a position that was tailor made for me, if only I'd been eager to jump into the fray. I interviewed with the firm, and went back at the end of December to discuss more details with them.
I was sitting in the cafeteria with the head of trading, talking about the state of the financial crisis, which was in full bloom at that point. Markets were getting crushed. I made a comment about how I wasn't a fan of extend and pretend and abandoning mark to market, and this guy told me, verbatim, "If we had to mark to market we'd be bankrupt." My jaw, literally, dropped. Dude - if you want me to come work for you, especially in a trading capacity, that's not the kind of thing you tell me. Especially since I come from a background trading instruments which were always marked to market daily (equities, options, futures). My counterparty quickly backpedaled, clarifying what he meant, explaining "held-to-maturity" classifications, etc - I don't really want to debate mark-to-market, although Barry Ritholtz has a thread on it today, if that's what you're interested in. In any case, this wasn't the kind of thing I'd expect to hear from someone in a head trading role. Market prices are the life blood of a trader, in my opinion.
Anyway, we left it with "we need to clean up our year end stuff, and we'll settle this in the New Year." Basically, I assumed that the job was mine if I wanted it, and I was agonizing over if I actually wanted it! Less than three weeks later, this firm reported earnings, wrote down marks on billions of dollars of assets, and saw their stock price get cut in half. That was the end of those job discussions - I never even followed up. But I was kicking myself and shaking my head that morning saying "Jeezus - the head of trading basically TOLD me that the stuff was worth way less than they were pretending it was worth - this was the easiest short in history." But would it have been legal if I'd traded on that?
Let's review important criteria that we discussed in my prior pieces on this subject: 1) Did the Tipper, my interviewer, have a fiduciary duty? Yes, of course - to his bank. 2) Was he violating that duty by telling me this? And was it even non-public information? Hmmm... Who knows - it was probably common knowledge that all the banks were pretending that their pile of balance sheet crap was worth a lot more than it really was - almost every bank continued to write down their assets further, quarter after quarter, for several quarters in a row starting in mid 2008. He didn't tell me "In three weeks, when we report earnings, we're going to write down the value of our fixed income portfolio by $5B."
Since many of my readers have expertise in this matter, I'll leave the question for the comments: could I have legally gone out and shorted this company's stock based on what my interviewer said to me: "If we had to mark to market we'd be bankrupt" ?