Were the September 11 hijackers insider traders as well as murderers? The 9/11 Commission’s report has belatedly put paid to the rumor that Osama bin Laden and his accomplices speculated in the stocks and options of vulnerable companies in the weeks before the attacks. The potential profits garnered from such manipulation would have been in the millions.
Truth to tell, if one looked at the trading figures–especially with the benefit of hindsight–for early September, there was a lot to be suspicious about.
Trading in AMR–the ticker for American Airlines’ parent–rang alarm bells, especially in regard to frenetic put-option activity before September 11. A put, in brief, is a contract to sell a certain number of shares at a previously agreed upon “strike” price sometime in the future. The price of the put depends on a number of factors, not least of which is the price of the underlying security. Cautious investors buy puts as insurance if they believe a stock they hold might fall, while speculators exploit their high volatility and relatively low cost to leverage profits if the stock does dive. (A call option is the same, but in reverse, and is oriented towards the bullish).
Some 4,516 put contracts–which could be potentially leveraged into controlling more than 450,000 shares of AMR–traded hands the afternoon before the attacks (compared to 748 calls). Thus, about 85 percent of the day’s options activity involved puts–a massive imbalance rarely seen. When the markets opened for the first time after September 11, AMR plummeted by 39 percent, which would work out to be $4 million profit for the holder or holders of those puts (assuming the “insiders” had bought 4,000 of the contracts). Put it this way, on September 10, 2001, somebody, somewhere, was very, very bearish about AMR’s near-term prospects.
Derivatives trading in UAL (United Airlines’s parent) on the Chicago Board Options Exchange (CBOE) on September 6 (and into the next day) exhibited identical characteristics: 4,744 puts on UAL, compared to just 396 calls. By September 10, short interest (essentially, a wager that a stock’s price will fall) in UAL jumped by 40 percent over its level of a month previously. As for AMR, its short interest increased by 20 percent.
The deeper we delve into the murky world of futures the darker the picture apparently becomes (a few excitable souls still believe the CIA and Bush–you know, because they knew the attacks were coming–were behind the shorting). One hedge-fund manager whispered to the New York Times that he’d heard that major short-selling had been happening in eSpeed (ESPD), the electronic bond-trading network controlled by Cantor Fitzgerald (whose offices were high up in 1 World Trade Center). There was probably something to this rumor. Between August 7 and Friday, September 7, ESPD fell by $5.85 (or 42 percent) to $7.95.
Or what about the zealous buying of 17,955 short-term S&P 500 index puts at 1,050 points–the “strike price,” essentially–on Monday, September 10, 2001? Those investors were gambling that the S&P, which closed at 1,092.54 at 4pm that day, would fall by at least 42 points by September 21, when the options were scheduled to expire. Without such a significant decline, the options would be worthless. (Hey, options trading is highly risky, but potentially very profitable). More eerie stuff turned up in Britain and Germany. In London, investigators detected what seemed to be huge bets on a decline in airline stocks, while in the latter, the price of Munich Re, a reinsurance company that would be hit by claims resulting from the attacks, plummeted amid a surge of puts-buying.
So, to repeat, were Osama and his accomplices involved in insider trading? Part of the answer is tucked away in a footnote on page 499 of the 9/11 Commission Report. The commissioners, basing their findings upon exhaustive research of millions of transactions by the Securities and Exchange Commission, note that “some unusual trading did in fact occur, but each such trade proved to have an innocuous explanation.” Moreover, “the trading had no connection with 9/11.” So what happened? “A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6.” This same institution, as part of a complex trading strategy, also purchased 115,000 shares of AMR on September 10. But what about the spike in AMR puts trading on September 10? It turns out that a “U.S.-based options trading newsletter, faxed to its subscribers on Sunday, September 9…recommended these trades.” Readers jumped in headfirst come Monday morning, only to strike it tragically lucky the next day.
Recall, as well, the mood of the summer of 2001. By early September, the airline industry was in the doldrums after the dot.com meltdown hit business and vacation travel. On September 5, meanwhile, Reuters, the news service widely followed by Wall Streeters, quoted analysts as saying that “a further deterioration” in airline financials was probable. Translation: Bail out now, boys. Matters were not helped by AMR’s announcement two days later that its third- and fourth-quarter losses would be larger even than already forecast. Immediately, airline analysts downgraded AMR, as did hotel specialists, and a wave of shorting hit the travel industry (people even took positions in Royal Caribbean Cruise lines and Cruise Lines Carnival Corps).
As a result, investors hurled themselves into the puts market, desperate to lock in profits or make a killing if AMR went bust. The panic was not restricted only to AMR: Speculators rightly predicted that UAL would also go from bad to worse, and took their bear positions accordingly. Thus, the short interest on UAL was up, as I’ve said, 40 percent over the previous month (and AMR’s by 20 percent), but the average for the other major airlines was 11 percent during the same period. While UAL’s and AMR’s short interest was greater than the airline average–reflecting widespread pessimism as to their chances–keep in mind that the average short ratio of all stocks on the exchange reportedly rose by one percent: pretty much every airline was getting clipped that summer compared to the rest of the market. In other words, American and United were in deep trouble even before September 11, and the market reacted normally (well, perhaps a little overheatedly) to bad news and darkened forecasts.
As for the ESPD rumor, yes, the stock–in common with most Nasdaq tech listings, a highly volatile one in the first place (it’s Beta today is a whopping 1.886)–had gone into a tailspin thanks to the short-sellers, but by Monday, September 10, it had bounced to $8.69–or 74 cents above its September 7 closing price. If Osama was an eSpeed short-seller, he had his wallet pick-pocketed by the longs on that occasion. (Since then, ESPD’s lagged behind the major indexes).
The mysterious London trades, it turns out, were the work of a small European airline that was following a tried-and-true hedging strategy against a downturn (wisely, it seems). And as for Munich Re, the stock had been dropping since the beginning of September, and a week before September 11, two brokerages cut their ratings on the firm owing to their concerns about deterioration in the capital markets.
It is hardly likely, in any case, that a cell of terrorists, having planned these attacks for some years, would risk detection by the Security and Exchange Commission just a few days before they pulled the trigger. Even granting that bin Laden himself might be somewhat more sophisticated financially than his Taliban protectors, it is most improbable that his accomplices and sympathizers around the world were au fait with the workings of the derivatives market. And for executing options orders of the magnitude of early September, one would require the services of a major institutional broker–you try inputting “Buy 4,500 AMR October Puts” on E*Trade without getting a quizzical call from the broker. That kind of access would have been far beyond the means of anyone who could possibly have known in advance of the attacks.
Conspiracies do exist in this world but the UAL and AMR affair was not one of them. Sometimes, the most complex events have deceptively simple causes.
–Alexander Rose is NR’s deputy managing editor.