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     Apr 27, 2012

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'Economists are scared'
By Lars Schall

Recently, I had published at Asia Times Online an exclusive investigation, Insider Trading 9/11 ... The Facts Laid Bare (March 21, 2012).

In this article I presented evidence of informed trading activities prior to the terror attacks of September 11, 2001 on areas of New York City and Washington that resulted in the death of 2,996 people, including the 19 hijackers of four commercial jets. (The four aircraft hijacked on September 11 were American Airlines Flight 11, American Airlines Flight 77 and UAL flights 175 and 93.)
On the same subject matter, Asia Times Online now presents an


interview that I have conducted with United States economist Paul Zarembka.

Professor Zarembka is a professor of economics at the State University of New York (SUNY) at Buffalo. He has been the general editor for Research in Political Economy since 1977, and is the author of Toward a Theory of Economic Development, editor of Frontiers in Econometrics, and co-editor of Essays in Modern Capital Theory.

He is working on the concept and application of accumulation of capital. Furthermore, he is an expert on Marxist theory and economic development. In 2008, Zarembka edited the book The Hidden History of 9-11, a serious reference volume that examines 9/11 and its background, showing how much remains unknown and where further investigation and debate is needed. His own chapter in the book includes investigation of insider trading before 9/11 and was updated in 2011 [1].

Lars Schall: Professor Zarembka, how did you as an economist became interested in the topic of insider trading activities prior to the terror attacks of 9/11?

Paul Zarembka: Well, I did not got directly interested in it, I got directly interested in 9/11 itself. That eventually led to insider trading, and since I specialized in econometrics it was the natural thing for me to jump unto and investigate for myself.

LS:Right after the attacks, a fair amount of mainstream financial media articles surfaced suggesting that there was informed trading going on related to 9/11. Why do you believe this reporting disappeared soon after and was never seen again?

PZ: That's a good question, and I'll tell you what I think, but it's kind of speculative, I can't know for sure. What I think happened was that many people who were not involved in any way whatsoever with 9/11 noticed the extreme levels of put options in certain securities before 9/11.

That is publicly available information, particularly if you have the services that provide that data to you. Some of these people noticed the extreme volumes and they thought, I believe, that it would lead to nailing [al-Qaeda leader] Osama bin Laden as responsible for 9/11. So we've got a lot of news coverage for about a month or two after 9/11, and then suddenly it died. I think the reason why it died - and that's speculation - is that somehow the word got out that it's not going to lead to Osama bin Laden.

LS: And so said the 9/11 Commission in its report.

PZ: Right, but that was much later after it died, and I mean it really died very quickly. On the other hand, the fact that it got out there at all meant that the 9/11 Commission report had to say something about it. They said something very minimal, but they said something, and if hadn't been for those news stories nothing would have probably got out about it.

LS: What was the position of the 9/11 Commission relating to insider trading, and why do you think its conclusions are unconvincing?

PZ: That's a big question, perhaps bigger than you anticipated. Let me go back a little bit to the history of discussions about insider trading connected with 9/11.

The first scientific paper that came out about it was from Professor Allen Poteshman, who was at that time working at the University of Illinois at Urbana-Champaign. His article was published in the Journal of Business which nobody can criticize for its respectability and the integrity of its peer-review process, and yet he came to the conclusion that there was insider trading with high probability (nothing is ever certain in statistics) in American Airlines stock options and to a lesser extent in United Airlines [2].

It was accepted for publication, I think, around 2004, well before the 9/11 Commission report came out, but they did not make any reference to it. I am not sure if they knew or didn't know about it, but my guess would be that they would have been informed that that study had been done.

Now the 9/11 Commission made its reports and said that they did investigations throughout the financial world, I mean not just only in the United States but also abroad, and not just in put option trading but in other financial instruments, and they concluded that they could not find any evidence of irregular financial transactions.
In its report, only two cases are actually cited, the two cases that Poteshman had studied and written about, namely in American Airlines put option trading and United Airlines. However, the commission provided almost no direct evidence of what its finding was, but rather just made assertions. So what the 9/11 Commission said is basically worthless because it didn't give us any evidence for its statement.

The drama is magnified when two more studies were done which again confirmed that insider trading took place. Where it also gets dramatic is that in 2009, some parts of the investigation fed into the 9/11 Commission were released, and frankly I have to tell you that at least for American Airlines the report is convincing that there wasn't insider trading in American Airlines.

I say this not because it changes the final result very much, but I think it is a deep warning to everybody working on these kind of issues that these issues are complicated, and that in the final analysis the government has the data and has knowledge we don't have - so some of what we are doing is based upon hard facts, but some of it speculates around things we don't have the hard facts about.

LS: And then the label "conspiracy theorist" raises its ugly head very fast when you do speculate.

PZ: Yes, and that's why I am not interested in speculating. I try to say truthfully whatever I discover. For example, Poteshman's results were never a certainty, they were always stated as a high probability. But from an econometric point of view when you get results which have a probability of 99% you take them very seriously.

And that leads us to something else. I have enough experience in econometric issues which were controversial to know that typically, when you got controversial results, somebody else comes along with a series of objections to the methodology that you have used and you get a big controversy.

No one ever responded to Poteshman's article from a critical perspective, and this is very curious. It's a major piece of work, and he got the data actually from the Chicago Board Option Exchange [CBOE] in a way that the rest of us don't have; he got confidential data for his work.

I suspect that the CBOE wanted to find out if a methodology could be developed which would be useful for checking into insider trading in other incidents, not only in this one, and I think that's why the CBOE gave him the data. Whatever the reason is, he had data the rest of us don't have. So it really was something to investigate further, but his work was never challenged. And then we get two other papers which actually more than reinforced what Poteshman said.

One of those papers came from two professors and a graduate student at the University of Wisconsin-Madison, who studied abnormal trading in the S&P 500 index options prior to the 9/11 attacks. [3] Their study came to the conclusion that there was a high probability of insider trading in S&P 500 index options prior to September 11.

What is very interesting about their results is that the underlying reports that were made available to the 9/11 Commission (which we didn't see until later) say that they could not examine the S&P 500 index options because trading in it is too extensive. Now why that becomes interesting is because the 9/11 Commission report had said that they made a wide-ranging study and they found no evidence of any sort of financial irregularities before 9/11, but also said the S&P 500 index options couldn't even be investigated - so the commission is kind of contradicting itself. And more than that, when some did investigate the S&P 500 index options, they find out that in fact it did have abnormal trading before 9/11, with high probability.

Continued 1 2 3

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2. A technical knockout in Afghanistan

3. Aftershocks of the Egypt Spring on Syria

4. Dangerous illusions over North Korea

5. China holds court in the global village

6. Taiwan chooses to shoot blanks

7. Thinking the unthinkable

8. The crisis tales roll on

9. Old Beijing lanes embody a useful spirit

10. Yusufov fights to keep bid for DEPA alive

(24 hours to 11:59pm ET, Apr 25, 2012)



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