Marketplace Scratch Pad

Trading in Wall Street’s graveyard

Scott Jagow Sep 24, 2009

Did you know that Washington Mutual’s stock gained 64% earlier this week? Lehman Brothers shares have quadrupled the past month. The stock of the old, bankrupt GM has tripled. You see anything wrong with this picture?

Apparently, the latest craze in the stock game is to buy shares of dead companies. Blue-penny stocks, they’re called. They rarely trade above a $1, but high-volume traders and day traders can make a quick buck with the sudden price swings.

But Lehman, Wamu and old GM don’t conduct any business. Fannie Mae, Freddie Mac, and AIG are controlled by the government. So why is trading of these stocks even allowed? From the LA Times:

In most cases, shares in bankrupt or government-controlled firms can be bought and sold until a judge orders that trading cease. Stocks of Enron and Bethlehem Steel continued trading long after going belly up, although at very low volumes.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority say they can do little to restrict such trading….

Online brokerages and investor information websites aren’t helping. At least two sites describe Lehman as a 28,500-employee investment bank, for example, when in fact it is no longer a going concern and has no employees.

Eh, who cares? There’s still a piece of paper people can trade back and forth:

Critics argue that brokerages and exchanges have little interest in discouraging such activity because of trading commissions.

“It’s all about . . . brokerage commissions and luring in suckers,” said Timothy Sykes, a New York day trader who calls these risky stocks “carcasses.”

The trend underscores how Wall Street is changing and how easily valuations can be manipulated. Thanks to new technologies, millions of shares can now trade in a fraction of the time it takes to blink.

Here lies the US economy, in the graveyard at the end of Wall Street (there actually is one):

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