Professor Elam

One of the most famous lines in Hollywood movies comes from Casablanca. THe quote is-

What, Gambling in this Establishment, I’m Shocked! It is the understatement by Claude Rains, the French Vichy Commander in Casablanca after being informed by the Germans that gambling is occurring at Rick’s Cafe American. Upon making the startling revelation, a croupier hands Claude his winnings and he puts them in his pocket….

And so read SEC Probes TXU Option Trading. It seems several thousand call options that were out of the money were purchased JIT for the take over announcement by KKR.  Gee do you think someone might have acted on inside information?  We have studied derivatives in Intermed II, do you understand the terms call option, out of the money, expiration date?  Can you see why Barney Frank describes derivative valuation as somewhere between alchemy and astrology? Have you noticed that the same Big Three Investment Banks keep showing up in these deals, J P Morgan, Merrill, and Goldman?  Note that Goldman provided two Secy of Treasury in the last two administrations.  Is the fox guarding the henhouse?