Financial Report on Recent FOMC Meeting & SAC Advisor Plea Bargain

By Jeni Merino & Ellen Yu

For our in-class financial presentation, we reported the overall effect of the Federal Open Market Committee on the S&P 500 index and the Dow Jones Industrial Average index. Before their meeting, the returns for S&P 500 and DJI indexes increased. However, after the results of the meeting were given, there was a decrease in returns for the two indexes, which may be because many expectations that the Fed would not taper with quantitative easing were not met. Also the Federal Reserve decided to limit monthly bond purchases to $85 billion until they observe that the economy continues to improve.

One major result of the government shutdown is that many institutions that evaluate the performance of the financial markets were not able to produce data, which is necessary in order to determine proper changes from the last FOMC meeting. Also the central bank left unchanged their decision, from September, to hold target interest rates near zero, so long as overall expectations for inflation do not increase higher than 2.5 percent.

The results of the FOMC meeting changes the behavior of other investments, who may now start to questions how effective the economy has been at recovering after the government shutdown. Also the answers needed to resolve the questioning of the market traders may not be dependable due to miscalculations given as a result of the government shutdown.

Later in the week, on Monday, the company SAC Capital Advisors, L.P., made a plea bargain of $1.2 billion due to prosecutions of five counts of insider trading. Even the founder of the company, Steven Cohen, faces criminal charges of failing to properly manage his employees, or “turning a blind eye,” according to some of his prosecutors. The company also agreed to terminate their business of managing outsider investments.

Currently the present value of the SAC hedge fund is $15 billion. And since SAC is no longer able to manage outsider investment, there is a $6 billion cut in the company’s value. This leaves $9 billion of manageable investments that belong to Cohen. However if he is found guilty of encouraging insider trading in the company, it will result in a loss of the company’s only investment that it manages. Essentially this could lead to a shutdown of the hedge fund.

Some of the major effects of  the penalties SAC faces is that other hedge fund companies will be discouraged from insider trading. Moreover, the government is showing that it’s getting better at prosecuting those who practice insider trading. This is especially true since JP Morgan Chase, another major company on Wall Street, has also recently been forced to make a plea bargain deal due to some of their questionable mortgage practices.

This leads to another question about the government seeking to bring down these major companies. Can they be too large to jail? In other words if the penalties that these companies face leads to their shutdown, will it affect the economy negatively? Also, if other current major hedge funds allow insider trading practices, they may choose to refrain from using this strategy, leading to a change in the investment game. This leads to a final question, how might the strategy change in investments influence our economy? This is definitely something that many people worry about and can lead to even further insecurities amongst traders.