The Economics of Covert Actions

Ray Fisman features Arindrajit Dube, Ethan Kaplan, and Suresh Naidu:

Forensic economists examine the effects of CIA-led coups on the stock market: In 1951, Jacobo Árbenz Gúzman became Guatemala's second democratically elected president. Árbenz's authoritarian predecessors had been very sympathetic to... the United Fruit Co.... Once in office, Presidente Árbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.

But UFC had friends in very high places—the assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that Árbenz had to go and sponsored a coup that drove Árbenz from office in 1954.

With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy.... By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someone—perhaps one of the Dulleses, Cabots, or others in the know—was trading stocks based on classified information of these coups-in-the-making....

Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions.... These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.

Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup....

For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow Árbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week. In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths....

The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly—the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.

Comments

[peter]

One of Joseph Finder's novels, perhaps "The Moscow Club", includes a story about the CIA management using their budgetary allocation for share-trading. IIRC, this is done with the initial intention of amassing a cash-reserve in case Congress were to reduce their budget allocation, but degenerates into personal corruption.

[Ken Houghton]

Next deep, profound revelation: The CIA helped with 11 September 1973. They didn't run it--it was too efficient--although they did supply their economists when asked.

(all right, _maybe_ I made that last part up.)

[PSP]

Does this mean the Cabots talked to the Dulleses, not just god? Or does it mean the Dulleses [and the CIA] thought and acted as if they were god, back in the 50s?

[peter]

Ian: The insiders knew that the Bay of Pigs was going to fail ahead of time. The original CIA invasion plans were altered and countermanded by the bow-tie-wearing folks in the Kennedy White House to the point where failure was almost certain, as is clear from the histories of the period and memoirs of the actors involved (eg, Dick Bissell). For example, the site for the invasion was changed only a few days before it took place, and inadequate operational planning could be done for the new location in this short time. The CIA team knew this full well, and tried to argue against the changes, but they were over-ruled, in some cases by JFK himself.

[elspi]

"The insiders knew that the Bay of Pigs was going to fail ahead of time"

DUHHHHHHHHHHH

"The original CIA invasion plans were altered and countermanded by the bow-tie-wearing folks in the Kennedy White House to the point where failure was almost certain"

Anyone who thinks that failure was wasn't certain in any case hasn't been paying attention. The only hope for success was to convince Kennedy to send in the Marines, which he wasn't going to do.

Epic Troll Fail = peter

[peffer]

Well, elspi, we can argue about this till the cows come home (and, thankyou, no, nice of you to offer, but I have enough personal insults already, thanks). The fact is that, other than the CIA insiders, most everyone else who knew about the Bay Of Pigs invasion ahead of time (ie, senior people in the White House, the State Department, the DoD, and the US military) expected it to succeed.

[christofay]

So we have a form of government like Israel's where national interests and personal gains overlap

[PeonInChief]

No sensible person thought that the Bay of Pigs invasion was going to be successful. In fact, it's likely that the bow-tie boys were cutting their losses, rather than trying to wreck the action. Jose Basulto (later of Brothers to the Rescue fame) fled when the invasion started, knowing that it wasn't going to be successful--air cover or no air cover.