On September 5, 2001, the Osama Bin Laden-led Al-Qaeda organization finalized the date for the most heinous terror attack of the century. The 9/11 attack shook the United States’ supremacy to its core by destroying its two most prestigious assets, the twin towers.
The attacks had a substantial economic impact on the United States and global markets. The New York Stock Exchange (NYSE) and the Nasdaq did not open for trading on Tuesday, September 11, 2001, in order to avoid a stock market meltdown.
When the market reopened, the Dow Jones Industrial Average (DJIA) fell 684 points, or 7.1 percent, to 8921, a record one-day point decline. The Dow Jones was down more than 14 percent at the close of trading that Friday, capping off a week that saw the biggest losses in NYSE history.
The S&P 500 Index fell 11.6 percent, while the Nasdaq Index fell 16 percent. During those five days of trading, an estimated $1.4 trillion in value was lost.
In the three months following the attacks, approximately 430,000 job months and $2.8 billion in wages were lost in New York City. The economic effects primarily impacted the economy’s export sectors.
The city’s GDP was estimated to have fallen by $27.3 billion in the final three months of 2001 and the entire year of 2002. In September 2001, the United States provided $11.2 billion in immediate assistance to the City of New York, followed by $10.5 billion in early 2002 for economic development and infrastructure needs.
When trading resumed, major stock sell-offs hit the airline and insurance sectors, as expected. American Airlines (AAL) and United Airlines (UAL) were the hardest hit, as their planes were hijacked for the terrorist attacks. The traders profited millions of dollars from their trades.
American Airlines’ stock fell 39 percent from a high of $29.70 per share on September 11 to a low of $18.00 per share on September 17. United Airlines dropped from $30.82 per share near the end of August to $17.50 per share at the end of September, a 42 percent drop.
According to reports, insurance companies eventually paid out $40 billion in 9/11-related claims. Warren Buffet’s Berkshire Hathaway was one of the biggest losers.
Terrorists profit from market speculation. Terrorists who have “inside information” about an impending attack buy financial derivatives before the attack and profit millions from subsequent market movements.
The number of put options on British Airways was four times normal on September 7, 2001. British Airways’ stock dropped 42% the following week. On United Airlines, 4 744 put options were purchased between September 6-7, which was six times the normal volume.
If 4000 of these options were purchased by terrorists with advanced knowledge of the impending attacks, these ‘insiders’ would have profited by nearly $5 million. On September 10, 4516 put options were purchased on American Airlines, which was 285 times normal volume. If 4000 of these options were purchased by ‘terrorist insiders,’ they would have made about $4 million.
According to the International Organization of Securities Commissions, the financial maneuverings that occurred in the days preceding 9/11 totaled several hundred million dollars, constituting “the most significant crime of insider trading ever committed.”
Despite the screaming evidence about insider trading in the options markets, the official 9/11 commission issued a statement that “Their extensive investigation has uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions”.
For the next four years, extensive research was carried out in the academic circles to understand the peculiar behavior of the options markets prior to the terrorist attacks. The researchers took large sets of data and established the price activity of the stocks under normal circumstances. They called it the ‘baseline activity.
Dr. Hugh McDermott, senior lecturer in law enforcement at the Charles Sturt University (CSU) Australian Graduate School of Policing strongly disagrees with this finding
“This seems implausible, and this explanation overlooks some important facts. Short selling was up 11% on airlines due to the global downturn following the ‘dot com bust’, but it was up around 40% on United and American Airlines. Surges in call options on gold and oil were also not explained.Dr. Hugh McDermott
The 9/11 Commission Report has been widely criticized, and academic quantitative studies have confirmed that there is evidence of unusual option market activity in the days preceding 9/11, consistent with investors trading on advance knowledge of the attacks.
As a result, 9/11 became the terror trade of the century. A small group of investors made huge private gains at the expense of public loss. People lost not only their lives but also their entire life savings.
compiled by MarketMoja