Forensic economists examine the effects of CIA-led coups on the stock market.

The search for better economic policy.
Oct. 28 2008 7:07 AM

They Made a Killing

Did people who knew about secret, CIA-led coups use that information to game the stock market?

In 1951, Jacobo Árbenz Gúzman became Guatemala's second democratically elected president. Árbenz's authoritarian predecessors had been very sympathetic to American business interests, particularly those of the United Fruit Co. (now Chiquita), which had bought up land titles on the cheap from Guatemala's corrupt elite for its ever-expanding banana empire. 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.

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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: A recent study by economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu argues that those in on the planning process also profited handsomely. 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.

This exposé is a contribution to the rapidly expanding field of "forensic economics," which tries to understand the who, what, and why of illicit transactions. Since these are activities that take place out of sight (at least when they're done right), researchers are forced to look for fingerprints left in the data by smugglers, bribe-taking politicians, and other lawbreakers.

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 events would have increased the expected future profits of companies like UFC—if the CIA-led coup in Guatemala were successful, for example, UFC would get its plantations back. If stock traders were privy to the coup-planning process, we would expect them to bid up the prices of affected companies in anticipation of these higher profits. 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. To understand why insider trading would boost a company's stock price, suppose that someone in on the planning—perhaps at UFC or at the State Department itself—started quietly buying up cheap UFC stock in anticipation of the price jump that would come when the coup took place (or tipped off his stock-trading cousins about the future boost to UFC so they could do the same). All of this pre-coup buying would increase demand for UFC stock, bidding up its price even before CIA operatives actually got to work overthrowing the Guatemalan government.

Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling efforts—UFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cuba—went up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)