The Wolf of Wall Street AKA the most fantastic movie in the world is the place of comfort for all of us financial nerds with an obsession with the world of business and well…money. If you’re like me then you probably have watched this masterpiece a couple of dozen times with a little part of you seduced by the chaos of wall street.
The Wolf of Wall Street film is actually based on the real-life story of Jordan Belfort whose memoir titled the Wolf of Wall Street was adapted. Read on to find out how Jordan Belfort made just short of a million every week by scamming rich and poor people alike through his ingenious schemes.
Unveiling the secrets of Wall Street
Belfort joins the L.F Rothschilds firm as a stockbroker, the name might ring a bell if you’re into this finance stuff however keep in mind that the firm is not actually related to the Rothschild family. The next scene is when we first get our real insight into the twisted morality of Wall Street and even better, our protagonist (for now, coughspoilercough)* Belfort’s first interaction with legendary Matthew McConaughey’s character of Mark Hanna.
Hanna was introduced as a senior partner of the LF Rothschilds firm and we find out that he had actually earned over $1,000,000 in commissions his first year as a stockbroker. Hanna takes a special interest in Belfort after learning that he had actually pitched a stock in his job interview and invited him to talk over a meal and this is where we get our first glimpse at the twisted morality and ethics of Wall Street Brokers.
‘“Number one rule of Wall Street: Nobody — I don’t care if you’re Warren Buffett or Jimmy Buffett — Nobody knows if the stock’s going to go up, down, sideways, or in f*cking circles, least of all stockbrokers.’
This iconic line was Hanna’s response to Jordan’s initial naivete. When Hanna introduces the ethics of Wall Street by telling Belfort to ‘move the money from the client’s pocket into your pocket.’ Belfort was stunned by this seemingly callous approach to managing the client’s money. The gist basically was the fact that since these brokerage firms (and thus the brokers too) make their money from commission on their clients’ trade positions- for example, if a broker’s commission for their service is 1%, for every $100 a client trades or takes on a position, the brokers get $1 in commission. Although this may seem insignificant, when these brokerages are dealing with large sums of money, with big investors and corporations investing and trading millions if not billions of dollars, their slice of that cash is nothing to laugh at.
Because of this method of gaining money through commission fees, brokers will often do everything in their power to keep their clients in the markets, taking on more trades- through introducing these ‘new ideas’, or ‘once in a lifetime opportunities’, the brokers are able to leech off of their clients. Arguably a little extreme, perhaps for the sake of cinema, but the fact that brokers cannot know for certain where a stock is heading means that their aim is not to try and make their clients the most money but rather to keep them ‘addicted’ and in the market as long as possible so THEY themselves can profit off of the clients.
‘Meanwhile, he thinks he’s getting sh*t rich, which he is, on paper. But you and me, the brokers, we’re taking home cold hard cash via commission, mother(you know what)!’
Trouble at Wall Street
Fast forward a few months when Belfort was in full scumbag mode and had adjusted to his new environment of Wall Street, a financial crisis (based on a real event), hitting markets in Hong Kong, Australia, and Singapore, among many others known as ‘Black Monday’, had caused Belfort, like many other employees, to be laid off. Now a little background context on the financial crisis. The 1987 stock market crash, commonly referred to as ‘Black Monday’ was a stock market crash that happened on Monday, October 19, 1987- this was one of the first global market crashes where it wasn’t a single market that was affected but several. To this day economists still cannot exactly explain the cause of this crash but it is widely believed that it was due to the growing number of automated computer trading and the inability of the system to handle just the amount of capital that was now circulating the exchanges and brokerages resulting in a seemingly never ending circle of automated sell orders then panic selling, then repeat when the market goes down. The firm L.F Rothschild would actually close in 1988, just a year later, because of this crisis.
With the economy worsening and his firm on Wall Street on the verge of collapse, Belfort found a job as a broker at ‘Investor’s Center’ on long island. The Investor’s Center unlike his previous firm operated on the exchange of over-the-counter (OTC) securities/stocks or ‘penny stocks’ (because they literally traded for pennies)- these securities are basically stocks where the companies behind them do not meet the requirements to be listed on actual exchanges but still need to raise money from investors. Because of these business owners’ desperation to raise capital, they are offering the brokerages commission of much higher rates- in the Wolf of Wall Street- the trading of these OTC stocks offers the brokers a whopping 50% commission. Now compare that with the 1% Belfort made in his previous firm and you’ve got yourself a motivation for fraud.
And that’s exactly what happened. Jordan, with his natural charisma and salesmanship, started running what is known in the industry as ‘boiler room scams’- essentially promoting these often fraudulent and speculative stocks using misrepresented information that could not easily be verified by the investors through high-pressure sales tactics which sometimes involves issuing threats for noncompliance.
Scaling the Scam
After Belfort realized just how profitable this business could be, like any ambitious entrepreneur he decided to scale up.
‘[Ladies and] Gentlemen, welcome to Stratton Oakmont.’
Belfort decided that if he were able to carry out the same operations but this time around with wealthy, high-profile clients as the target, he would be able to make unfathomable amounts of money. So that’s exactly what he did. Luring in these clients with the well-known ‘Blue-Chip’ stocks(stocks with a large market cap) to gain trust, the brokers would then slowly transition to more speculative OTC stocks where with insider information using people from within the organization, Belfort would instruct the brokers to buy up the stocks, driving the price up which of course makes the marketing aspect of these stocks much easier. Once the clients buy in which further drives up the price of the stock in the market, Belfort and the brokers would then sell off their positions at the higher price realizing their profits in the price difference and driving the stocks’ price back down again. And if you’re a financial geek like me then you are probably connecting the dots and realizing that this sounds a heck lot like a Pump and Dump scheme which it basically is.
He repeated this process when bringing companies public- ‘carrying out IPOs’ (Initial Public Offerings). The example used in the field was with Steve Madden Shoes where Belfort made his brokers buy up shares of the stock and once at a profitable price, sell them off, realizing the profits.
So it was through a combination of insider trading, pumping and dumping schemes, and money laundering that Belfort was able to ‘breathe the oxygen of capitalism’.
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