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A developing Goldman-Sachs scandal?

by whataboutbob Mon Jul 13th, 2009 at 09:53:05 AM EST

From one in a recent series of Daily Kos diaries by bobswern

DKos Diary Reverberates Throughout Wall St. (w/update) there is this eye-catching quote:

While the Street is percolating with anger and curiosity about "High Frequency Trading" there is also frustration and astonishment that the media, regulators and our duly elected are not addressing what could be the biggest financial abuse story of our times, if not history.

Kind of catches ones attention, don't it?

Not being well versed in things regarding the economy and the stock market, I defer to the resident wizards here at Eurotrib to better elaborate what this means in the discussion section, but I for one am watching to see if anything happens with this one, of if the masters of the universe put this down before it explodes.

See below for a more detailed description:


From the above noted diary, there is this:

...The abbreviated version of the story, in a few sentences: A senior technology strategist and Vice President at Goldman-Sachs,  Sergey Aleynikov, copied much of his firm's "secret sauce"--an extensive set of proprietary, automated stock trading software code and algorithms--all related to "program trading." Upon finding out about this, senior officials at Goldman-Sachs informed the FBI of all of this and had Aleynikov arrested at Newark Airport on July 3rd.

The code, as it has been noted by many, including Goldman-Sachs, allows the firm to execute securities/commodities transactions in microseconds, thus providing their company with an extreme edge over their competitors. The tacit fact is, with proper monitoring of market trades, in general and as facilitated by Goldman's own practices, it's entirely conceivable--albeit significantly questionable from a legal standpoint--that the firm would be enabled to "frontrun" its competition at quite a grand scale, too, since it could see trades occurring in real-time, and then execute its own trades automatically at lightning speed, before the previously-observed trades of others were even concluded.

All along, for the past nine-plus months--and in part due to government-related authorizations (by appointing Goldman-Sachs as the only active player in a new effort known as the "Supplemental Liquidity Program") to enable Goldman to assist the Feds in propping up stock/commodities markets during the noted economic upheavals of same during this period--it has also been widely noted that Goldman had all but cornered the market, literally, in terms of the sheer volume of in-house trading the firm was engaged in during the time, supposedly, on its own behalf; to the point where it had been widely observed and documented that well over half of all program trading occuring on Wall Street (we're talking 20%-30% plus of all stock/commodities trades in this country, for all intents and purposes), during many weeks over the past nine months, was being executed by Goldman-Sachs, too.

Go read the whole article, it is quite intriguing (but maybe not so surprizing)...the question is, will anything happen, or will this just quietly be swept under the carpet?

Display:
The diary author offers a lot of links - so follow them too. Anyone have insights to offer on this?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Mon Jul 13th, 2009 at 04:09:58 AM EST
I think that GS are acting as agents for the Fed in providing liquidity to these markets

JP Morgan have been doing this in the bullion market for years.

Of course, they have to be remunerated....

Manipulation is only manipulation when it's not the government responsible for it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 07:58:00 AM EST
[ Parent ]
Market making is one (legitimate) thing. Front-running is quite another.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 09:14:02 AM EST
[ Parent ]
Front running - Wikipedia, the free encyclopedia
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. When orders previously submitted by its customers will predictably affect the price of the security, purchasing first for its own account gives the broker an unfair advantage, since it can expect to close out its position at a profit based on the new price level. Front running may involve either buying (where the broker buys for their account, before filling customer buy orders that drive up the price) or selling (where the broker sells for its own account, before filling customer sell orders that drive down the price).

...

A practice similar to front running is called "tailgating". Tailgating means the action of a broker or adviser purchasing or selling a security for his or her client(s) and then immediately making the same transaction in his or her own account. This is not illegal like front running, but it is not looked upon favorably because the broker is most likely placing a trade for his or her own account based on what the client knows (like inside information).

The question is whether higher speed of execution can turn tailgating into frontrunning.

Daily Kos: Daily Kos
DKos Diary Reverberates Throughout Wall St. (w/update)

Interestingly, it is also possible that, simply due to the enhanced speed (as mentioned in numerous pieces about this story) with which one would be enabled to follow/mimic another trade at Goldman-Sachs (with the assumption being that the tailgating trade was executed on a faster "channel" or system, or modulated with a higher-priority tag on it, than the original trade), after it commenced, one could then conclude their "tailgating" trade in a more timely manner than the original trade, if it was facilitated on a slower system and/or modulated on a "lower-priority channel." (For instance, routing instructions for the tailgating trade might be made via a "priority path" to the New York Stock Exchange, while the original trade might be tagged to be executed on a "standard" and/or "normal path.")


The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 05:30:42 AM EST
Circumstantial evidence:
it had been widely observed and documented that well over half of all program trading occuring on Wall Street (we're talking 20%-30% plus of all stock/commodities trades in this country, for all intents and purposes), during many weeks over the past nine months, was being executed by Goldman-Sachs


The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 05:31:51 AM EST
[ Parent ]
It's hard to see how Gold Sacks can be investigated for this when they more or less own the Street, and DC too.

And putting the software into the public domain would be more damaging if it weren't for those rumoured exclusive high speed trading channels.

So the net effect of this probably won't be much.

The reality is probably of Madoff-esque proportions, criminally if not necessarily in a literal pyramid-ish way. But I doubt we'll ever know for sure.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 06:09:54 AM EST
[ Parent ]
Sad. They rig the system, make money off of financial disasters hands over fists, and then when they get caught using illegal methods...nothing. Real hard not being cynical about change...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Mon Jul 13th, 2009 at 07:08:09 AM EST
[ Parent ]
In my experience GS don't break rules.

If rules are inconvenient they get them changed, or instead get waivers quietly issued that then surface years later.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 07:54:43 AM EST
[ Parent ]
Tobin tax, anyone?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 13th, 2009 at 08:26:50 AM EST
[ Parent ]
Cart and horse problem.

Here's a question - what would it take in practice to change the game and eliminate the influence of the likes of GS?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 09:01:29 AM EST
[ Parent ]
Abandoning the fetish of liquidity. From and old thread:
As long as the "units" are liquid there will be bubbles. And if they are not liquid it will be very difficult to find investors to sell them to.

Here's Keynes on liquidity (with my emphasis)

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind  by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called 'liquidity'. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of an investment institutions to concentrate their resources upon the holding of 'liquid' securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance whichh envelop the future. The actual, private object of the most skilled investment of to-day is 'to beat the gun'. as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
He then proposes a Tobin tax, or high barriers to entry to capital markets
These tendencies are a scarcely avoidable outcome of our having successfully organised 'liquid' investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmonton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber's 'turn', the high brokerage charges and the  heavy transfer tax payable to the Exchaquer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street.[4]   The introduction  of a substantial overnment transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
However, there is a dilemma: liquidity leads to speculation but you cannot have investment without liquidity.
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) callms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are availale to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.
Unitisation cannot solve the dilemma. It can do away with default risk and default/recovery costs, but it cannot do away with the liquidity/speculation dilemma.

The facts that

there is no such thing as liquidity of investment for the community as a whole
and
each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively
is behind my diary How much is $172 trillion worth? from March 24th, 2008.
later revisited.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 09:13:03 AM EST
[ Parent ]
I think the model is fundamentally broken.

Money = leverage is not a sustainable foundation for an economy. Taxing it slows down its velocity and constrains its influence. But it's still a broken model because the aim is almost always zero sum personal aggrandisement, not synergetic creative contribution.

There's nothing wrong with the concepts of social sponsorship and risky adventuring. But it's going to take some completely new political and economic metaphors to make stable non-insane development possible.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 09:27:23 AM EST
[ Parent ]
... zero-sum claims on existing production rather than on the process of creation ... that's more deeply embedded than leverage. As long as there is a decentralized system, there's an incentive to focus on extracting tolls from occupation of strategic intersections rather than on creation of new product.

Progressive income taxation swings the incentives in the favor of going productive concerns ...

... but then we have just seen five decades plus of gutting the intellectual basis of economics as a social science, just as a side play in the fight to undermine progressive income taxation and protective regulation in the finance sector.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jul 13th, 2009 at 09:34:26 AM EST
[ Parent ]
Unitisation cannot solve the dilemma. It can do away with default risk and default/recovery costs, but it cannot do away with the liquidity/speculation dilemma.

What this statement misses is that redeemability of Units massively increases liquidity.

Conventional Units can only be sold to Investors, and Unit prices therefore diverge from the underlying.

REITs and Investment Trusts invested in relatively illiquid investments are cases in point and the Unit prices therefore usually trade at a discount to the underlying pool of assets.

But when the price of the redeemable Units I advocate drops below the "physical" price, it will be in consumers' interests to buy them and redeem them against physical consumption, either immediately (or if at a discount to the spot price) in the future.

That is why the "unitisation" I advocate is in fact "monetisation".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 10:00:23 AM EST
[ Parent ]
ChrisCook:
redeemability of Units massively increases liquidity
Subject to the issuer having enough "product" in stock at any given time to redeem the units on demand.

If you monetize several years' worth of production there will be trouble if everyone decides to redeem their units at the same time.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 10:27:41 AM EST
[ Parent ]
to redeem the units on demand.

You've still not quite grokked it.....these Units have no "demand" built in, as futures contracts have.

They may be presented for redemption against supply or consumption, that's all, but that's still pretty powerful.

What Units do is decouple speculation from the physical market.

It means that if you can't consume now, you would require a discount against when you CAN consume. It's a forward purchase - a hedge, but 100% margined.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 11:02:21 AM EST
[ Parent ]
Suppose I find myself in possession of an Ecuadorean crude oil unit. Can Ecuador refuse to sell me the equivalent volume of oil in exchange for my unit at a time of my choosing?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 11:46:35 AM EST
[ Parent ]
Yes. But I don't see crude oil as being the source of these Units directly.

I see crude oil producers entering into processing partnerships with refiner/transport infrastructure service providers, and thereby having entitlements (through "equity Shares" in the flow) to Units redeemable in carbon fuel Units.

These are much more homogeneous, and with a fixed price by reference to an energy standard.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 12:52:56 PM EST
[ Parent ]
What happens if they're presented and they can't be redeemed because the supply to redeem them doesn't exist?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 11:47:21 AM EST
[ Parent ]
You mean as when the US ended redeemability of US dollars in gold?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 11:50:37 AM EST
[ Parent ]
I was thinking more in terms of wanting to buy electricity for the house and not being able to because the instantaneous demand for redeemable e-units exceeds the available supply.

But otherwise, yes.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 11:54:21 AM EST
[ Parent ]
In that case whether you want to pay for your electricity with a redeemable e-unit or with currency is no different.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Mon Jul 13th, 2009 at 11:57:42 AM EST
[ Parent ]
Yes it is, because you can always buy other things with the currency.

And the e-unit may be tied to a single supplier, which the currency wouldn't be.

So you have these units which on the one hand are supposed to be redeemable in a specific way, but in another are a kinda sorta stand-in for 'real' currency. At the same time, the e-units may be influenced by physical failures, and also limited by contractual specifics.

There's a lot wrong with money, but I think people are getting confused by the purely transactional accounting function of money, and the political and social side-effects of money-ism.

They're close, but they're not synonymous. E-units will have different features, but unless some of these specific questions can be answered they won't necessarily be better.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 12:15:25 PM EST
[ Parent ]
e-units would be units in an energy pool with a common custodian.

Producers would supply the Pool, and consumers would receive from the Pool, with the electricity "spot" price being a market price - a continuous auction maybe - set periodically without any middlemen being involved.

ie direct peer to peer electricity between producer and consumer.

The current middlemen would morph to service provision in return for a share in the flow.

Speculators could buy and sell Units in the Pool, but their doing so would have no effect on the underlying "physical" market price.

See

Energy Pool

particularly slides 59 to 70

Units acquired by consumers are essentially a "hedge". if people want a geared investment/speculation, then they can borrow to buy Units, but it won't affect the market price of physical electricity.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 01:03:20 PM EST
[ Parent ]
That doesn't answer the question.

If I have a credit balance of X units then - presumably - I can use them to pay for electricity to heat my house.

But what happens if all of the physical output of the pool has already been claimed by others?

What happens if speculators see a particularly good hedging opportunity and try to buy up as many units as they can?

How does this work if you have tens or hundreds (or thousands) of different units in a market with tens or hundreds (or thousands) of commodities?

Are they interconvertible? How are exchange rates set?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 06:13:02 PM EST
[ Parent ]
Good questions.

You need service-providers-formerly-known-as-banks to manage issue/do due diligence in respect of producers, and a quasi-monetary authority by way of quality control.

That ensures that there aren't more sold than are capable of being produced.

You also need transparency in relation to the number in issue.

If speculators buy up and hoard units - which does not affect the physical market price btw - then they run the risk that when they want out the price they get is way below the spot price, because it will take years for buyers to consume that much, and they therefore require a discount in order to buy.

Units are Units are Units: KiloWatt hours are KiloWatt Hours. There is a common market custodian, and a single homogeneous pool of electricity production.

Re lots of different commodities it's no different to what we have now, except that instead of being exchanged for Units redeemable in intrinsically worthless fiat currency, we have a Unit redeemable in something with an intrinsic use value, that would be pretty much universally acceptable.

The exchange rate is whatever the market arrives at.

IMHO Bob Hahl makes a good case here for such a currency here

KiloWatt Cards

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 13th, 2009 at 06:34:48 PM EST
[ Parent ]
So the simple peer to peer scheme now has due diligence management (who are the former banks answerable to?) and a quasi-monetary authority which has to count every unit created and redeemed.

This is starting to look a little more complicated than it did originally.

This is more or less practical for something like electricity, which is relatively predictable. It's not so practical for farming or anything which is weather-dependent and inherently riskier. Sometimes it simply won't be possible to guarantee supply, which means that it won't be possible to guarantee that units will be redeemable.

This seems like it might not be an entirely good thing.

ChrisCook:

If speculators buy up and hoard units - which does not affect the physical market price btw - then they run the risk that when they want out the price they get is way below the spot price, because it will take years for buyers to consume that much, and they therefore require a discount in order to buy.

But won't a supply intermediary want to do exactly this, or something like it? The consumer suppliers will need a guaranteed share of the pool to guarantee customer supply, and the only way to create that will be by locking in and hedging a set number of units.

If there isn't a mechanism for this, consumers will effectively be trading the pool directly, which will be an interesting thing to watch.

Re lots of different commodities it's no different to what we have now, except that instead of being exchanged for Units redeemable in intrinsically worthless fiat currency, we have a Unit redeemable in something with an intrinsic use value, that would be pretty much universally acceptable.

The exchange rate is whatever the market arrives at.

Firstly, cash is universal. It may be monopoly money, but its unversality is recognised and useful. (Arguably, abstraction and universality are the one real advantage of fiat currency.)

Exchangeable units would not be universal. I may be able to exchange my kWh unit for a bread unit, but I won't be able to do it by going into a shop - or even online - without a huge currency exchange machine to manage the relative values of every traded unit.

If exchange isn't practical and everything is unitised, that means everyone has to carry around a huge inventory of different units, people would be paid in unit mixes, and so on - which certainly won't be workable.

Secondly, if exchange values aren't stable, they can be gamed, which will attract speculation, sharking, and the rest.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 13th, 2009 at 09:10:34 PM EST
[ Parent ]
If you have been reading what I have been writing you will know that a transition of banks from intermediary to service provider has always been a cornerstone of the architecture I advocate.


If there isn't a mechanism for this, consumers will effectively be trading the pool directly, which will be an interesting thing to watch.

Consumers buy physical electricity from the supplier at the market price. They pay for it either with £ or Units. What's difficult about that? If consumers think Units are good value, they buy them from the Pool or from their mates: if they don't they won't.

Re units as currency generally, I am proposing unitising location rental value and certain forms of energy, particularly electricity.

That's it.

Unitising other commodities etc would not necessarily result in fungible currencies - probably wouldn't.

The former are domestically fungible/ acceptable in exchange. They may be acceptable elsewhere, but would not be redeemable elsewhere of course. ie an element of exchange control is pretty much built in.

The latter are pretty much universally acceptable.

The "Value Standard" or Unit of measure would IMHO best be a unit of energy, rather than an arbitrary abstract £, $ or € with no basis on anything.

What is more stable than a unit of energy as a reference point? A currency consisting of units redeemable in electricity would be pretty much universal,I think, and for a transitional period, and possibly longer, since carbon fules may be synthesised, Units redeemable in carbon fuels will also be universally acceptable against an energy standard.

A Peer to Peer financial system - like any other - needs some form of quality control or framework of trust. How that may be accountable and democratic in a participative way is a matter for agreement between the users of the service and the providers.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jul 14th, 2009 at 09:48:08 AM EST
[ Parent ]
Consumers buy physical electricity from the supplier at the market price.

Bzzzt, wrong. There is no such thing as an "electricity market."

Thank you for playing. Please try again next week.

Re units as currency generally, I am proposing unitising location rental value and certain forms of energy, particularly electricity.

A megajoule/square meters double standard, in other words, with 100 % reserve requirements.

How is this different from a fiat currency (essentially a "tax standard" currency) with 100 % reserve requirements? Except that public policy will have even less ability to control the money supply than it has today.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 14th, 2009 at 02:29:41 PM EST
[ Parent ]
Bzzzt, wrong. There is no such thing as an "electricity market."

Of course there is. By definition. If you buy electricity from any supplier you pay a market price.

You appear to mean an Exchange. And no, there isn't one, for retail customers anyway.


A megajoule/square meters double standard, in other words, with 100 % reserve requirements.

What on earth are you talking about?

Proportional Units - eg billionths - in Pools of land/location rentals will change hands in exchange for whatever buyers and sellers agree, and by reference to whatever value standard they wish to use, fiat or energy.

If a location rental is charged by a community in respect of land of which they have custody then what are essentially local Treasury branches would be in a position to issue redeemable credits based upon this rental.

It's not difficult to value land/location rentals. You should know, the Danes have been doing it for years.

So it's not difficult to manage the issue of Units redeemable in location rental value.

And it really isn't difficult either to manage the issue of Units redeemable in energy by (say) a renewable energy producer or any other producer, come to that. A damn site easier than attempting to measure carbon dioxide emissions.

Both of these would be currencies backed 100% by value. They are consensually acceptable, or not, and are not imposed by fiat.

The key point is that Units of location rentals, and Units redeemed in renewable energy, or out of energy saved, both allow value to be received now in exchange for Units to be redeemed later with intrinsic value created at nil cost.

Unlike units of fiat currency, which is redeemable for......more fiat currency with no intrinsic value.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jul 14th, 2009 at 08:38:50 PM EST
[ Parent ]
  1. Your definition of "market" is not one that appears in any economic school of thought that I am aware of. (Discounting the Austrians, who make a point of claiming that every private enterprise operates on a competitive market. Because in theory another enterprise could start up and challenge them, so they have to behave as if they were actually competing. Yes, the Austrians are insane, that's why I'm discounting them.)

  2. Fiat currencies are backed by real value: The control of the economic production by the state, and the ability to leverage said control into taxes. The easiest way to realise that there is something substantial backing fiat money is to look at a country in which there is nothing substantial backing the fiat currency, whether because the state is too weak to effectively tax the economy (think a dollarised flag of convenience country) or because the local economy has ceased to exist (think Zimbabwe).

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 15th, 2009 at 02:19:33 AM EST
[ Parent ]
1/ A market is defined by the transactions entered into.

So the electricity market consists of the sum of all electricity transactions.

These may be one to one (Peer to Peer): one to many; many to many and so on.

In the electricity "market" there are "sub-markets": including a wholesale market (entered into on specific wholesalemarket terms) and a pretty fragmented retail market. There is competition (sometimes) between wholesale distributors, and retail customers may buy at an agreed price from distributors for an agreed period.

There is typically no homogeneous "market price". Whatever the price a buyer has agreed for his physical supply, he would - if the supplier is a member of the Pool I propose - be able to pay in fiat currency, in Units, or in anything else acceptable to the seller. (eg Tesco Points).

2/ Fiat currencies are backed by the power of the State to collect taxes.

The State is one of a chain of credit intermediaries, and like all intermediaries, redundant. The State as a facilitator and service provider is another issue.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jul 15th, 2009 at 04:52:22 AM EST
[ Parent ]
More on Goldman Sachs from today's Greenwald article:

http://www.salon.com/opinion/greenwald/2009/07/13/goldman/index.html

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Mon Jul 13th, 2009 at 10:27:00 AM EST
It has been noted that one of the factors favoring the speed of the GS operation is that they "co-locate" their hardware on the floors of the exchanges.  Others also do the same, but GS seems to do it better.  By integrating their proprietary, or prop trading with their market monitoring and their market making capability it has been claimed that GS has been making $100 million per day since March.  They are being paid by the exchange and the government to "provide liquidity" both as electronic market makers by the exchange and as "Supplementary Liquidity Providers" by the government.  Providing half or more of the trades on any given day is quite a supplement.  $100 million per day at a penny or so per trade has certainly provided GS with excellent liquidity.

There were those, possibly including Tyler Durden, who complained loudly last September that Paulson was proposing a scheme in which the Fed and Treasury would pick winners and losers in the market.  Paulson was the former CEO of GS.  Surprise!  GS is a BIG winner.  Given that, it hardly would be surprising that the Fed and Treasury knew that this is what GS would do with the SLP provision and thought it was a good thing.

  From their point of view strengthening GS IS strengthening the economy.  THAT POINT OF VIEW IS THE REAL PROBLEM.  They just didn't think that this whole arrangement would be exposed so publicly.  And it is still not too bad.  Most of the MSM is still ignoring it.  This could be related to the fact that only GS has taken advantage of the incredibly lucrative opportunity provided by the SLP program, through intimidation, IMO.  Only one SLP provider at a time would be readily able to combine the fraction of a penny incentive for "market making" with the monitoring and proprietary desk trading as GS has done and GS has the mojo with Treasury.

As the saying goes "THERE CAN BE ONLY ONE!"  The others don't want to volunteer to have their heads cut off in a failed challenge.  Neither do the heads of most financially troubled MSM organizations.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 13th, 2009 at 01:41:13 PM EST
It would be irresponsible not to speculate, so I'm guessing that Goldman Sachs is extracting significant monopoly rents through its domination of program trading. $6.5 billion profits in a quarter might represent both pennies per trade in terms of the market volume and a big share of overall profits.
by nanne (zwaerdenmaecker@gmail.com) on Tue Jul 14th, 2009 at 04:02:41 PM EST
[ Parent ]
How can we tell the difference between profits from market-making and front-loading?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:15:24 PM EST
[ Parent ]
To disentangle tailgating, normal trading, market making and front-loading we'd have to raid Goldman Sachs, I guess.

I'm not so much addressing the illegality of the practice (interesting enough, in itself) as the implications for the overall cost (overhead) of the financial system.

To go into more speculation, I don't know what Goldman Sachs charges for executing program trades. I guess it ends up as pennies. These are costs of doing transactions. People who trade through Goldman Sachs should know that the costs don't end there. There's tailgating, possible front-loading, a range of practices to steer or manipulate the market (the difference may be hard to tell). These are hidden transaction costs of doing business through Goldman Sachs. They may not affect your individual trade negatively, but they extract rents from the market that would not exist if there were no dominant firm.

by nanne (zwaerdenmaecker@gmail.com) on Tue Jul 14th, 2009 at 04:32:15 PM EST
[ Parent ]
You can assume costs (interest, commissions) are measured in basis points (0.01%).

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:36:44 PM EST
[ Parent ]
During the bubble (and during the early bust, when people still believe that happy times can come again if just the "organised support" - read: Large-scale manipulation - arrives in time), people do not mind manipulations, as long as they think they have a chance to get in on the action.

Galbraith has (as usual) a couple of pithy quotes about that, but my copy of The Great Crash of 1929 is at a friend's house right now...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 14th, 2009 at 04:47:14 PM EST
[ Parent ]
How can we tell the difference between profits from market-making and front-loading?

Simple, presuming you meant front-running.  The exchange pays them ~1/4 cent per trade "to provide liquidity."  Subtract that out.  GS should be paying the exchange for the "cover" that this "liquidity provision" service affords, IMO.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:10:41 PM EST
[ Parent ]
AIRC, the quoted figure was 1/4 cent per trade for providing liquidity.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:12:01 PM EST
[ Parent ]
There were those, possibly including Tyler Durden, who complained loudly last September that Paulson was proposing a scheme in which the Fed and Treasury would pick winners and losers in the market.  Paulson was the former CEO of GS.  Surprise!  GS is a BIG winner.  Given that, it hardly would be surprising that the Fed and Treasury knew that this is what GS would do with the SLP provision and thought it was a good thing.
Thinking about this and about the perception of Goldman Sachs as being the dominant intermediary for program trading, I'd like to revisit what happened in the third week of September 2008.

On the weekend of September 13-14, Lehman Brothers and Merrill Lynch, respectively the 4th and 3rd "pure" investment banks in the US, were in talks brokered by the US treasury and the Fed to avert bankruptcy. Merrill Lynch was taken over by Bank of America. Lehman Brothers failed. This left Goldman Sachs and Morgan Stanley as the remaining two investment banks.

On Wednesday the 17th, the stock of Goldman Sachs lost about 15% and the stock of Merrill Lynch lost about 25%. There was also a run on both banks' prime brokerage businesses. Clients (such as hedge funds) who used MS and GS as intermediaries decided they didn't trust them to not collapse taking their portfolios down with them (like Lehman did) and started switching their portfolios to "supermarket" banks with broad retail and commercial banking operations such as Citi and JP Morgan.

It was then that Paulson and Bernanke went to Congress and told them that a meltdown of the entire financial system was looming.

On Thursday the 18th, Paulson introduced the TARP. As we soon found out, this was a 3-page plan drafted in huge haste, clearly in reaction to the events of the day before and not the result of a longer contingency planning process.

I wrote at the time that Paulson had acted to save GS's from a run on its prime brokerage business.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:59:17 PM EST
[ Parent ]
I wrote at the time

Well, not exactly at the time. That was February, and I had an earlier version in December...

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 05:20:26 PM EST
[ Parent ]
the stock of Goldman Sachs lost about 15% and the stock of Merrill LynchMorgan Stanley lost about 25%


The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 05:45:35 PM EST
[ Parent ]
There's a new bobswern article today:

Greenwald: Mass Outrage Over Goldman's "Blowout Profits"

One quote from the article (via Bill Moyers):

BLACK: The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.
MOYERS: Even though Goldman Sachs had a big vested stake.
BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.
MOYERS: Yeah, like a conflict of interest, it seems.
BLACK: Massive conflict of interests.
MOYERS: So, how did he get away with it?
BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

But...no scandal...so far...


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Tue Jul 14th, 2009 at 06:47:52 AM EST
Maybe I should change the title to the Scandalous Non-Scandal...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Jul 14th, 2009 at 06:52:08 AM EST
[ Parent ]
Economist's View

The NY Times Room for Debate is discussing how we should interpret Goldman Sach's compensation pool, which will be an $11.36 billion set aside for the first half of 2009. Here's the unedited version of my entry (you may like the shorter, edited version better):  

What does the size of Goldman's compensation pool tell us? It signals several things. First, it gives some indication that the financial sector is improving, and that is good news. There's no guarantee, however, that the overall economy will follow anytime soon. Even with improvements in the financial sector, the recovery of the broader economy is likely to be a slow process.

One of the reasons I expect the recovery to be slow despite improvements in the financial sector is that the economy cannot go back to where it was before the crisis hit. The financial and housing sectors need to shrink, too many economic resources were used unproductively in support of these activities, and the automobile sector is also in transition.

And it's not just that the financial sector needs to get smaller so that resources can be used productively elsewhere, the financial sector also needs to change its ways so that risk accumulations do not threaten the financial system and the broader economy. As Robert Reich notes today, Goldman's chief financial officer tells Bloomberg News that "Our model really never changed, we've said very consistently that our business model remained the same." Thus, a second signal from Goldman's unexpectedly large earnings is that firms such as Goldman Sachs are returning to the same high-risk strategies backed by too big to fail government guarantees that got us into trouble in the first place, and that aspect of Goldman's success is worrisome. It's a signal that the excesses that led to the high incomes of financial executives have not ended.

...

Other entries from William K. Black, Yves Smith, Charles Geisst, David Merkel, and Jeffrey Miron.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jul 15th, 2009 at 02:37:17 AM EST
It's scary that about 70% of the stock market buisness is run by computers automatically, so it seems everything is about who's having a system which is a millionth seconds faster to make more millions of dollars to make it a millionth second faster to make more millions of dollars to make it a millionth second faster to make more...when they reach zero, what will happen, is there a minus millionth second...?
by Specs on Wed Jul 15th, 2009 at 03:57:09 AM EST
From Mike Lux over at Open Left (Jul 14th)

Okay, Goldman. So as long as you're paying record bonuses to many of the same employees that engaged in these wildly speculative trading ventures, how about paying back the $13 billion you got from AIG by way of the U.S.Treasury? Or the unrevealed billions (likely many tens of billions) from the Federal Reserve?

THAT'S the scandal - being bailed out by the taxpayers and not paying back ALL of it (and giving bonuses instead...)


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Wed Jul 15th, 2009 at 08:11:42 AM EST


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