Goldman’s Prop Trading and Reputational Risk
by ilene - March 13th, 2010 1:25 pm
If you haven’t seen Larry Doyle’s website, Sense on Cents, it’s worth a visit and bookmark. Larry has over 20 years of experience on Wall Street, from trading mortgage-backed securities to serving as National Sales Manager for Securitized Products at JP Morgan Chase. Through his writing and radio program, Larry hopes to help his audience better understand the complexities of the economy, global finance and the markets.
Larry’s internet radio show, Sense on Cents with Larry Doyle, is on "No Quarter Radio" every Sunday night from 8-9PM. There are links here to previous interviews by Larry with Michael Panzner, and Steve Megremis, founder of The Daily Bail, and many others. - Ilene
Goldman’s Prop Trading and Reputational Risk
Courtesy of Larry Doyle at Sense on Cents
On Wall Street, information is everything.
Timely access to information as to who is buying/selling what, how much they are buying/selling, and why they are buying/selling is absolutely invaluable. The Wall Street banks fight tooth and nail to protect their information franchises.
That said, there are supposed to be rules as to how information is handled and processed so that trading complies with the rules of the road. Banks are not supposed to front run clients. Banks are not supposed to give up client names. Do the banks practice what the regulators preach?
Given the fact that Wall Street banks run both customer operations and proprietary desks, there are supposed to be Chinese walls in place to make sure that information is handled properly between desks. At the firms where I worked, the proprietary desks were either on a different floor from the customer desk or in an entirely different building.
Thank you to a friend of Sense on Cents for sharing a recently released report which would seem to indicate that the Chinese walls at Goldman Sachs would appear to be neither tall nor long (said in jest), but virtually non-existent.
Asset-Backed Alert, a Wall Street trade publication, reports:
Data-Sharing Worries Grip Goldman Clients
Investors are accusing Goldman Sachs of violating Wall Street code by permitting information-sharing between two types of collateralized debt obligation traders: those who work on behalf of clients and those who handle proprietary capital.Goldman currently has the two desks situated next to each other in its Lower Manhattan headquarters. They also have a common supervisor, managing director Jerry Ouderkirk. Such a lack of separation is frowned upon by market players, and buysiders say the bank has committed an even graver transgression by allowing the traders to exchange information about CDO prices and…
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Goldman Sucks
by ilene - March 8th, 2010 12:30 pm
Goldman Sachs
Courtesy of Prieur du Plessis
This video is a visualization of Matt Taibbi’s article “Inside the great American bubble machine” on how Goldman Sachs has engineered every major market manipulation since the Great Depression. Click here for Taibbi’s article.
Source: Lebed.biz (via YouTube), March 3, 2010.
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Smoking Swap Guns in EuroLand: Sovereign Debt Buyer Beware
by ilene - March 4th, 2010 9:01 pm
Smoking Swap Guns in EuroLand: Sovereign Debt Buyer Beware
Courtesy of Reggie Middleton’s BoomBustBlog.com
There are broad indications hinting that Italy and Greece are not the only countries that have used swap agreements to manipulate its budget and deficit figures. France and Portugal may be two other European economies which have resorted to similar manipulations in the past in order to qualify as part of single currency member nations (Euro Zone). Below is a small subset of the research that I have been gathering as I construct a global sovereign default model. This model is very comprehensive and thus far has indicated that quite a few (as in more than two or three) nations of significance have a 90% probability of defaulting on their debt in the near to medium term.
More on this later. Now let’s dig into what we have found that looks like gross manipulation of the numbers in order to hide debt in several European countries. I think I’ll call it the Pan-European Ponzi. Conspiracy theorists are going to love this post.
Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank executed currency swaps on behalf of Portugal between 1998 and 2003. He also said that Deutsche Bank’s (DB) business with Portugal included "completely normal currency swaps" and other business activity, which he declined to discuss in detail. He also added that the currency swaps on behalf of Portugal were within the "framework of sovereign-debt management," and the trades weren’t intended to hide Portugal’s national debt position (yeah okay!).
Though the Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, it said Portugal only uses financial instruments that comply with European Union rules. Thus, if the use of these instruments complied with European Union rules, then there is nothing wrong with them, right??!! The word "if" is probably one of the most abused words in the English language. As my lawyer used to tell me as I once abused the word, "If Grandma had balls, she’d be Grandpa, wouldn’t she?"
The French
In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom (FTE) workers in return.…
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Here’s The Untold Story Of How AIG Destroyed Itself
by ilene - March 3rd, 2010 10:10 am
Here’s The Untold Story Of How AIG Destroyed Itself
Courtesy of John Carney at Clusterstock/Business Insider
Image: http://commons.wikimedia.org
The collapse of American International Group (AIG) was largely the result of a little understood investment strategy that allowed the insurance giant to make optimistic bets on the housing market and other asset classes without having to actually buy the bonds backed by mortgages or other assets.
The details of AIG’s investment strategy have been largely obscured by the analogy with insurance. In the typical telling, AIG is depicted as insuring mortgage bonds packaged by banks. AIG often seems to be almost a passive and unsophisticated player that came in after the deal.
In reality, AIG was deeply involved in the creation of the financial products it insured, according to a person familiar with the matter.
AIG was frequently involved right from the start of deals to securitize assets. It conducted its own due diligence on asset backed securities, sometimes going further than the banks that were actually buying the securities. Its financial professionals at times pitched deals AIG wanted insure to underwriters. It was an active participant in the market with a sophisticated, if risky, strategy for investing in the housing markets and infrastructure projects.
AIG As A Buyer Of Risk
AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds. AIGFP would sell credit default swaps that performed for the company much like an ordinary bond would for a bond investor. As long as the insured bonds were performing, AIG would receive a regular revenue stream from the buyer that mirrored the regular payments of interest and principle that a bond holder would receive. AIG was able investing in the bonds without actually having to buy them.
AIG, in other words, was essentially performing the financial product equivalent of buying a house with out having to make a down payment.
Goldman Sachs, which has been depicted in the press as “stuffing” AIG with risk to bad mortgages, frequently found itself packaging bond deals specifically to meet the demand from AIG for mortgage exposure, sources familiar with the matter say.
For AIG, investing in the bonds synthetically by selling credit default swaps had a major advantage over buying the bonds directly. Much of AIG’s capital was tied up in regulated insurance business, which meant that despite its huge balance sheet it could only deploy investment assets in…
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Goldman Says Matt Taibbi, Zero Hedge, Louise Story, And Janet Tavakoli Have Become Risks To Its Business
by ilene - March 1st, 2010 9:37 pm
Goldman Says Matt Taibbi, Zero Hedge, Louise Story, And Janet Tavakoli Have Become Risks To Its Business
Courtesy of Joe Weisenthal of Clusterstock/Business Insider
In its latest latest 10-K (via Dealbook) Goldman Sachs (GS) writes:
“The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or elected officials.
“Press coverage and other public statements that assert some form of wrongdoing, regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators and law enforcement officials, or in lawsuits."
In other words, pesky gadflies like anonymous bloggers, Rolling Stone critics, and New York Times journalists are hurting the company.
(What's this?)
(naked capitalism, 2/23/10)
(Short-Term Trading, 3/14/10)
(LOLFed, 3/3/10)
Goldman Sachs Group,
Hedging,
2008 Financial Crisis
at Wikinvest
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Uh Oh: Europe is Starting the Old ‘Blame The Shorts’ Game
by ilene - February 28th, 2010 1:22 am
Uh Oh: Europe is Starting the Old ‘Blame The Shorts’ Game
Courtesy of Joshua M Brown, The Reformed Broker
Memo to European "Finance Ministers" or "Directors of Monies" or "Dutchesses of the Royal Treasury":
The absolute WORST thing you can do when you’re in trouble is blame the shorts.
I’m starting to see articles planted left and right, laden with anonymous sources, that attempt to shift the focus of the Euro sovereign debt crisis to an exposé of evil speculators. Goldman Sachs this, George Soros that, John Paulson the other thing.
‘Blame The Shorts’ is the oldest and faultiest play in the Desperation Playbook. Don’t believe me? Go ask ex-Lehman CEO Dick Fuld how things went after his public proclamations about "burning the shorts". Go ask ex-SEC head Chris Cox how the financial sector fared in the immediate aftermath of his short-sale ban?
There are no puppeteers pulling the strings behind the slow-motion reckoning now rippling across European bourses - just huge, unsustainable debt loads and entitlement-suckers who refuse to view the "Account Balance" screen on their national ATM.
In short, Europe, you may be displeased with the fact that certain hedge funds and traders are seeking to profit from your misery, but they certainly cannot be said to have caused it in the first place. Consider:
- George Soros didn’t tell the quasi state-run banks of Spain to be vigorous participants in a Florida-esque building orgy. Nor did he tell them to conceal a great deal of their losses as unemployment rates made it obvious to the populace that there was ugliness beneath the surface.
- Goldman Sachs didn’t ask Greece to become a union-dominated, inside-out dystopia where institutions that should be government-run were privatized while the government itself became a competitive force within the enterprise markets of many industries.
So please, blame it on the rain, blame it on Rio, blame Canada - but DON’T blame the shorts. It never works and scares the hell out of constructive market participants whose trust and respect you are in dire need of right now.
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Bernanke Says He Will Investigate
by ilene - February 25th, 2010 4:08 pm
Bernanke Says He Will Investigate
Courtesy of JESSE’S CAFÉ AMÉRICAIN
What Goldman and other the other banks have done in Greece is no different from what they have been doing around the world for the past ten years. They facilitate various forms of questionable financial instruments with corrupt partners, and then trade on their detailed knowledge of that misrepresentation, mis-pricing and even outright fraud to reap enormous profits, often at the expense of the productive economy and programs designed to protect legitimate commercial banking activities. This is at the very core of the CDO financial crisis in the States.
Banks should not be able to trade in their own proprietary portfolios on the integrity of financial assets of their own devices. Otherwise, the conflicts of interest are irresistible. This is the very problem that Glass-Steagall was originally enacted in 1933 to prevent.
Only the most conservative and restrained banking system can function in the face of such obvious temptations for self-dealing. And this does not describe the financial system in the US.
Setting up regulatory hurdles, ‘chinese walls,’ and capital requirements to try and stem such obvious temptation to greed is a fool’s errand, but one that the banks encourage, knowing full well they will find ways to circumvent them as fast as they can be created.
The banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.
Bernanke: Looking at Goldman Sachs role in Greece
Thu Feb 25, 2010 10:03am ESTWASHINGTON (Reuters) - The Federal Reserve is examining the role that Wall Street firms including Goldman Sachs (GS.N) played in helping Greece arrange credit default swaps, Fed Chairman Ben Bernanke said on Thursday.
"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question for Senate banking Committee Chairman Chris Dodd.
Bernanke said the Securities and Exchange Commission was also "interested" in the issue and added: "Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive."
(What's this?)
(naked capitalism, 2/26/10)
(naked capitalism, 1/12/10)
(THE PRAGMATIC CAPITALIST, 2/10/10)
…
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The PR War
by ilene - February 24th, 2010 3:43 pm
The PR War
Courtesy of James Kwak at Baseline Scenario
Every major bank other than Goldman Sachs must be ecstatically happy that Goldman exists, soaking up all the attention with its escapades in Greece and Italy. The other banks, by contrast, are trying to make themselves out to be white knights. See, for example, JPMorgan’s ad today in multiple major print newspapers describing its commitment to small business lending:
Like that picture of small-town America?
The main claim is in the second paragraph: a commitment to lend $10 billion to small businesses in 2010. These kinds of marketing claims are difficult to verify. But I gave it a shot.
“Small business” lending, in JPMorgan’s financial supplements (great web page, by the way), is almost certainly “Business banking origination volume,” on page 13 (PDF page fourteen) of the most recent supplement. To see how JPMorgan Chase defines its business lines, see page 3 (PDF page eight) of this Realigned Financial Supplement. “Middle Market Banking” is included in Commercial Banking. So the “Business banking” segment of Retail Financial Services is almost certainly small business lending.
What does $10 billion mean? First let’s look at the history, thanks to those helpful supplements.
That’s called falling off a cliff. In words, JPMorgan Chase’s small business lending fell by two-thirds from 2007 to 2009. Or, in slow motion:
Note that the economic recovery began in Q3 2009 — no thanks to JPMorgan, apparently.
Still, $10 billion is still an increase over the previous high of $6.9 billion in 2007, right? Well, not quite. Because in the meantime, JPMorgan Chase went and bought Washington Mutual. At the end of 2007, Washington Mutual held over $47 billion in commercial loans of one sort or another (from a custom FDIC SDI report that you can build here). Most of those are not small business by JPMorgan’s definition, since commercial real estate and multifamily real estate got put into the Commercial Banking business after the acquisition. But that still leaves $7.5 billion in potential small business loans, up from $5.1 billion at the end of 2006, which means WaMu did at least $2.4 billion of new lending in 2007.
I don’t know how much of this is small business lending, but this is part of the problem — banks can choose what they call small business lending, and they can choose to change the definitions from quarter to quarter. It’s not also clear (from the outside, at least) what counts as an origination. If…
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Keiser Report No.19: Markets! Finance! Scandal! - And Karl Denninger
by ilene - February 24th, 2010 2:59 pm
Keiser Report No.19: Markets! Finance! Scandal! - And Karl Denninger
Courtesy of JESSE’S CAFÉ AMÉRICAIN
Although I don’t always agree with them, obviously, I am always interested, informed, and entertained by what madcap Max Keiser and his cerebral colleague Stacy Herbert have to say on The Keiser Report. As you may know, Max is the latest American in Paris, having left the States after selling his Hollywood Stock Exchange to Cantor Fitzgerald of Wall Street. Perhaps some day we can have a drink at the Ritz and philosophize, as expatriates are often wont to do, about the tragic transience of empire. The Ritz. Alas, when I was a visiting student at ESSEC I could not afford it, and now that I can, I do not get out much anymore. But who can tell what the future may bring.
The most recent broadcast of the Keiser Report has an added attraction in its second half, Karl Denninger. Karl is probably more familiar to our American patrons as theoutre financial commentator from The Market Ticker.
Karl always has something interesting to say, spoken plainly, and without the kind of courtly manner towards corporate America that is so fashionable among the journalists in the mainstream media who are members of the Wall Street demimonde.
Mr. Denninger is particularly effective, when he gets it right as he frequently does, in describing complex transactions because he is not an economist or a financial professional, but a computer engineer, an honest technical sort, who brings some formidable analytical skills to a relatively unfamiliar subject. He often gets ‘nit-picked’ by the pros who play word games with their jargon, but more often than not he is directionally correct.
And he occasionally admits it when he is wrong, and changes tack, a refreshing trait amongst the greater universe of financial commentators. But if you post on his chat board, be prepared for ideological frisking, and little patience for deviation from the local standards and fundamental assumptions. A weakness perhaps, from the perspective of ideological diversity, but more common than most moderators care to admit.
Enjoy.
Bonus post by Jesse at the Cafe,
How Bad Can It Get?
They have our money. What more can they want?
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Wall Street’s Bailout Hustle
by ilene - February 19th, 2010 10:15 am
Wall Street’s Bailout Hustle
Goldman Sachs and other big banks aren’t just pocketing the trillions we gave them to rescue the economy - they’re re-creating the conditions for another crash
By MATT TAIBBI
On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America’s pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman’s role in precipitating the global financial crisis.
The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn’t the right time for Goldman to be throwing its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we’re so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Goldman wasn’t alone. The nation’s six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?"…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(