Wednesday, July 15, 2009


July 15, 2009

This evening’s discussion of the current financial and economic crisis will begin with an analysis of the factors which caused the crisis and , then, move on to a discussion of where we are now and conclude with a discussion of the factors that will determine where we go from here.

Causes of the Current Financial and Economic Crisis

The first major cause of the crisis was the relentless push for De-Regulation of financial markets over the last 30 years.

The push for de-regulation started during the presidency of Jimmy Carter. During its second half, the Carter administration tacked sharply rightward in both domestic and international policy. With the unrelenting urging of his Economic Czar, Alfred Kahn, Jimmy Carter implemented a wave of de-regulation across a variety of industries: the trucking industry, the airline industry, the railroad industry, and the banking and financial services industry. The de-regulation of the banking and financial industry erased rules, regulations, and guidelines that had been in place for decades.

The Carter administration’s de-regulation of the financial industry thus set the table, politically and operationally, for the de-regulatory push that would gain added momentum and scope during the next nearly 30 years.

The successor Reagan administration, in particular, and the administration of George Bush, Sr., were ideologically hostile to virtually any and all government regulation, oversight, and enforcement and moved the de-regulatory ball forward with unremitting zeal.

In addition to reining in the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and other regulatory bodies from effectively carrying out their oversight and regulatory functions, the Reagan administration eviscerated long-existing anti-trust rules and regulations. This allowed enormous consolidation of power and size within the banking and financial industry as virtually all bank mergers and acquisitions were given the green light by the Reagan Justice Department. This led to the creation of mammoth financial institutions whose very size constitutes an inherent threat to the integrity and viability of the financial system and have, thus, been deemed “ too big to fail.”

The accession to power of the Democratic administration of Bill Clinton did nothing to slow, much less reverse, this de-regulatory freight train. Instead, the Clinton administration fervently backed several key measures that speeded the de-regulatory freight train along its course to inevitable catastrophe in the financial system.

The first of these measures was the repeal by Congress in 1999--- with the full and complete backing of Pres. Bill Clinton, Vice-President Al Gore and Treasury Secretary Lawrence Summers—of the Glass- Steagall Act ( This repeal was formally called the Financial Services Modernization Act.)

The Glass-Steagall Act, passed in 1933, was arguably the cornerstone of the financial reforms passed in the 1930s to correct the financial market conditions that led to the stock market crash and the Great Depression. Glass-Steagall created a firewall between commercial banking and investment banking, thus precluding any one financial institution from engaging in both sets of activities.

The repeal of Glass- Steagall in 1999 removed this crucial firewall and allowed commercial banks to go head-to-head with investment banks---- thus, propelling the commercial banks into the riskier lines of business that were previously the domain of the investment banks.

The second of the two major de-regulatory acts pushed by the Clinton administration that would prove to have such a crucial role in creating the current financial/economic crisis occurred in 2000. In 2000, with the fervent backing of Treasury Secretary Lawrence Summers, legislation was passed ( the Commodities Futures Modernization Act ) which allowed the unregulated trading of financial derivatives such as credit default swaps, which were derivative instruments that in a major way provided the financial fuel for the housing bubble. This legislation led to the explosion of the financial derivatives market so that, at the time of the implosion of the global financial markets in Sept. 2008, the total derivatives market in the U.S. was estimated to be roughly $ 750 trillion dollars------nearly 14 times the entire world’s total Gross Domestic Product of roughly 55 trillion dollars.

In addition, during the Clinton administration----- and with the full backing of the administration----- the two major government agencies involved in the housing market, Fannie Mae and Freddie Mac, moved away from their traditional exclusive focus on prime mortgages and began diverting an increasingly larger percentage of their assets to the purchase of subprime mortgages so that by the peak of the housing boom in 2005-2006 Fannie Mae and Freddie Mac were the leading purchasers in the country of subprime mortgages.

Of course, the juggernaut of de-regulation continued its headlong rush during the administration of George Bush Jr.

In 2004, the SEC overturned a rule in effect since 1975 that had required investment banks to maintain a debt-to-capital ratio of less than 15-to-1, thus limiting the amount of borrowed money and leverage investment banks could employ. The repeal of this longstanding 15-to-1 limit on leverage meant that investment banks were now free to leverage themselves to levels as high as 40-to-1. This hyper leverage not only made the investment banks more vulnerable when the housing bubble burst. It also enabled the banks to create far larger, far more complex networks of financial derivative instruments, with the result that their individual failure, or threat of failure, created systemic financial crises.

Another regulatory breakdown this decade was the failure of banking regulators to crack down on predatory lending abuses by banks and other financial institutions regarding the issuance of sub-prime loans. Such enforcement activity would have protected homeowners and would have lessened considerably the current financial crisis. Thus, between 2002-2007, the Federal Reserve only took three formal actions against subprime lenders, while the Office of the Comptroller of the Currency, which has authority over 1,800 banks, similarly took only three consumer protection enforcement actions during that same period.

The final major regulatory failure pertained to the failure of the credit rating agencies to properly perform their intended function.

In discussing this regulatory issue, one has to turn attention to another major, non-regulatory cause of the financial implosion and economic crisis. That is securitization . In order to create another source of big, fast profits from the sub-prime lending boom, Wall Street lit upon the idea of securitizing all these sub-prime mortgages. Thus, these mortgages would be sliced up into tranches to be sold primarily to institutional investors throughout the U.S. and all across the globe. These securitized packages of sub-prime loans were highly attractive to investors because of their high yields and the prevailing belief that real estate prices would never fall.

However, in order to be successfully marketed and sold, particularly to institutional investors such as pension funds and college endowments, the investment banks needed these securitized sub-prime assets to be highly rated by the credit rating agencies. In order to maintain their relationship with the banks and ensure future business with the banks, the credit agencies were only too willing to give their seal of approval, giving AAA ratings to countless packages of these extremely risky securities.

This institutional failure and conflict of interest on the part of the credit rating agencies could have been prevented by the SEC. However, the Credit Rating Agencies Reform Act of 2006 reined in and undercut the SEC’s oversight authority, thus giving the credit rating agencies carte blanche.

While not falling precisely under the de-regulatory rubric of the aforementioned events, an ancillary event that played a big part in the current financial crisis was the explosive growth of the “ shadow financial market. ‘ Specifically, during the 1990s and this decade, a huge amount of financial activity moved away from regulated and transparent markets and institutions into the lightly regulated or entirely unregulated shadow financial market comprised of hedge funds, private equity funds, mortgage brokers, off-balance sheet structured investment vehicles, and the aforementioned financial derivate market.


The pivotal role of the evisceration of the regulatory system in creating the current economic crisis provides a natural segue to a second major cause of the crisis: Alan Greenspan, who was the Chairman of the Federal Reserve Board from 1987-2006.

If there were one person, and one person only, who could be cited as a causative agent of the financial/economic crisis, that person would be Alan Greenspan.

Greenspan deserves this ignominious distinction for two reasons.

First, as a disciple of Ayn Rand and as one who fervently worshipped at the altar of the Free Market, Greenspan pushed relentlessly for the dismantling of the regulatory structure outlined above and successfully fought against the institution of any regulations regarding the exploding financial derivates market and the shadow financial market.

Second, Alan Greenspan was the prime enabler of the stock market bubble in the second half of the 1990s and the real estate bubble in this decade.

By mid-1996, it was becoming apparent that the stock market was becoming enveloped in a speculative fever. Since much of this speculative fever was coming from individual investors who were rushing headlong into technology and internet stocks, it was also apparent that one of the key ways, if not the key way, that this speculative fever could be broken would be to raise margin requirements for purchases of stock. If one buys stock ,one only has to put down 50% of the total cost of the stock and can borrow the remaining 50% on margin. If the Fed raised the margin requirement to 75-80% of the total purchase price,or to 90% or even 100% of the purchase price, the buyer of stock would then have to put down 75-100% of his own money to purchase the stock rather than being able to borrow 50% from his broker on margin. This reduction in leverage would, by definition, have reduced the buying power that, during the remainder of the 1990s, would push stock prices to absurdly overvalued levels.

Minutes of the Federal Reserve Board’s Meeting in September 1996 reveal that Alan Greenspan stated at that Meeting that raising margin requirements for stock purchases would be “ the single most effective thing the Fed could do to end the speculative excess in the stock market.”
Thus, by failing to take the step that Greenspan, himself, acknowledged would put an end to the speculative excesses in the stock market, Alan Greenspan bears the ultimate responsibility for the stock market bubble of the late 90s and for the ensuing stock market crash and recession in the early part of this decade that resulted from the inevitable bursting of the stock market bubble.

Then, in order to mitigate the fallout from the stock market plunge and the recession, Greenspan flooded the financial system with liquidity and drove down interest rates to the lowest levels since 1958. By pumping so much liquidity into the financial system and keeping interest rates so low for so long, Greenspan created the economic conditions for the creation of the housing bubble in this decade.

While Greenspan deserves blame for laying the economic foundation for the housing bubble, there were other key agents who played a critical role in creating the housing bubble.

The banks, mortgage lenders and other financial institutions effectively threw out the window any prudent lending standards or procedures. They failed to carry out any of the most basic due diligence in documenting a mortgage applicant’s income or assets, thus making loans to people who the most basic due diligence would have revealed to be clearly unqualified to purchase the house in question.
In addition, these lending institutions devised a patchwork of financially irresponsible, reckless mortgage products. No Down Payment Loans. Interest Only Loans. Negative Amortization Loans. Or Combinations of the above.

The other key agents in creating the housing bubble were the Appraisers. In countless cases, the appraisers would willfully sign off on inflated house prices, thus allowing the speculative madness to continue apace.
As one might assume, the motivating factor for the irresponsible actions of the mortgage lenders and the appraisers was money. There were big fees and commissions to be garnered from generating these toxic mortgages. If they turned bad several years down the road, that would be someone else’s problem.
And, of course, it was the bursting of the housing bubble that triggered the tsunami in the U.S. and global financial systems.


One final factor should be cited as a significant contributing factor to the current financial and economic crisis. That is the compensation system at the investment banks and other financial institutions. Specifically, the great majority of the compensation at these financial firms is comprised of bonuses rather than salary. And, the bonuses, in turn, were based on the current year’s performance. Thus, the compensation system was based upon short term rather than long-term performance of an investment, with the result that bankers were heavily incentivized financially to make increasingly risky bets regardless of their long-term consequences.

Having now analyzed the factors that led to this crisis, let’s look at where we are now and at what will determine what lies ahead.


While the U.S. and global financial systems have pulled back from the threat of collapse that loomed so large in September and October; while the credit markets, which is where this crisis started, have improved significantly; while the stock market, which is both a barometer and a determinant of the health of the economy, has staged an impressive upmove since March 9th; while the rate of deterioration in the overall economy has slowed down considerably, we are by no means out of the woods.

Housing foreclosures are projected to begin rising again shortly and to continue rising into 2010 and are, also, projected to hit increasingly hard in the high-end prime segment of the housing market. Delinquencies on credit card debt have been rising significantly in recent months and are projected to continue rising into 2010. The unemployment rate, currently at 9.4%, a level not seen since August 1983, is virtually guaranteed to cross the 10% threshold in the near future. And, of course, as we know the current unemployment rate is understated since it excludes discouraged workers, who, if they were included, would drive up the real unemployment rate to roughly 15%.

The decisive, forceful monetary and fiscal policy measures taken by the Federal Reserve and the government since the financial crisis exploded on Sept. 15th with the bankruptcy of Lehman Brothers deserve the lion’s share of the credit for the avoidance of a possible systemic financial collapse; for the significantly improved functioning of the credit markets, which are critical for the functioning of the overall economy; and for averting an even worse plunge in the economy than the already bad-enough downturn we have experienced to date.

However, we are now at a critical juncture. Just as it is imperative that the Federal Reserve and the government intervene quickly and powerfully at the earliest stage of a financial crisis to prevent it from cascading into a financial crash and economic Depression, so is it critical that the Fed and the government do not take their foot off the accelerator or tap on the brakes too soon.
This was a major policy error that the Fed and the Roosevelt administration made in 1936.
Virtually everyone thinks that the 1930s were an unmitigated downward financial and economic trajectory. However, in fact, the 1930s had three distinct segments.

The first segment , from the beginning of the stock market crash in the fall of 1929 through 1932 was a period of unmitigated hell that everyone associates with the worst images of the Depression and stock market crash. However, the nightmare scenario that played out during that period did so because of the policy failures of the Hoover administration and of the Federal Reserve. President Herbert Hoover and his Treasury Secretary Andrew Mellon, given their Republican laissez-faire ideology refused to provide any fiscal stimulus to the plunging economy. And, the Federal Reserve not only failed to provide the massive injection of liquidity that the financial system desperately required, but, instead, made the catastrophic policy mistake of reducing the money supply by 30% between 1930 and 1933. That was akin to failing to provide critically-needed oxygen to a patient who suffered a heart attack and, instead, putting
duct tape over his nose and mouth.

Then, in 1933, with the assumption of power by the Roosevelt administration and a new Federal Reserve chairman in place, the government and the Fed totally reversed the disastrous fiscal and monetary policies of the Hoover administration. The Roosevelt administration implemented a massive fiscal stimulus program and the Fed injected the massive doses of liquidity the financial system desperately needed. The result was that both the economy and the stock market registered solid double-digit gains from 1933 to 1936.

However, in late 1936, both the Fed and the Roosevelt administration did an about-face and took their feet off the accelerator and started applying the monetary and fiscal brakes. The result was that both the stock market and the economy renewed their decline in 1937 and 1938.
The Fed reversed course in 1936 because it was worried that the huge amount of liquidity it had pumped into the financial system could create future inflation. The Roosevelt administration reversed course because of worries about the federal budget deficits resulting from its massive federal spending.

We hear those same concerns being voiced today, mostly from Congressional Republicans and right-wing media voices, who are urging the Fed to reverse course and tighten monetary policy and urging the Obama administration to reverse course and curtail its ambitious fiscal stimulus program.

Hopefully, Fed Chairman Ben Bernanke, Treasury Secretary Tim Geithner, and President Obama do not heed these hawkish, misguided cries. If they learn from the mistakes of 1936 and do not heed those cries, then, I think there is a strong possibility the economy and the stock market will experience a stronger recovery than is anticipated. If they do heed those cries, then, we could be in for considerably more economic pain, for a considerably longer period of time.

The second major factor that is going to determine our financial and economic future is whether Congress and the Obama administration will have the political will to withstand the intense lobbying pressure---- and the inducement of big campaign contributions----- that is sure to come from the financial industry and put into effect the network of strong regulation and oversight necessary to try to ensure that we do not experience a cataclysmic financial crisis like this again.

Some of the regulatory reforms that we would need to see would be:

1) The identification and increased regulation of financial institutions that pose a systemic risk;
2) Significantly reducing the leverage that financial institutions can use;
3) Supervision of the shadow financial system of hedge funds, private equity groups, and mortgage lenders;
4) Significantly reduce the amount of financial derivatives that financial institutions can employ and require transparency of financial derivative holdings and transactions;
5) Create a new system for federal and state regulation of mortgages and other consumer credit products;
6) Reform the credit rating system;
7) Create an executive pay system at financial institutions that discourages excessive risk taking.

The next several months will be critical and will provide us with the answer as to whether Congress and the Obama administration have the political will to enact this critically-needed strong regulatory system. If they do have the will and do what is necessary, then the financial system will emerge from this crisis on a stronger and more solid footing. However, if they do not have the will to do what has to be done, then the financial system and the economy will remain vulnerable to a future crisis of equal, or greater, magnitude than the cataclysm of last fall.


Despite what may appear to be the case at first glance, because of the sheer magnitude of the 88-page proposal put forth this week, the Obama administration’s Regulatory Reform Plan is not cause for great encouragement that the fundamental structural reforms that are needed will be enacted.

A potentially major problem pertains to what is, effectively, the centerpiece of the Obama Plan: namely, significantly remaking and increasing the power and scope of the Federal Reserve to make the Fed the supreme supervisor of systemically significant financial institutions and, thus, in effect, the overall stability of the financial system. The problem with this is apparent since the Fed exercising its regulatory due diligence would be entirely dependent on the ideological and political proclivities of its members, particularly its Chairman. As the record of Alan Greenspan makes abundantly clear, if we were to have another Chairman such as Greenspan, the Fed could hardly be depended upon to prosecute vigorously its crucial regulatory functions.

Another major problem is that the Obama Plan does not deal with the type of derivatives that caused so much of the problem with derivatives in general. Specifically, it does nothing to address so-called “ bespoke derivatives “ which are customized, one-of-a-kind products, as opposed to standardized derivative products. It was the “ bespoke derivatives “ which were responsible for a disproportionate share of the financial carnage caused by financial derivatives in general.

This failure of the Obama Plan to deal with the core of the derivative problem is part of an overall problem with the Obama Plan according to a number of sources in Washington who have studied these regulatory issues thoroughly. These sources---- at the Economic Policy Institute and the Multinational Monitor, among others-----have stated that, while the “ headline proposals “ of the Obama Plan sound good, the problem is that, when you start analyzing the substance behind each of the proposals, there is a lot less than meets the eye.

And, of course, another major problem is the political process that lies ahead. The Obama proposals will be bandied about for the next few months by Congress. And, as stated previously, the banking and financial industry will be exerting enormous lobbying pressure----pressure greatly strengthened by the lure of big campaign contributions-----to water down significantly an Obama Plan that already has significant shortcomings and potential problems.

Friday, July 3, 2009


July 3, 2009

On giving Goldman a chance

(Response from Matt Taibbi:)

My Rolling Stone piece about Goldman Sachs hit the newsstands last week (unfortunately the piece is not yet up on the magazine’s web site, so I can’t link to it yet — but it is out in print), I started to get a lot of mail. Most of it was thoughtful and respectful criticism, although there was an amusingly large number of people writing in impassioned defense of their right, under our American system, to be ripped off by large impersonal financial companies.

“If my pension fund is buying [crap mortgages] from Goldman, and my pension fund loses lots of value, that’s not Goldman’s fault,” wrote one reader. “No one is forcing anyone to buy anything. The only thing Goldman is guilty of is making profits.”

I’m not even going to go there — the psychology of a human being who would take the time to actually write in a complaint like that is so bizarre that it would take more time than I have today to even begin discussing it. One other complaint that I will address quickly, though, is the notion that I didn’t tell Goldman’s side of the story.

“Not exactly a balanced approach,” complained one reader.

“You should take an ethics class. You have to give the other side a fair shot.”

Actually I did contact Goldman and gave the bank every opportunity to respond to the factual issues in the article. I’m bringing this up because their decision not to comment on any of those questions was actually pretty interesting.

We figured ahead of time that Goldman was probably not going to respond to many of the allegations in the article, since its MO in the past with regard to hostile journalists has usually either been to make bald denials or to simply avoid comment (that’s when they’re not using the carpet-bomb litigation technique, as in the case of So what I decided to do the first time I approached them was to send a short list of simple factual questions. If the bank decided to engage us and educate us as to its point of view on these simple questions, we would send more queries and expand the dialogue.

Given this, I tried to make that first list of questions as basic as possible.

I asked if Goldman would have turned a profit in Q1 2009 if it hadn’t orphaned the month of December 2008. Then I asked if Goldman had made changes to its underwriting standards during the internet boom years; if Goldman’s position was still that the steep rise in oil prices last year was due to normal changes in supply and demand; and if it could explain its 1991 request to the CFTC to have its subsidiary J. Aron classified as a physical hedger on the commodities market. Citing various sources, I also noted that some people had complained that its move to short the mortgage market in 2006 even as it was selling those same types of instruments proved that the bank knew the weakness of its mortgage products, and asked if the bank had an answer for that.

And I asked if the bank supported cap-and-trade legislation, and if it was fair to say (as we planned to in the piece) that the bank would capitalize financially if such legislation was passed.

I intentionally put a lot of yes/no questions on that list. If the underlying thinking behind any of those questions was faulty, it would have been easy enough for them to say so and to educate us as to the truth. Instead, here is the response that we got:

“Your questions are couched in such a way that presupposes the conclusions and suggests the people you spoke with have an agenda or do not fully understand the issues.”

You have to have swallowed half a lifetime of carefully-worded p.r. statements to see the message written between the lines here. That this is a non-denial denial is obvious, but what’s more notable here is that they didn’t stop with just a flat “no comment,” which they easily could have done.

No, they had to go a little further than that and — and this is pure Goldman, just outstanding stuff — make it clear that both I and my sources are simply not as smart as they are and don’t understand what we’re talking about. So the rough translation here is:

“No comment, but if you were as smart as us, you wouldn’t be asking these questions.”

So now word filters through that Goldman has issued yet another statement in response to the piece, this one by mouthpiece Lucas Van Praag (or Von Doom, as he apparently is often called). Again, the company does not take issue with any of the facts in the piece — not one. Here’s what he says (via Felix Salmon at Reuters):

"Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

"Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

"We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good."

Okay, let’s look at that bit piece by piece.

Von Doom takes issue with the bubble argument by citing two “examples” of the case not holding water, the first being:

"… the blame for creating the internet bubble cannot credibly be laid at our door…"

I kept waiting for the “because…” clause here, but there wasn’t one. He just says so and leaves it at that. Now there is obviously some measure of hyperbole in solely blaming Goldman Sachs for something like the internet bubble, or any of the other recent Wall Street disasters, for that matter. But you’d have to be absolutely crazy (and you wouldn’t need “the worst will in the world,” either) not to accept the notion that Goldman shouldered a significant portion of the blame for the internet mess. They were, after all, the leading underwriter of internet IPOs during the internet boom years. In 1999, at the height of the boom, they underwrote 37 internet companies, most of which had little or no history and were losing money at the time of the launch. By late 1999 Goldman was underwriting one out of every five internet IPOs. They were repeatedly caught and punished for manipulating the prices of their IPOs, either via laddering or spinning. Van Evil doesn’t deny any of this, and just blithely says that one can’t credibly blame them for the internet bubble. I’m almost insulted by the lameness and half-assedness of that comeback, but that might be part of the point, to be insulting. He moves on:

"…and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors."

Again, not to beat this into the ground, but in 2006, at the height of the housing boom, Goldman underwrote over $75 billion in mortgages, over $59 billion of which were non-prime. That represented 7% of the entire market, which seems like a pretty “major” slice to me. It is true that they did not jump so completely ass-first into the market as Lehman and Bear did (note Von Doom’s bemused reference to “former competitors”), but if you read the piece, we noted why that doesn’t take them off the hook at all. Because while their “former competitors” (one of whom is clearly “former” in large part because a former Goldmanite, Hank Paulson, elected to save Goldman’s hide instead of Lehman’s) were dumb enough to hold their mortgage paper and be sunk by it, Goldman shorted their own crap, which means (and I know I’m repeating myself here) they knew that what they were selling was a loser. So while they maybe weren’t the biggest player, they were still a major player, and one can easily make the case that they were the most obnoxious player, given that they dove into this muck with their eyes wide open, unlike so many other idiots on Wall Street.

In the middle of this weirdly substanceless retort, Von Doom then goes on complain about the lack of substance in the article, makes the predictable charge that the piece was a compendium of invented conspiracy theories, then moves on to “reject” the notion that the company inflates bubbles and profits in busts (about that last part: I recommend checking out Goldman’s profit/bonus numbers in 2002, 2008, and 2009 to date. I’m not sure how they can refute the notion that they have profited during the recent financial calamities). Lastly, he says that the bank is “painfully conscious” of the importance of being a force for good, which I noted with amusement is not quite the same thing as saying that that bank is a force for good, or wants to be.

So to sum up, this all translates as:

“Taibbi’s bubble case doesn’t hold water. To use just two examples, Taibbi’s internet bubble case doesn’t hold water, and we didn’t sell as many mortgages as Lehman Brothers. Taibbi’s article is a compendium of every other story about Goldman that doesn’t hold water. We reject these theories that do not hold water, and are aware of the difference between right and wrong, making us legally sane according to the law.”

I’m aware that some people feel that it’s a journalist’s responsibility to “give both sides of the story” and be “even-handed” and “objective.” A person who believes that will naturally find serious flaws with any article like the one I wrote about Goldman. I personally don’t subscribe to that point of view. My feeling is that companies like Goldman Sachs have a virtual monopoly on mainstream-news public relations; for every one reporter like me, or like far more knowledgeable critics like Tyler Durden, there are a thousand hacks out there willing to pimp Goldman’s viewpoint on things in the front pages and ledes of the major news organizations. And there are probably another thousand poor working stiffs who are nudged into pushing the Goldman party line by their editors and superiors (how many political reporters with no experience reporting on financial issues have swallowed whole the news cliche about Goldman being the “smart guys” on Wall Street? A lot, for sure).

Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it. Given all of this, I personally think it’s absurd to talk about the need for “balance” in every single magazine and news article. I understand that some people feel differently, but that’s my take on things.

Happy Independence Day!



July 3, 2009

Tuesday, June 30, 2009

NYSE Halts Transparency, Feels Goldman Program Trading Disclosure Is Unnecessary

Posted by Tyler Durden at 1:26 PM

In a move set to infuriate and send many Zero Hedge readers over the top,
the NYSE has taken action to make sure that nobody will henceforth be able to keep track of the complete dominance that Goldman Sachs exerts over the New York Stock Exchange. This basically ends our weekly Program Trading updates disclosed every Thursday indicating that Goldman has singlehandedly captured all of NYSE's program trading.In an information memorandum released on June 24 (09-31), the NYSE Regulation team has announced the Decommissioning of the Daily Program Trading Report (DPTR).From the memo:

The New York Stock Exchange LLC (“NYSE”) will be decommissioning the requirement to report program trading activity via the Daily Program Trading Report (“DPTR”), which was previously approved by the Securities and Exchange Commission (the “Commission”).1 The last trade date for which member organizations will be required to file the DPTR with the Exchange will be July 10, 2009 and therefore the last required date to submit the DPTR will be July 14, 2009.In the 2007 rule filing, the Exchange proposed to eliminate DPTR. The 2007 filing noted that there was some duplication between the DPTR data and the audit trail information that member organizations provide to the Exchange via account-type indicators at the time that they submit program trades to the Exchange... [A]fter consulting with the SEC, the Exchange announced that it would delay implementation of the two redefined account type indicators, and pending such implementation, member organizations would be required to continue filing the DPTR with the Exchange. The current delayed implementation date of the redefined J and K account type indicators is June 30, 2009. Accordingly, the Exchange still requires member organizations to submit DPTR.The Exchange has filed with the SEC to implement the decommissioning of the DPTR requirement following the July 10, 2009 trade date. Accordingly, the last required submission of the DPTR will be on July 14, 2009, which is the second business day after the last trade date for which the DPTR is required.In addition, in connection with the decommissioning of the DPTR, the Exchange will not be implementing the proposed redefined program trading account type indicators (J and K) and will continue to use the existing J and K audit trail account types. Upon further analysis and based on industry input, the Exchange has determined that these redefined account type indicators do not enhance the regulatory audit trail because the proposed redefined J and K could subsume some of the other, more granular account type indicators that the Exchange currently receives. Accordingly, the Exchange has determined not to redefine the J and K account types in the manner previously proposed, and is instead leaving the J and K account-type definitions unchanged.The Exchange further notes that it will use the existing account type indicator data – which captures program trade information for those orders sent to and executed on the Exchange – to report to the Commission on a weekly basis the program trading statistics for portions of program trades executed on the Exchange. Accordingly, beginning on July 23, 2009, the Exchange will provide the Commission with its weekly statistics on program trading based on account type indicator data rather than DPTR data. Similarly, at the same time, the weekly statistics regarding program trades that the Exchange provides to media outlets will also be derived from account type indicator data rather than the DPTR.

Basically this is the beginning of the end of unmodified data transparency. Going forward the NYSE will provide whatever data it feels comfortable, after sufficient internal "audits," and media outlets such as Zero Hedge, which had presented its millions of readers the only data point about Goldman's complete encroachment of not only NYSE but Program Trading, will be henceforth unreliable and likely will present no useful information at all.

This is a travesty, as well as a complete obliteration and a mockery of the move for transparency that the Administration, Regulators and Exchanges have been posturing they support. We advise all readers to contact the provided staff on the memorandum and voice your incredulity with this brazen move to completely obfuscate Goldman's behind-the-scenes take over the world's biggest stock exchange.

Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 orAleksandra Radakovic, Vice President, NYSE Regulation at (212) 656-4144

Wednesday, July 1, 2009

Is Goldman Legally Frontrunning Its Clients?

Posted by Tyler Durden at 11:25 AM

Everyone who is anyone on Wall Street has at some point used the
Goldman 360 portal whether for research, news, keeping a track of prime brokerage portfolio or, disturbingly, for trading, via the REDI Plus 9.0 platform (now loaded with enhanced algo trading features to make life for you, dear soon to be frontran Goldman client, so much easier). A second widely accepted Wall Street concept is that a disclaimer is the last thing that anyone reads, if ever. Yet after taking a close look at the Goldman disclaimer for the 360 portal, which is an umbrella waiver or all downstream websites, including REDI, one discovers the following gem:

Monitoring by GS: Your use of the products and services on this Web site may be monitored by GS, and that the resultant information may be used by GS for its internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory organization.

Second: by using Goldman 360 a client voluntarily allows Goldman to provide keystroke by keystroke data of everything the client does, even if that includes launching trades via REDI, to Goldman for the internal business purposes.

The third thing everyone on Wall Street agrees on is that "internal business purposes" usually (and in Goldman's case, almost exclusively) means proprietary trading.

Are Goldman 360 clients (in)voluntarily signing off a release to be front ran by Goldman on any portal-based trade? Could Goldman please clarify just what "internal business purposes" means in the context of this overarching disclaimer, and also whether Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk? Lucas Van Pragg: the floor is yours.

Update: several readers have presented some other Goldman Sachs and Spear, Leeds and Kellogg form documents that contain an even more cryptic warning in section 4(f) in Use Of Services:

You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation.

NOT FOR YOUR BENEFIT? I mean, come on, how more clearer does it need to get.

Thursday, July 2, 2009

Goldman Sachs Responds To Zero Hedge

Posted by Tyler Durden at
12:02 PM

It seems quite a few individuals noticed
our post attempting to justify some very peculiar language in not just a certain Goldman Sachs Internet disclaimer, but also the strange wording prominently featured in critical GS-client agreements. One happened to be Goldman Sachs itself. We take this opportunity to present the response by Goldman Sachs' spokesman Ed Canaday:

Dear Mr Durbin:

This is in response to your recent blog about our web site disclaimer. It is quite usual for websites to have disclaimers that refer to the monitoring of site usage. Most web sites, including yours we noticed, track usage by their visitors. This is primarily used for marketing and to help inform decision about enhancing content.Your suggestion that we monitor our web site to facilitate front-running is untrue and offensive.


Ed Canaday
Vice President
Goldman, Sachs & Co.
Ed Canaday
Office: xxx-xxx-xxxx
Cell: xxx-xxx-xxxx

We are happy to have caught the attention of Mr. Canaday. We believe this is the start of a great ongoing dialog.

In that vein, Marla has replied to Mr. Canaday and Goldman Sachs, attempting to elaborate on some of the point that Ed did not touch upon. I present it below and am looking forward for Goldman's forthcoming reponse:

Dear Mr. Canady:

Thanks for your quick reply.

For your future reference, the correct spelling for "Tyler" is "Tyler Durden." (A re-viewing of "Fight Club" might be in order, but I know Goldman VPs probably rarely have time for such luxuries).

Obviously, we want to make sure we have our facts correct so I am pleased to see your email. Perhaps you can lay to rest some questions we have for the record:

1. Indeed, data use disclaimers are a common feature on most websites. Still, I think you will agree that where usage patterns are so directly linked with potential investment activity and customer intentions it is a bit unusual not to have a more explicit description of the kind of use Goldman intends here. This is particularly so where customer attitudes are concerned, and appearances are important. "Internal business purposes" is a bit vague in this respect, don't you find? This seems unlike Goldman, usually a firm known for very careful attention to detail. Why is a more specific description of such purposes not included? I would think that easier than explaining the matter repeatedly to random bloggers (and customers).

2. I notice that you have not taken the opportunity to address similar disclaimer language in the form contracts used by Goldman and Spear, Leeds and Kellogg. Was this omission intentional or an oversight? (For your reference you can find the language we are curious about here:

"You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation."Not to be a stickler, but the drafting here seems quite careless.Note the differing terms between the website disclaimer "...the resultant information may be used by GS for its internal business purposes OR in accordance with the rules of any applicable regulatory or self-regulatory organization...." (emphasis added) and the form disclaimer "...we may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body AND in compliance with applicable law and regulation...." (emphasis added).As a reformed legal professional myself, this seems a bit sloppy to me. Can you comment on the language and in particular why a more explicit definition of "internal business purposes" is not included?

3. I also notice that you do not specifically address our question:"...has Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk?" Could you give us a response there? Perhaps you might augment that to include the decision making process of any Goldman investment decisions rather than just the prop desk and all information Goldman collects about 360 users.And lastly, while we have your attention, we were hoping you could make a statement for Zero Hedge and its readers on the long discussed topic on our pages regarding Goldman Sachs' effective monopolization of Principal Program Trading in the New York Stock Exchange. In other venues you have attributed this domination solely to Goldman's selection as the one and only SLP currently used by the NYSE. Would you care to elaborate how that fits in with the NYSE's upcoming changes to their DPTR ( as pertaining to J and K account type indicators.

Was Goldman in any way consulted in the making of this decision by the NYSE? Did Goldman have any direct communication with the SEC on this issue?Thanks for your help with these matters. As an aside, if there is a contact at Goldman we can routinely direct these questions to that might be helpful for both of us going forward. I look forward to hearing from you.

Best Regards,"Marla Singer"

Thursday, July 2, 2009


July 2, 2009


Dear boys and girls,

Based on analysts' earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict. On a per- employee basis, payouts are expected to exceed last year's average of $262,000. Howard Chen, an analyst at Credit Suisse, projects that the company's average pay will come close to the $340,000 paid out by Morgan Stanley in fiscal 2007.

Champagne Kisses,

Carole Lieff
@2009 The Art Advisor

Monday, June 29, 2009


Dear boys and girls,

You must read this article on Goldman Sachs.

I wish I had known this about the IPO's in the early 2000's.

I would have been able to help you out with your civil lawsuits during the collapse of the era.

Kisses of Jade,


The Art Advisor