Comment Text:
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From:
Sent:
To:
Subject:
Ray < [email protected] >
Tuesday, February 23, 2010 7:22 AM
secretary
Regulation of Retail FOREX
David Stawick,
Secretary, .C..o..m.m..o..~ !t.y....F.u..t.u..r.e.s...T.r.a. d !n. g..c.9..m m..i .s.s. !o...n.,
1155 21st street, N.W.,
Washington, DC 20581.
RE: RIN 3038-AC61
Dear Mr. Stawick,
I stand firmly against the proposed ruling of 10:1 leverage. It should remain at 100:1 or higher.
Additionally the erroneous rules of FIFO and No-hedge imposed by the NFA should be abolished and tossed out as
"Anti-Competitive" and "Unconstitutional".
As the opening of US brokerages overseas would tell you.
If you are looking for criminals to prosecute and protect people against fraud I suggest you look to your
banker friends on wall street. They are the ones responsible for this bailout mess. If you were doing your "JOB" in
the first place none of this would have happened.
I emplore you to read the extent of this email so that you will rightly know who is to blame and who is not ....then
apply this information to your "Job title".
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 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 birthday.
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 boatload of money last year because we're so amazing at our jobs,
so too bad for 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 rnilkshake!
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?" asks
Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor
of New York.
Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a
collective sigh of resignation. Because beneath America's populist veneer, on a more subtlei0-001
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strata of the national psyche, there remains a strong temptation to not really give a rat's butt.
The rich, after all, have always made way too much money; what's the difference if some fat
cat in New York pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's still a widespread
misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation
marks around "earns." The question everyone should be asking, as one bailout recipient after
another posts massive profits Goldman reported $13.4 billion in profits last year, after paying
out that $16.2 billion in bonuses and compensation is this: In an economy as horrible as
ours, with every factory town between New York and Los Angeles looking like those hollowed-
out ghost ships we see on History Channel documentaries like
Shipwrecks of the Great Lakes,
where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go
from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance"
was just that awesome? A year and a half after they were minutes away from bankruptcy, how
are these losers not only back on their feet again, but hauling in bonuses at the same rate they
were during the bubble?
The answer to that question is basically twofold: They scammed the taxpayer, and
they scammed their clients.
The bottom line is that banks like Goldman have learned absolutely nothing from the global
economic meltdown. In fact, they're back conniving and playing speculative long shots in
force only this time with the full financial support of the U.S. government. In the process,
they're rapidly re-creating the conditions for another crash, with the same actors once again
playing the same crazy games of financial chicken with the same toxic assets as before.
That's why this bonus business isn't merely a matter of getting upset about whether or not
Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that
the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-
stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-
school hustles that, but for their ponderous complexity, would have fit well in slick grifter
movies like
?-he Sting
and
Matchstick Men.
There's even a term in con-man lingo for what some
of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and
giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is
known as the "Cool Off."
To appreciate how all of these (sometimes brilliant) schemes work is to understand the
difference between earning money and taking scores, and to realize that the profits these
banks are posting don't so much represent national growth and recovery, but something closer
to the losses one would report after a theft or a car crash. Many Americans instinctively
understand this to be true but, much like when your wife does it with your 300-pound
plumber in the kids' playroom, knowing it and actually watching the whole scene from start to
finish are two very different things. In that spirit, a brief history of the best 18 months of
grifting this country has ever seen:
CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was
actually a bailout of AIG's "counterparties" the big banks like Goldman to whom the insurance
giant owed billions when it went belly up,
What is less understood is that the bailout of AIG counter-parties like Goldman and Soci~ G~9
rale, a French bank, actually began
before
the collapse of AIG, before the Federal Reserve paid
them so much as a dollar, Nor is it understood that these counterparties actually accelerated
the wreck of AIG in what was, ironically, something very like the old insurance scam known as
"Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and
wrecked, with the mark in the game being the target's insurance company in this case, thei0-001
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government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a
perverse series of legal incentives that often made failed investments worth more than thriving
ones. Our economy was like a town where everyone has juicy insurance policies on their
neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will
be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman
was selling billions in bundled mortgage-backed securities often toxic crap of the no-money-
down, no-identification-needed variety of home loan to various institutional suckers like
pensions and insurance companies, who frequently thought they were buying investment-grade
instruments. At the same time, in a glaring example of the perverse incentives that existed and
still exist, Goldman was also betting
against
those same sorts of securities a practice that
one government investigator compared to "selling a car with faulty brakes and then buying an
insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of
pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by
Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't
required to actually have the capital to pay off the deals. As a result, banks like Goldman
bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that
the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money coming and going. They
made money selling the crap mortgages, and they made money by collecting on the bogus
insurance from AIG when the crap mortgages flopped.
Still, the trick for Goldman was: how to
coflect
the insurance money. As AIG headed into a
tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have
the money to pay off the bogus insurance. So Goldman and other banks began demanding that
AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG,
Goldman received $5.9 billion in collateral. Soci$~ G~jtrale, a bank holding lots of mortgage-
backed crap originally underwritten by Goldman, received $5.5 billion. These collateral
demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed
the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately
involved in the AIG bailout as head of the New York State Insurance Department.
It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over
big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute
whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would
have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court
that saw those collateral payments would have declined that transaction as a fraudulent
conveyance," says Barry Ritholtz, the author of
Bailout Nation.
Instead, Goldman and the other
counterparties got their money out in advance putting a torch to what was left of AIG. Fans
of the movie
Goodfellas
will recall Henry Hill and Tommy DeVito taking the same approach to
the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when
there's nothing left, when you can't borrow another buck.., you bust the joint out. You light
a match."
And why not? After all, according to the terms of the bailout deal struck when AIG was taken
over by the state in September 2008, Goldman was paid 100 cents on the dollar on an
additional $12.9 billion it was owed by AIG again, money it almost certainly would not have
seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it
pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without
massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that
doesn't even include the
direct
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earnest after the collapse of AIG.
CON #2 THE DOLLAR STORE
In the usual "DollarStore" or "Big Store" scam popularized in movies like
The Sting
a huge
cast of con artists is hired to create a whole fake environment into which the unsuspecting
mark walks and gets robbed over and over again. A warehouse is converted into a makeshift
casino or off-track betting parlor, the fool walks in with money, leaves without it.
The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job
and the fact that everyone is in on it except the mark. In this case, a pair of investment banks
were dressed up to look like commercial banks overnight, and it was the taxpayer who walked
in and lost his shirt, confused by the appearance of what looked like real Federal Reserve
officials minding the store.
Less than a week after the AIG bailout, Goldman and another investment bank, Morgan
Stanley, applied for, and received, federal permission to become bank holding companies a
move that would make them eligible for much greater federal support. The stock prices of both
firms were cratering, and there was talk that either or both might go the way of Lehman
Brothers, another once-mighty investment bank that just a week earlier had disappeared from
the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was
required for such a conversion but the two banks got them overnight, with final approval
actually coming only five days after the AIG bailout.
Why did they need those federal bank charters? This question is the key to understanding the
entire bailout era because this Dollar Store scam was the big one. Institutions that were, in
reality, high-risk gambling houses were allowed to masquerade as conservative commercial
banks. As a result of this new designation, they were given access to a virtually endless tap of
"free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the
better-known TARP bailout was chump change in comparison to the smorgasbord of direct and
indirect aid it qualified for as a commercial bank.
When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of
America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed
and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-
cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The
ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan
Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital
at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former
managing director at Goldman Sachs. "The Fed was the only shot."
In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and
Morgan Stanley to stave off disaster it became a source of long-term guaranteed income.
Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make
money. In one of the most common maneuvers, they simply took the money they borrowed
from the government at zero percent and lent it back to the government by buying Treasury
bills that paid interest of three or four percent. It was basically a license to print money no
different than attaching an ATM to the side of the Federal Reserve.
"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions
of dollars man, you can make a lot of money that way," says the manager of one prominent
hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits
last year. But all that free money was amplified by another scam:
CON #3 THE P'rG 'rN THE POKE
At one point or another, pretty much everyone who takes drugs has been burned by this one,
also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaicani0-001
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Switch." Someone sells you what looks like what you want in a box, you get home to open the
box, and there's nothing but rocks in there.
The scam's name comes from the Middle Ages, when some fool would be sold a bound and
gagged pig that he would see being put into a bag; he'd miss the switch, then get home and
find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."
The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the
housing bubble the largest asset bubble in history the economy was suddenly flooded with
securities backed by failing or near-failing home loans. In the cleanup phase after that bubble
burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless
cats, but at pig prices.
One of the first times we saw the scam appear was in September 2008, right around the time
that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning
banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated
corporate bonds, could now borrow against pretty much anything including some of the
mortgage-backed sewage that got us into this mess in the first place. In other words, banks
that once had to show a real pig to borrow from the Fed could now show up with a cat and get
pig money. "All of a sudden, banks were allowed to post absolute garbage to the Fed's balance
sheet," says the manager of the prominent hedge fund.
The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of
its first bailout facilities the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up
described the changes: "With the Fed's action, all the kinds of collateral then in use . . .
including non-investment-grade securities and equities..,
became eligible for pledge in the
PDCF."
Translation: We now accept cats.
The Pig in the Poke also came into play in April of last year, when Congress pushed a little-
known agency called the Financial Accounting Standards Board, or FASB, to change the so-
called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-
market price to all of their assets. If they had a balance sheet full of securities they had bought
at $3 that were now only worth $1, they had to figure their year-end accounting using that $1
value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't
invite your shareholders to a slate of pork dinners come year-end accounting time.
But last April, FASB changed all that. From now on, it announced, banks could avoid reporting
losses on some of their crappy cat investments simply by declaring that they would "more
likely than not" hold on to them until they recovered their pig value. In short, the banks didn't
even have to
actually
hold on to the toxic crap they owned they just had to
sort of
promise
to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we
have absolutely no idea how many cats are in their proverbial bag. What they call "profits"
might really be profits, only
minus
undeclared millions or billions in losses.
"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the
banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market
on the way up don't have to mark to market on the way down."
CON #4
THE RUMAN:~AN
BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote
the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This
was a little machine that a mark would put a blank piece of paper into, only to see real
currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over
again for vast sums but he's been outdone by the modern barons of Wall Street, who
managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights the challenge of placing this era
in any kind of historical context of known financial crime. What the banks did was something
that was never and never could have been thought of before. They took so much moneyi0-001
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from the government, and then did so little with it, that the state was forced to start printing
new cash to throw at them. Even the great Lustig in his wildest, craziest of dreams could never
have dreamed up
this
one.
The setup: By early 2009, the banks had already replenished themselves with billions if not
trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided
by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed
banks to collect interest on the cash they were required by law to keep in reserve accounts at
the Fed meaning the state was now compensating the banks simply for guaranteeing their
own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program
let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and
borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's
good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins,
the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the
government's standpoint, was to spark a national recovery: We refill the banks' balance sheets,
and they, in turn, start to lend money again, recharging the economy and producing jobs. "The
banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street
who nevertheless defends the initial decision to bail out the banks. "It was vitally important
that we recapitalize these institutions."
But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing
interest rates down to nothing and showering the banks with mountains of guarantees,
Goldman and its friends had still not jump-started lending again by the first quarter of 2009.
That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and
other banks basically threatened to pick up their bailout billions and go home if the government
didn't fork over more cash a
lot
more. "Even if the Fed could make interest rates negative,
that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius.
"We're in a deep recession mainly because the private sector, for a variety of reasons, has
decided to save a lot more."
Translation: You can lower interest rates all you want, but we're still not lending the bailout
money to anyone in this economy. Until the government agreed to hand over even more
goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid
they had received in the form of bonuses and compensation.
The ploy worked. In March of last year, the Fed sharply expanded a radical new program called
quantitative easing, which effectively operated as a real-live Rumanian Box. The government
put stacks of paper in one side, and out came $1.2 trillion "real" dollars.
The government used some of that freshly printed money to prop itself up by purchasing
Treasury bonds a desperation move, since Washington's demand for cash was so great post-
toxic scam '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America
afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort
to spur home lending instantly creating a massive market for major banks.
And what did the banks do with the proceeds? Among other things, they bought Treasury
bonds, essentially lending the money back to the government, at interest. The money that
came out of the magic Rumanian Box went from the government back to the government, with
Wall Street stepping into the circle just long enough to get paid. And once quantitative easing
ends, as it is scheduled to do in March, the flow of money for home loans will once again grind
to a halt. The Mortgage Bankers Association expects the number of new residential mortgages
to plunge by 40 percent this year.
CON #5
THE BIG MITT
All of that Rumanian box paper was made even more valuable by running it through the nexti0-001
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stage of the grift. Michael Masters, one of the country's leading experts on commodities trading,
compares this part of the scam to the poker game in the Bill Murray comedy
Stripes.
"It's like
that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see
your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy
has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what
it's like. It's like they're looking at your cards as they give you advice."
In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the
con man's name for a rigged poker game. Everybody was indeed looking at everyone else's
cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.
At the same time the Fed and the Treasury were making massive, earthshaking moves like
quantitative easing and TARP, they were also consulting regularly with private advisory boards
that include every major player on Wall Street. The Treasury Borrowing Advisory Committee
has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman,
while the board advising the Fed includes bankers from Capital One and Bank of New York
Mellon. That means that, in addition to getting great gobs of free money, the banks were also
getting clear signals about
when
they were getting that money, making it possible to position
themselves to make the appropriate investments.
One of the best examples of the banks blatantly gambling, and winning, on government moves
was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by
goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds
and other private investors to buy up the absolutely most toxic horsecrap on the market the
same kind of high-risk, high-yield mortgages that were most responsible for triggering the
financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the
bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped
those mortgages into securities and then sold them off to pensions and other suckers as
investment-grade deals. The whole point of the PPIP was to get private investors to relieve the
banks of these dangerous assets before they hurt any more innocent bystanders.
But what did the banks do instead, once they got wind of the PPIP? They started
buying
that
worthless crap again, presumably to sell back to the government at inflated prices! In the third
quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add
$3.36 billion of exactly this horsecrap to their balance sheets.
This brazen decision to gouge the taxpayer startled even hardened market observers. According
to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous"
that the banks that were supposed to be reducing their exposure to these volatile instruments
were instead loading up on them in order to make a quick buck. "Some of them created this
mess," he said, "and they are making a killing undoing it."
CON
#6 THE WXRE
Here's the thing about our current economy. When Goldman and Morgan Stanley transformed
overnight from investment banks into commercial banks, we were told this would mean a new
era of "significantly tighter regulations and much closer supervision by bank examiners," as
?-he
New York Times
put it the very next day. In reality, however, the conversion of Goldman and
Morgan Stanley simply completed the dangerous concentration of power and wealth that began
in 1999, when Congress repealed the Glass-Steagall Act the Depression-era law that had
prevented the merger of insurance firms, commercial banks and investment houses. Wall Street
and the government became one giant dope house, where a few major players share valuable
information between conflicted departments the way junkies share needles.
One of the most common practices is a thing called front-running, which is really no different
from the old "Wire" con, another scam popularized in
?-he Sting.
But instead of intercepting a
telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is
make bets ahead of valuable information they obtain in the course of everyday business.i0-001
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Say you're working for the commodities desk of a big investment bank, and a major client a
pension fund, perhaps calls you up and asks you to buy a billion dollars of oil futures for
them. Once you place that huge order, the price of those futures is almost guaranteed to go
up. If the guy in charge of asset management a few desks down from you somehow finds out
about that, he can make a fortune for the bank by betting ahead of that client of yours. The
deal would be instantaneous and undetectable, and it would offer huge profits. Your own client
would lose money, of course he'd end up paying a higher price for the oil futures he ordered,
because you would have driven up the price. But that doesn't keep banks from scamming their
own customers in this very way.
The scam is so blatant that Goldman Sachs actually warns its clients that something along
these lines might happen to them. In the disclosure section at the back of a research paper the
bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds
while admitting that the bank itself may bet
against
those same worthless bonds. "Our
salespeople, traders and other professionals may provide oral or written market commentary or
trading strategies to our clients and our proprietary trading desks that reflect opinions that are
contrary to the opinions expressed in this research," the disclosure reads. "Our asset-
management area, our proprietary-trading desks and investing businesses may make
investment decisions that are inconsistent with the recommendations or views expressed in this
resea rch ."
Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that
require banks to engage in "fair dealing with customers" and prohibit analysts from issuing
opinions that are at odds with what they really think. And yet here they are, saying flat-out
that they may be issuing an opinion at odds with what they really think.
To help them scam their own clients, the major investment banks employ high-speed computer
programs that can glimpse orders from investors before the deals are processed and then make
trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but
everybody knows what this computerized trading known as "flash trading" really is. "Flash
trading is nothing more than computerized front-running," says the prominent hedge-fund
manager. The SEC voted to ban flash trading in September, but five months later it has yet to
issue a regulation to put a stop to the practice.
Over the summer, Goldman suffered an embarrassment on that score when one of its
employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading
code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti
reported that "the bank has raised the possibility that there is a danger that somebody who
knew how to use this program could use it to manipulate markets in unfair ways."
Six months after a federal prosecutor admitted in open court that the Goldman trading program
could be used to unfairly manipulate markets, the bank released its annual numbers. Among
the notable details was the fact that a staggering 76 percent of its revenue came from trading,
both for its clients and for its own account. "That is much, much higher than any other bank,"
says Prins, the former Goldman managing director. "If I were a client and I saw that they were
making this much money from trading, I would question how badly I was getting taken for a
sucker."
Why big institutional investors like pension funds continually come to Wall Street to
get scammed is the million-dollar question that many experienced observers puzzle over.
Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony
before a government panel in January, Blankfein was confronted about his firm's practice of
betting against the same sorts of investments it sells to clients. His response: "These are the
professional investors who want this exposure."
In other words, our clients are big boys, so scam 'em if they're dumb enough to take the sucker
bets I'm offering.
CON #7
THE RELOADi0-001
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Not many con men are good enough or brazen enough to con the same victim twice in a row,
but the few who try have a name for this excellent sport:
reloading.
The usual way to reload on
a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the
money he just lost. This is exactly what started to happen late last year.
It's important to remember that the housing bubble itself was a classic confidence game the
Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off
with money from new investors to keep up what appear to be high rates of investment return.
Residential housing was never as valuable as it seemed during the bubble; the soaring home
values were instead a reflection of a continual upward rush of new investors in mortgage-
backed securities, a rush that finally collapsed in 2008.
But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A
bailout policy that was designed to help us get out from under the bursting of the largest asset
bubble in history inadvertently produced exactly the opposite result, as all that government-
fueled capital suddenly began flowing into the most dangerous and destructive investments all
over again. Wall Street was going for the reload.
A lot of this was the government's own fault, of course. By slashing interest rates to zero and
flooding the market with money, the Fed was replicating the historic mistake that Alan
Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before
the housing bubble in the early 2000s. By making sure that traditionally safe investments like
CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates,
investors were forced to go elsewhere to search for moneymaking opportunities.
Now we're in the same situation all over again, only far worse. Wall Street is flooded with
government money, and interest rates that are not just low but flat are pushing investors to
seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund
trader.) Some of that money could be put to use on Main Street, of course, backing the efforts
of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do.
"They don't seem to want to lend to small and medium-sized business," says Rep. Brad
Sherman, who serves on the House Financial Services Committee. "What they want to invest in
is marketable securities. And the definition of small and medium-sized businesses, for the most
part, is that they don't
have
marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major, publicly traded company, or a
giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil
futures, or some country's debt, or anything else that can be rapidly traded back and forth in
huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.
So with small business out of the picture, and the safe stuff not worth looking at thanks to the
Fed's low interest rates, where did Wall Street go? Right back into the crap cake that got us
here.
One trader, who asked not to be identified, recounts a story of what happened with his hedge
fund this past fall. His firm wanted to short that is, bet against all the crap toxic bonds
that were suddenly in vogue again. The fund's analysts had examined the fundamentals of
these instruments and concluded that they were absolutely not good investments.
So they took a short position. One month passed, and they lost money. Another month
passed same thing. Finally, the trader just shrugged and decided to change course and buy.
"I said, 'heck with it, let's make some money,'" he recalls. "I absolutely did not believe in the
fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know
when to jump out of the car before it goes off the cliff!"
This is the very definition of bubble economics betting on crowd behavior instead of on
fundamentals. It's old investors betting on the arrival of new ones, with the value of the
underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the
biggest firms on Wall Street.i0-001
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The research report published by Goldman Sachs on January 15th underlines this sort of
thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic
crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our
views," the bank wrote, "we expect robust flows.., to dominate fundamentals." In other
words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too.
Just like tech stocks in 1999, and mortgage-backed securities in 2006.
To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money
from the government, sit on it until the government starts printing trillions of dollars in a
desperate attempt to restart the economy, buy even more toxic assets to sell back to the
government at inflated prices and then, when all else fails, start driving us all toward the cliff
again with a frank and open endorsement of bubble economics. I mean, crimany who
wouldn't deserve billions in bonuses for doing all that?
Con artists have a word for the inability of their victims to accept that they've been scammed.
They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging
disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules
or incompetent regulators, although both of these things are certainly true. The real problem is
that it doesn't matter what regulations are in place if the people running the economy are rip-
off artists. The system assumes a certain minimum level of ethical behavior and civic instinct
over and above what is spelled out by the regulations. If those ethics are absent well, this
thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law,
but it's also easy. To prevent it, we depend, for the most part, not on cops but on people
making the conscious decision not to do it.
That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The
most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're
Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all
down with them in a giant Ponzi scheme, we have showered them with money and guarantees
and all sorts of other enabling gestures. And what should really freak everyone out is the fact
that Wall Street immediately started skimming off its own rescue money. If the bailouts
validated anew the crooked psychology of the bubble, the recent profit and bonus numbers
show that the same psychology is back, thriving, and looking for new disasters to create. "It's
evidence," says Rep. Kanjorski, "that they still don't get it."
More to the point, the fact that we haven't done much of anything to change the rules and
behavior of Wall Street shows that
we
still don't get it. Instituting a bailout policy that stressed
recapitalizing bad banks was like the addict coming back to the con man to get his lost money
back. Ask yourself how well that ever works out. And then get ready for the reload.
[From RollingStone Issue 1099 March 4, 2010---edited for profanity by me]
by Matt Taibbi:
