Nothing Was Sacred: The Theft of the American Dream...

http://jessescrossroadscafe.blogspot.com/2010/07/phil-it-is-end-of-world-as-we-know-it.html

Posted by Jesse at 1:07 PM - July 17, 2010

America must decide what type of country it wishes to be, and then conform public and foreign policy to those ends, and not the other way around. Politicians have no right to subjugate the constitutional process of government to any foreign organization.

Secrecy, except in very select military matters, is repugnant to the health of a democratic government, and is almost always a means to conceal a fraud. Corporations are not people, and do not have the rights of individuals as such.

Banks are utilities for the rational allocation of capital created by savings, and as utilities deserve special protections. All else is speculation and gambling. In banking, simpler and more stable is better. Low cost rules, as excessive financialisation is a pernicious tax on the real economy.

Financial speculation, as opposed to entrepreneurial investment, creates little value, serving largely to transfer wealth from the many to the few, often by exploiting the weak, and corrupting the law. It does serve to identify and correct market inefficiencies, but this benefit is vastly overrated, because those are quickly eliminated. As such it should be allowed, but tightly regulated and highly taxed as a form of gambling.

When the oligarchy's enablers, hired help is the politer word, and assorted useful idiots ask, "But how then will we do this or that?" ask them back, "How did we do it twenty years ago?" Before the financial revolution and the descent into a bubble economy and a secretive and largely corrupted government with a GDP whose primary product is fraud.

Other nations, such as China, are surely acting for their own interests, and in many cases the interests of their people, much more diligently and effectively than the kleptocrats who are in power in Washington and New York these days. How then could we possibly subvert the Constitution and the welfare of the people to unelected foreign organizations? If this requires a greater reliance on self-sufficiency, then so be it. America is large enough to see to its own, as the others see to theirs.

Economics will not provide any answers in and of itself. Economics without an a priori policy and morality, without a guiding principle like the Constitution, is a heartless monster easily manipulated to say whatever one wishes it to say, if they are willing to pay enough economists to say it. Its reputation as a science is greatly exaggerated.

"Eliminating government" is a trap put forward by the plutocrats for those unable to reason except by prejudice, as they desire to exercise their power unimpeded by the rule of law. Once you knock down the protections and the safeguards in the name of reform, the wolves will turn on the public in an orgy of looting and exploitation. This is an old story, and sadly it often works.

Efficient markets hypothesis is almost as great a hoax as the benefits of globalization and 'free trade' have been to the American people as a whole. These things are promoted by the few, at the expense of the gullible many, for their own personal benefit.

Hatred, mean spiritedness, and resentment of the weak, the old, the different, is a trick played on the masses by oligarchs and would be dictators from time immemorial. They play to the darker side of the crowd. It is a trap, and the means to the demise of freedom. And these tricksters play it well, because deceit is their specialty, their stock in trade.

"First they ignore you, then they ridicule you, then they fight you, then you win." - Mohandas K. Gandhi

So it will not be easy, and it is a mistake to think that it will be. But what greater task can we set ourselves to, other than justice and freedom for ourselves and children?


It’s the End of the World As We Know It:

By Phil of Phil’s Stock World

What are 308,367,109 Americans supposed to do?



First of all, despite clamping down on immigration, our population grew by 2.6M people last year. Unfortunately, not only did we not create jobs for those 2.6M new people but we lost about 4M jobs so what are these new people going to do? Not only that, but nobody is talking about the another major job issue: People aren’t retiring! They can’t afford to because the economy is bad – that means there are even less job openings… The pimply faced kid can’t get a job delivering pizza because his grandpa’s doing it.

There are some brilliant pundits who believe cutting retirement benefits will fix our economy. How will that work exactly? Pay old people less money, don’t cover their medical care and what happens? Then they need money. If they need money, they need to work and if they need to work they increase the supply of labor, which reduces wages and leaves all 308,367,109 of us with less money. Oh sorry, not ALL 308,367,109 – just 308,337,109 – the top 30,000 (0.01%) own the business the other 308,337,109 work at and they will be raking it in because labor is roughly 1/3 of the cost of doing business in America and our great and powerful capitalists have already cut their manufacturing costs by shipping all those jobs overseas, where they pay as little as $1 a day for a human life so now, in order to increase their profits (because profits MUST be increased) they have now turned inward to see what they can shave off in America.



How does one decrease the cost of labor in America?

Well first, you have to bust the unions. Check. Then you have to create a pressing need for people to work – perhaps give them easy access to credit and then get them to go so deeply into debt that they will have to work until they die to pay them off. Check. It also helps if you push up the cost of living by manipulating commodity prices. Check. Then, take away people’s retirement savings. Check. Lower interest rates to make savings futile and interest income inadequate. Check. And finally, threaten to take away the 12% a year that people have been saving for retirement by labeling Social Security an “entitlement” program – as if it wasn’t money Americans worked their whole lives to save and gave to the government in good faith. Check.

As Allen Smith says:

“Ronald Reagan and Alan Greenspan pulled off one of the greatest frauds ever perpetrated against the American people in the history of this great nation, and the underlying scam is still alive and well, more than a quarter century later. It represents the very foundation upon which the economic malpractice that led the nation to the great economic collapse of 2008 was built. Essentially, Reagan switched the federal government from what he critically called, a “tax and spend” policy, to a “borrow and spend” policy, where the government continued its heavy spending, but used borrowed money instead of tax revenue to pay the bills. The results were catastrophic. Although it had taken the United States more than 200 years to accumulate the first $1 trillion of national debt, it took only five years under Reagan to add the second one trillion dollars to the debt. By the end of the 12 years of the Reagan-Bush administrations, the national debt had quadrupled to $4 trillion!“

Both Reagan and Greenspan saw big government as an evil, and they saw big business as a virtue. They both had despised the progressive policies of Roosevelt, Kennedy and Johnson, and they wanted to turn back the pages of time. They came up with the perfect strategy for the redistribution of income and wealth from the working class to the rich. If Reagan had campaigned for the presidency by promising big tax cuts for the rich and pledging to make up for the lost revenue by imposing substantial tax increases on the working class, he would probably not have been elected. But that is exactly what Reagan did, with the help of Alan Greenspan. Consider the following sequence of events:

1) President Reagan appointed Greenspan as chairman of the 1982 National Commission on Social Security Reform (aka The Greenspan Commission)

2) The Greenspan Commission recommended a major payroll tax hike to generate Social Security surpluses for the next 30 years, in order to build up a large reserve in the trust fund that could be drawn down during the years after Social Security began running deficits.

3) The 1983 Social Security amendments enacted hefty increases in the payroll tax in order to generate large future surpluses.

4) As soon as the first surpluses began to role in, in 1985, the money was put into the general revenue fund and spent on other government programs. None of the surplus was saved or invested in anything. The surplus Social Security revenue, that was paid by working Americans, was used to replace the lost revenue from Reagan’s big income tax cuts that went primarily to the rich.

5) In 1987, President Reagan nominated Greenspan as the successor to Paul Volcker as chairman of the Federal Reserve Board. Greenspan continued as Fed Chairman until January 31, 2006. (One can only speculate on whether the coveted Fed Chairmanship represented, at least in part, a payback for Greenspan’s role in initiating the Social Security surplus revenue.)

6) In 1990, Senator Daniel Patrick Moynihan of New York, a member of the Greenspan Commission, and one of the strongest advocates the 1983 legislation, became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike. Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot. President Bush would have no part of repealing the payroll tax hike. The “read-my-lips-no-new-taxes” president was not about to give up his huge slush fund.

The practice of using every dollar of the surplus Social Security revenue for general government spending continues to this day. The 1983 payroll tax hike has generated approximately $2.5 trillion in surplus Social Security revenue which is supposed to be in the trust fund for use in paying for the retirement benefits of the baby boomers. But the trust fund is empty! It contains no real assets. As a result, the government will soon be unable to pay full benefits without a tax increase. Money can be spent or it can be saved. But you can’t do both. Absolutely none of the $2.5 trillion was saved or invested in anything.

That is how the largest theft in the history of the world was carried out.

300M people worked and saved their whole lives to set aside $2.5Tn into a retirement system that, if it were paying a fair compounding rate of 5% interest over 40 years of labor (assuming an even $62Bn a year was contributed), would be worth $8.4Tn today – enough money to give 100M workers $84,000 each in cash!

The looting of FICA hid the massive deficits of the last 30 years in the Unified Budget. Presidents and Congresses were able to reduce taxes on the wealthiest Americans without complaint from the deficit hawks, because they benefited. The money went directly from the pockets of average Americans into the pockets of the rich.



Now that it is time to repay those special bonds in the Trust Fund, we are inundated in opinion pieces in the leading newspapers and magazines complaining about Social Security and its horrible impact on the budget. Government finances have been trashed by foolish tax cuts, unpaid wars, tax loopholes for corporations and the very wealthy, the failures of economists, the greedy search for greater returns in financial markets and the collapse of moral values in giant businesses, but Social Security is supposed to be the problem that needs fixing…

Social Security is not “broken“–the money is in the Trust Fund. But the people who manage the finances of the United States don’t want to repay the bonds held by the Trust Fund. They want to default selectively against average people, their fellow citizens, who paid their taxes expecting to be protected in their retirement. Refusing to repay the $2.54 trillion dollars in bonds held by the Social Security Trust makes the US look like Greece, just another nation unable to govern itself coherently. The people who manage US finances come from the financial elites, the best that Wall Street and enormous corporations have to offer. Selective default exposes them as charlatans. The claims of the economics profession to expertise are puffery. Their theories about the benefits of tax cuts are proven false. Their mathematical proofs about free markets collapse in the real world.



So, what is this all about? It’s about forcing 5M people a year who reach the age 65 to remain in the work-force. The top 0.01% have already taken your money, they have already put you in debt, they have already bankrupted the government as well so it has no choice but to do their bidding. Now the top 0.01% want to make even MORE profits by paying American workers even LESS money. If they raise the retirement age to 70 to “balance” Social Security – that will guarantee that another 25M people remain in the workforce (less the ones that drop dead on the job – saving the bother of paying them severance).

What’s next? Is it fair to say that children can’t work in a struggling family business? Isn’t it to everybody’s benefit that kids should be allowed to help out at the family store? That will be the next step towards turning America into a 3rd World country. The seemingly innocent concept of “letting” kids work will deprive another 5M people of paying jobs – throwing them out into the labor force as well and driving labor costs down even further.

There’s an expression that goes “give them an inch and they’ll take a yard.” The top 0.01% of this country have taken their inches and they are foreclosing on the yards and they will come for the rest of your stuff next. If you think you are “safe” from the looting of America, it is only because they haven’t gotten around to you yet. As I explained in “America is 234 Years Old Today – Is It Finished?” – the game is rigged very much like a poker tournament. The people at the top table don’t care how well you do wiping out your fellow players at the lower tables, they know they will get you eventually and your efforts to scoop up a pile of cash for yourself simply makes their job easier when they are ready to take it from you.



The average American is $634,000 in debt thanks to the efforts that Reagan and Greenspan put in motion 30 years ago and the richer you are, the more of that money is going to come out of your hide eventually and the more you lobby to make sure that the “rich” are not taxed unfairly, the less fair it will be to you because, no matter how rich you THINK you are, unless your income is measured in MILLIONS PER MONTH, you aren’t even close to the top 30,000.

No progressive tax? That means that people and corporations who make $1M PER DAY should pay no more tax than a person making $1M per year, right? Well that means that the $2.5M debt that your family of four owes will be paid by you over 2.5 years of labor while the $2.5M owed by your Billionaire competitor will be paid over a long weekend, after which he can turn his attention back to crushing your business by creating cheaper goods – maintaining profit margins by driving down local labor costs and outsourcing the rest.

It’s a new world, America, and you’d better get used to it – we were sold down the river on a slow boat to China long ago and we’re only just beginning to feel the first effects of waves that wash back to our own shores. The people who own the media don’t want CHANGE. That’s why you never hear this stuff in the MSM – things are going exactly according to plan and the old money crowd is playing a long, patient game and they already have most of the chips – the last thing they want is people questioning the system…

http://www.philstockworld.com/2010/07/17/its-the-end-of-the-world-as-we-know-it/

Dead On Arrival: Financial Reform Fails:

http://stockmarketchartanalyst.blogspot.com/

By Simon Johnson - June 21, 2010 at 7:04 am

The House-Senate reconciliation process is still underway and some details will still change. But the broad contours of “financial reform” are already completely clear; there are no last minute miracles at this level of politics. The new consumer protection agency for financial products is a good idea and worth supporting – assuming someone sensible is appointed by the president to run it. Yet, at the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit cycle.

Go, for example, through the summary of “comprehensive financial regulatory reform bills” in President Obama’s letter to the G20 last week.

The president argues for more capital in banking – and this is a fine goal, particularly as the Europeans continue to drag their feet on this issue. But how much capital does his Treasury team think is “enough”? Most indications are that they will seek tier one capital requirements in the range of 10-12 percent – which is what Lehman had right before it failed. How would that help?

“Stronger oversight of derivatives” is also on the president’s international agenda but this cannot be taken seriously, given how little Treasury and the White House have pushed for tighter control of derivatives in the US legislation. If Senator Lincoln has made any progress at all – and we shall see where her initiative ends up – it has been without the full cooperation of the administration. (The WSJ today has a more positive interpretation, but even in this narrative you have to ask – where was the administration on this issue in the nine months of intense debate and hard work prior to April? Have they really woken up so recently to the dangers here?)

“More transparency and disclosure” sounds fine but this is just empty rhetoric. Where is the application – or strengthening if necessary – of anti-trust tools so that concentrated market share in over-the-counter derivatives can be confronted. The White House is making something of a show from Jamie Dimon falling out of favor, but all the points of substance that matter, Dimon’s JP Morgan Chase has won. The Securities and Exchange Commission is beginning to push in the right direction, but the reconciliation conference looks likely to deny them the self-funding – CFTC and FDIC, for example, collect fees from the industry – that could help build as a regulator. At the same time, the conference legislation would send a large number of important questions to the SEC “for further study”. None of this makes any sense – unless the goal is to block real reform.

The president also asks for a “more effective framework for winding down large global firms” but his experts know this is politically impossible. The G20 (and other) countries will not agree to such a cross-border resolution mechanism – and this was an important reason why Senators Sherrod Brown and Ted Kaufman argued so strongly that big banks had to become smaller (and be limited in how much they could borrow). Now administration officials brag to the press, on the record, about how they killed the Brown-Kaufman amendment. These people – in the White House and around the Treasury – simply cannot be taken seriously.

And as for “principles for the financial sector to make a fair and substantial contribution towards paying for any burdens”, this is a sad joke. This is not an oil spill, Mr. President. This is the worst recession since World War II, a 40 percentage points increase in government debt (attempting to prevent a Second Great Depression), loss of at least 8 million jobs in the United States, and a painfully slow recovery (in terms of unemployment) – not to mention all the collateral damage in so many parts of the world, including Europe. Could someone in the White House at least come to terms with this issue and provide the president with a sensible and clear text? Honestly, as staff work, this is embarrassing.

There is great deference to power in the United States, and perhaps that is appropriate. But those now calling the shots should remember that they will not be in power for ever and – at some point in the not too distant future – there will be a more balanced assessment of their legacies.

Simply claiming that the president is “tough” on big banks simply will not wash. There are too many facts, too much accumulated evidence, pointing exactly the other way. The president signed off on the most generous and least conditional bailout in world financial history. This is now widely understood. The administration has scrambled to create some political cover in terms of “reform” – but the lack of substance here is already clear to people who follow it closely and public perceptions will shift quickly.

The financial crisis of fall 2008 revealed serious dangers have developed in the heart of the world’s financial system. The Bush-Obama bailouts of 2008-09 confirmed that our biggest banks are “too big to fail” and the left, center, and right can agree with Gene Fama when he says: “too big to fail” is perverting activities and incentives.

This is not a leftist message, although you hear people on the left make the point. But people on the right also increasingly understand what is going on – there is excessive and abusive power at the heart of our financial system that completely distorts markets (and really amounts to a hidden, unfair and dangerous taxpayer subsidy).

This administration and this Congress had ample opportunity to confront this problem and at least wrestle hard with it. Some senators and representatives worked long and hard on precisely this issue. But the White House punted, repeatedly, and elected instead for a veneer of superficial tweaking. Welcome to the next global credit cycle – with too big to fail banks at center stage.

http://baselinescenario.com/2010/06/21/dead-on-arrival-financial-reform-fails/#more-7767

SEC Launches 'Circuit Breaker' Rules For Stocks:

http://www.sec.gov/news/press/2010/2010-80.htm

by The Associated Press - June 10, 2010

Federal regulators have put in place new rules aimed at preventing a repeat of last month's harrowing "flash crash" in the stock market.

Members of the Securities and Exchange Commission on Thursday approved the rules, which call for U.S. stock exchanges to briefly halt trading of some stocks that have big swings.

The exchanges will start putting the trading breaks into effect as early as Friday for six months.

The plan for the "circuit breakers" was worked out by the SEC and the major exchanges following the May 6 market plunge that saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour.

"Under the proposed rules, which are subject to Commission approval following the completion of the comment period, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010."

More Investigations on Wall Street:

Things are Heating Up for the Banks...Wall Street Probe Widens:

http://seekingalpha.com/article/204854-more-investigations-on-wall-street?source=yahoo

by Susan Pulliam, Kara Scannell, Aaron Lucchetti, and Serena Ng,WSJ:

Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter.

The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals... Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal. ...

At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs. ...

Prosecutors so far are simply gathering evidence. ... It's possible the probe could end with no charges being brought against any of the firms. ...

And:

Prosecutors Ask if 8 Banks Duped Rating Agencies, by Louise Story, NY Times:

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities...

The investigation parallels federal inquiries into ... interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities. ... The inquiry ... suggests that ... the agencies may have been duped by one or more of ... Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch...

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. ... Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is ... interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved... His ... focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive...

Edmund Andrews says financial reform legislation is not yet a done deal, and could still be watered down to appease banking interests:

Financial overhaul, perils ahead, by Edmund L. Andrews:

It’s tempting to think that financial regulatory reform is already a done deal in Congress... Don’t be fooled. It’s true that the Senate is likely to pass some kind of bill. Unfortunately, the legislation is still at risk of death by a thousand cuts: scores of seemingly anodyne amendments that, if passed, turn the bill into a cynical joke.

You know the drill..., some people – on Wall Street, or at the banks -- want to spare us from “unintended consequences.”

Today, Senate Democrats managed to vote down a major Republican push to gut portions of the bill to regulate derivatives, like the credit-default swaps that blew apart AIG. ...

Tomorrow, Republican Sam Brownback will push an amendment to exclude car dealers from oversight by the new Consumer Financial Protection Bureau. ...

But I would like to focus on a third imminent that seems drier than derivatives or car loans but is at least as important: federal pre-emption of state financial regulations. And this time, it's moderate Dems who are carrying water for the banks.

In the run-up to the mortgage meltdown, federal bank regulators fought hard to pre-empt any state efforts to crack down on shady bank practices. A number of states, like North Carolina and New York, were trying to crack down on abusive mortgage practices by subprime lenders. But many of the lenders were subsidiaries of national banks, and the Office of the Comptroller of the Currency declared that states had no right to touch them whatsoever. ...

The amendment to watch out for in the days ahead actually comes from a Democrat: Tom Carper of Delaware. Carper’s amendment would forbid state attorney generals from prosecuting banks that violate national consumer laws, much as the fed’s blocked Elliott Spitzer and Andrew Cuomo of New York from investigating racial and ethnic targeting by subprime lenders. It would also allow the Feds to override state consumer laws...

Don’t let it happen.

The bill needs to be made stronger, not weaker, so let's hope that amendments to water down the bill's impact continue to lack the necessary support.

On a broader note, there seems to be a shift in the narrative about what caused the crisis. Fraud, deception, and other questionable if not illegal behaviors are beginning to take on a larger role in the story of what happened to bring about the problems in the financial sector. The turning point was, of course, the investigation of Goldman (GS), and the investigations have been growing more numerous ever since.

The shift in attitude has probably helped to stave off challenges designed to weaken the legislation, and if a smoking gun turns up in one of the investigations like those described above, that would likely make it even harder for banks get the political support needed to water down the legislation. But I'm not counting on that happening, and as noted above, the deal isn't done yet. It's still possible for the legislation to be weakened, and as pointed out above there's no shortage of attempts to do just that.

High Frequency Terrorism: How the Big Banks and Federal Reserve Maintained Their Death Grip Over the United States:

By David DeGraw & Max Keiser, AmpedStatus Report
Posted on Monday, May 10th, 2010 at 1:11 am

http://ampedstatus.com/high-frequency-terrorism-how-the-big-banks-and-federal-reserve-maintained-their-death-grip-over-the-united-states

The following article is the third-part of a six-part report titled: “The Financial Oligarchy Reigns: Democracy’s Death Spiral From Greece to the United States.” The full report is available here:

http://ampedstatus.com/the-financial-oligarchy-reigns-democracys-death-spiral-from-greece-to-the-united-states

III: Financial Terrorism Operations: 9/29/08 & 5/6/10

In the aftermath of Goldman Sachs’ public flogging before the world in Congress, and while under investigation, on the very day that Congress was voting on the “break up the too big to fail banks” amendment and cutting behind the scenes deals to gut the audit of the Federal Reserve, the stock market had its greatest sudden drop in history, plummeting 700 points in ten minutes - shades of September 29, 2008 all over again.

If you recall, back in September ‘08, as Congress was voting down the first bailout, the big banks made the market plunge a record 778 points in one day, fear and panic then led Congress to pass the bailout. Trillions of our tax dollars, the money that we desperately need to keep our society functioning over the long run, then went out the window and into the pockets of the very people who caused the crash.

What happened on September 29, 2008 will go down in history as one of the greatest acts of terrorism ever.

9/29/08 proved that when you have so much power concentrated in the hands of a few, you can manipulate a computer algorithm and make the market and economy go which ever way you want it to go. So on 5/6/10, just as the power of the big banks was threatened again on the floor of the Senate and a deal on auditing the Federal Reserve was being negotiated, in came a sudden and unprecedented ten-minute 700 point market drop. A precision-guided High Frequency Trading (HFT) attack to show Congress who’s boss.

If you think the massive sudden drop happened because one lowly trader hit one wrong button, if you actually believe that the entire stock market can plunge because of one mistaken key stroke by a low level trader, you are stunningly naïve. I hate to burst your bubble, but this was a direct attack.

In a market where 70% of all trades are executed by computer algorithms via High Frequency Trading (HFT), Goldman Sachs has the power to make the market crash or rise at will. In fact, Goldman has a major Weapon of Mass Destruction in its Program Trading monopoly of the New York Stock Exchange, as Tyler Durden described on Zero Hedge:

“Goldman’s dominance of the NYSE’s Program Trading platform, where in addition to recent entrant GETCO, it has been to date an explicit monopolist of the so-called Supplementary Liquidity Provider program, a role which affords the company greater liquidity rebates for, well providing liquidity, and generating who knows what other possible front market-looking, flow-prop integration benefits. Yesterday [5/6/10], Goldman’s SLP function was non-existent. One wonders - was the Goldman SLP team in fact liquidity taking, or to put it bluntly, among the main reasons for the market collapse….

… here is the most recently disclosed NYSE program trading data….

What is notable here is that of the 1.4 billion in principal shares, or shares traded for the firm’s own account, Goldman was the top trader by a margin of over 100% compared to the second biggest program trader.

We have long claimed that Goldman is the de facto monopolist of the NYSE’s program trading platform. As such, it is certainly the case that Goldman was instrumental in either a) precipitating yesterday’s crash or b) not providing the critical liquidity which it is required to do, when the time came. There are no other options.”

For further investigation, I turned to Max Keiser, who has written and authored similar Program Trading and HFT computer algorithms. I asked him if he thought this was an attack, here is what he had to say:

“May 6th was an unequivocal act of domestic financial terrorism in America. A day that will live in infamy.

To scare the lawmakers, themselves large owners of the very banks and stocks that they are supposed to be regulating, a financial Weapon of Mass Destruction was put to their head and they acquiesced.

As the inventor of the continuous double-auction, market-making technology (VST tech. US pat. no. 5950176) that is referenced 132 times by program trading and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the gang simply pulled the ‘buys’ from their computer trading programs and manufactured a crash. And when the coast was clear, and it was clear the politicians were not going to vote for anything that would break up the ‘too big to fail’ banks; all the ’sells’ were pulled from the computers and the market roared back.

This is a Manchurian Candidate market where program trading bots start the ball rolling in whatever direction Wall St. wants the market to go - and then hundreds of thousands of day-traders watching Cramer on CNBC jump on the momentum bandwagon and commit the crime for the Wall St. financial terrorists, who then say, ‘It wasn’t us, it was ‘the market!’”

On Friday, the next day, after the “break up the too big to fail banks” amendment was soundly defeated by a 61 to 33 margin in Senate and a deal was struck to eliminate key provisions from the audit of the Federal Reserve bill, Goldman was meeting with the SEC to work out a settlement in their case against them. Once again, Goldman proves that crime pays. Welcome to the New Mafia World Order.

Other than the two major operations carried out on 9/29/08 and 5/6/10, we must also recall a smaller attack on January 21st and 22nd of 2010, when Obama had a press conference and came out in favor of the Volcker Rule, which would have limited these HFT and “proprietary trading” schemes. At that time, the market dropped 430 points. Soon after this attack, all follow up talk on the Volcker Rule faded away and this reform has not been seriously addressed by Obama since then.

The bottom line, the United States has been taken over by a financial terrorism network. Let’s face it, we are all hostages of these financial terrorists and our puppet politicians rather be in on the scam than defend our interests. If these terrorists don’t get their way at all times, they have the power to throw their tremendous weight around and turn millions of lives upside down in a matter of minutes, and as they have shown they have no hesitation in executing that power, no matter how many millions of lives they destroy.

They set off this crisis with a wave of bombings in their initial Economic Shock and Awe campaign two years ago, resulting in massive devastation. Just to name a few of their greatest hits within the U.S.:

* 50 million Americans are now living in poverty, which is the highest poverty rate in the industrialized world;

* 30 million Americans are in need of work;

* Five million American families foreclosed upon, 15 million expected by 2014;

* 50% of US children will now use a food stamp during childhood;

* Soaring budget deficits in states across the country and a record high national debt, with austerity measures on the way;

* Record-breaking profits and bonuses for themselves.

Like other terrorists, they don’t use IEDs, they use CDOs. They don’t use precision laser-guided missiles, they use High Frequency Trading. They don’t have WMDs, they have derivatives. Let’s also not forget that they have toxic assets and dirty debt bombs just waiting to be deployed upon the American public once there is any true growth in the economy. Their nuclear arsenal includes hundreds of Trillions in secretive derivatives and hidden debt bombs, just ticking away, waiting to be set off… at their whim...

High-Speed Trading Glitch Costs Investors Billions:

On Thursday May 6, 2010, 9:22 pm EDT

http://tinyurl.com/2b43wk8

The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200.

The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets Thursday.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at Georgetown University’s McDonough School of Business.

In recent years, what is known as high-frequency trading — rapid computerized buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.

In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on other, computerized exchanges.

Many questions were left unanswered even hours after the end of the trading day. Who or what was the culprit? Why did markets spin out of control so rapidly? What needs to be done to prevent this from happening again?

The Nasdaq exchange said it would cancel trades that moved shares more than 60 percent up or down at 2:40 p.m., when stocks like Accenture plummeted to a penny a share, for seemingly no reason. Exelon, the utility operator, fell to a hundredth of a penny, from $44.

Procter & Gamble, a big component of the Dow Jones industrial average, dived 37 percent for a brief time before rebounding. The move by Procter alone pushed down the Dow by more than 150 points, providing cause for a broad alarm among investors, followed by panicked selling.

The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were examining the cause of the unusual trading activity.

Mary Schapiro, the chief of the S.E.C., and Gary Gensler, the head of the C.F.T.C., held conference calls with overseers of the exchanges who were reviewing trading tapes from the day.

One official said they identified “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” at about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across all indexes and spiraled out of control.

How the markets managed to snap back remained a question Thursday night.

The near-instantaneous swings left brokers dumbfounded. Dermott W. Clancy, who runs a New York Stock Exchange broker, said Thursday was one of the five worst days he has seen in 24 years in the business. When the market dropped across all indexes in a matter of minutes, customers were calling him nonstop.

“They’re calling saying ‘Is there something I’m missing? Is there somebody valuing these securities at this level? Is there some news in the marketplace I’m not aware of?’ ” he said.

The answer — that it all started with an apparent error — infuriated Mr. Clancy. “There are so many things wrong with what happened today,” he said. “The market was never down one thousand points. Procter & Gamble should never have traded at $39. But a lot of people lost money as if the prices were meant to drop. This is an injustice to the public.”

The whole trading system, Mr. Clancy said, went into what brokers call “slow mode.” When the large sell order came in, the market makers for each of those stocks were overwhelmed trying to sell that order and they could not take other orders. It was sort of like a traffic jam on one highway that spread to create traffic jams everywhere.

Suddenly, traders started to distrust what they were seeing.

“There was no pricing mechanism,” Mr. Clancy said. “There was nothing. No one knew what anything was worth. You didn’t know where to buy a stock or sell a stock. You didn’t know if the market was down $500 or $1,000.”

Ten Ways the American Economy Is Built on Fraud:

This summary is not available. Please click here to view the post.

$GS - The Death of Goldman Sachs:

Steven G. Brant
Posted: April 27, 2010 06:58 PM

http://www.huffingtonpost.com/steven-g-brant/the-death-of-goldman-sach_b_554371.html

I saw something die today. It didn't die accidentally either. It was killed.

This was a very painful event to watch, not just because death is tragic and not because this death was intentional rather than accidental.

It was very painful to watch because the thing being killed didn't even know it was dying... and it didn't know it was actually participating in its own death. It didn't know it was helping the hangman not just put the noose around its neck but helping the hangman open the trap door under its feet.

What died today was Goldman Sachs. It has existed for 140 years. But today all that ended, as the head of Goldman Sachs, Lloyd Blankfein, in his prepared remarks before the Senate Governmental Affairs Subcommittee on Investigations, said "We have been a client-centered firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive."

That was Lloyd Blankfein putting the noose around Goldman Sachs' neck.

And then - in his opening exchange with Subcommittee chair Senator Carl Levin - Lloyd Blankfein proved that Goldman Sachs absolutely, positively does not deserve the trust of its clients.

That was Lloyd Blankfein helping open the door under Goldman Sachs' feet.

In his Senate appearance, Lloyd Blankfein participated in the death of his own company. It was really a stunning thing to watch.

I expect Goldman Sachs to be out of business by the end of this year and maybe before the November election. That's just my opinion, of course. But I'll justify it in a moment.

I will post C-Span's coverage of this testimony as soon as it's available. I predict it will be viewed for years to come by students of business ethics but also by students of famous moments in the civic life of America. I believe this moment will be seen on par with the famous incident in which Senator McCarthy was brought down with the simple question "Have you no sense of decency?"

Senator Carl Levin's simple question - the one that killed Goldman Sachs - was "Do you think it's proper for Goldman Sachs to bet against the security it is selling to a client without telling that client that it is making that bet?"

(I will check the transcript later, to make sure I have the wording of this question correct.)

Mr. Blankfein said over and over again that it was proper for Goldman Sachs to do what they had done. He even said at one point that the minute Goldman Sachs sells something to its customer, it no longer owns that security and has "the opposite interest" to its client regarding that security. This was just one of many breathtaking moments, as I could tell that Mr. Blankfein had no idea what he was doing to his firm.

In late 2001, the collapse of ENRON led to the death of the legendary accounting firm Arthur Andersen.

Arthur Anderson's reputation was unmatched in the field; but, in 2002, Arthur Andersen was found guilty of criminal charges related to its auditing of ENRON and gave up its license to practice accounting.

Criminal behavior. No trust. Reputation destroyed. No customers. Firm dead

Welcome to the Arthur Andersen reality, Goldman Sachs.

Civil charges of fraud brought, and there may be more coming. No trust. Reputation destroyed. No customers. Firm dead.

What a fascinating time we are living in. If things really do play out the way they did with ENRON and Arthur Andersen - and I think they will - I guess we'll be able to say that there is such a thing as white-collar justice in America.

Lloyd Blankfein's testimony is now available on C-Span's video page.

http://www.c-spanvideo.org/program/293196-3

Matt Taibbi: The Lunatics Who Made a Religion Out of Greed and Wrecked the Economy:

The SEC's lawsuit against Goldman Sachs is a chance to prevent greed without limits...

http://www.alternet.org/story/146611/taibbi:_the_lunatics_who_made_a_religion_out_of_greed_and_wrecked_the_economy__?page=entire



April 26, 2010

So Goldman Sachs, the world's greatest and smuggest investment bank, has been sued for fraud by the American Securities and Exchange Commission. Legally, the case hangs on a technicality.

Morally, however, the Goldman Sachs case may turn into a final referendum on the greed-is-good ethos that conquered America sometime in the 80s – and in the years since has aped other horrifying American trends such as boybands and reality shows in spreading across the western world like a venereal disease.

When Britain and other countries were engulfed in the flood of defaults and derivative losses that emerged from the collapse of the American housing bubble two years ago, few people understood that the crash had its roots in the lunatic greed-centered objectivist religion, fostered back in the 50s and 60s by ponderous emigre novelist Ayn Rand.

While, outside of America, Russian-born Rand is probably best known for being the unfunniest person western civilisation has seen since maybe Goebbels or Jack the Ripper (63 out of 100 colobus monkeys recently forced to read Atlas Shrugged in a laboratory setting died of boredom-induced aneurysms), in America Rand is upheld as an intellectual giant of limitless wisdom. Here in the States, her ideas are roundly worshipped even by people who've never read her books or even heard of her. The rightwing "Tea Party" movement is just one example of an entire demographic that has been inspired to mass protest by Rand without even knowing it.

Last summer I wrote a brutally negative article about Goldman Sachs for Rolling Stone magazine (I called the bank a "great vampire squid wrapped around the face of humanity") that unexpectedly sparked a heated national debate. On one side of the debate were people like me, who believed that Goldman is little better than a criminal enterprise that earns its billions by bilking the market, the government, and even its own clients in a bewildering variety of complex financial scams.

On the other side of the debate were the people who argued Goldman wasn't guilty of anything except being "too smart" and really, really good at making money. This side of the argument was based almost entirely on the Randian belief system, under which the leaders of Goldman Sachs appear not as the cheap swindlers they look like to me, but idealized heroes, the saviors of society.

In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the "parasites" and "moochers" who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.

Rand's fingerprints are all over the recent Goldman story. The case in question involves a hedge fund financier, John Paulson, who went to Goldman with the idea of a synthetic derivative package pegged to risky American mortgages, for use in betting against the mortgage market. Paulson would short the package, called Abacus, and Goldman would then sell the deal to suckers who would be told it was a good bet for a long investment. The SEC's contention is that Goldman committed a crime – a "failure to disclose" – when they failed to tell the suckers about the role played by the vulture betting against them on the other side of the deal.

Now, the instruments in question in this deal – collateralized debt obligations and credit default swaps – fall into the category of derivatives, which are virtually unregulated in the US thanks in large part to the effort of gremlinish former Federal Reserve chairman Alan Greenspan, who as a young man was close to Rand and remained a staunch Randian his whole life. In the late 90s, Greenspan lobbied hard for the passage of a law that came to be called the Commodity Futures Modernisation Act of 2000, a monster of a bill that among other things deregulated the sort of interest-rate swaps Goldman used in its now-infamous dealings with Greece.

Both the Paulson deal and the Greece deal were examples of Goldman making millions by bending over their own business partners. In the Paulson deal the suckers were European banks such as ABN-Amro and IKB, which were never told that the stuff Goldman was cheerfully selling to them was, in effect, designed to implode; in the Greece deal, Goldman hilariously used exotic swaps to help the country mask its financial problems, then turned right around and bet against the country by shorting Greece's debt.

Now here's the really weird thing. Confronted with the evidence of public outrage over these deals, the leaders of Goldman will often appear to be genuinely confused, scratching their heads and staring quizzically into the camera like they don't know what you're upset about. It's not an act. There have been a lot of greedy financiers and banks in history, but what makes Goldman stand out is its truly bizarre cultist/religious belief in the rightness of what it does.

The point was driven home in England last year, when Goldman's international adviser, sounding exactly like a character in Atlas Shrugged, told an audience at St Paul's Cathedral that "The injunction of Jesus to love others as ourselves is an endorsement of self-interest". A few weeks later, Goldman CEO Lloyd Blankfein told the Times that he was doing "God's work".

Even if he stands to make a buck at it, even your average used-car salesman won't sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!

People have to understand this Randian mindset is now ingrained in the American character. You have to live here to see it. There's a hatred toward "moochers" and "parasites" – the Tea Party movement, which is mainly a bunch of pissed off suburban white people whining about minorities consuming social services, describes the battle as being between "water-carriers" and "water-drinkers". And regulation of any kind is deeply resisted, even after a disaster as sweeping as the 2008 crash.

This debate is going to be crystallised in the Goldman case. Much of America is going to reflexively insist that Goldman's only crime was being smarter and better at making money than IKB and ABN-Amro, and that the intrusive, meddling government (in the American narrative, always the bad guy!) should get off Goldman's Armani-clad back. Another side is going to argue that Goldman winning this case would be a rebuke to the whole idea of civilisation – which, after all, is really just a collective decision by all of us not to screw each other over even when we can. It's an important moment in the history of modern global capitalism: whether or not to move forward into a world of greed without limits.

Computerized Front Running: How A Computer Program Designed to Save the Free Market Turned Into a MONSTER!:

Ellen Brown,
April 22nd, 2010

http://www.webofdebt.com/articles/computerized_front_running.php

While the SEC is busy investigating Goldman Sachs, it might want to look into another Goldman-dominated fraud: computerized front running using high-frequency trading programs.

Market commentators are fond of talking about “free market capitalism,” but according to Wall Street commentator Max Keiser, it is no more. It has morphed into what his TV co-host Stacy Herbert calls “rigged market capitalism”: all markets today are subject to manipulation for private gain.

Keiser isn’t just speculating about this. He claims to have invented one of the most widely used programs for doing the rigging. Not that that’s what he meant to invent. His patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating “front running” – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.

Also called High Frequency Trading (HFT) or “black box trading,” automated program trading uses high-speed computers governed by complex algorithms (instructions to the computer) to analyze data and transact orders in massive quantities at very high speeds. Like the poker player peeking in a mirror to see his opponent’s cards, HFT allows the program trader to peek at major incoming orders and jump in front of them to skim profits off the top. And these large institutional orders are our money -- our pension funds, mutual funds, and 401Ks.

When “market making” (matching buyers with sellers) was done strictly by human brokers on the floor of the stock exchange, manipulations and front running were considered an acceptable (if morally dubious) price to pay for continuously “liquid” markets. But front running by computer, using complex trading programs, is an entirely different species of fraud. A minor flaw in the system has morphed into a monster. Keiser maintains that computerized front running with HFT has become the principal business of Wall Street and the primary force driving most of the volume on exchanges, contributing not only to a large portion of trading profits but to the manipulation of markets for economic and political ends.

The “Virtual Specialist”: the Prototype for High Frequency Trading:

Until recently, most market making was done by brokers called “specialists,” those people you see on the floor of the New York Stock Exchange haggling over the price of stocks. The job of the specialist originated over a century ago, when the need was recognized for a system for continuous trading. That meant trading even when there was no “real” buyer or seller waiting to take the other side of the trade.

The specialist is a broker who deals in a specific stock and remains at one location on the floor holding an inventory of it. He posts the “bid” and “ask” prices, manages “limit” orders, executes trades, and is responsible for managing the uninterrupted flow of orders. If there is a large shift in demand on the “buy” side or the “sell” side, the specialist steps in and sells or buys out of his own inventory to meet the demand, until the gap has narrowed.

This gives him an opportunity to trade for himself, using his inside knowledge to book a profit. That practice is frowned on by the Securities Exchange Commission (SEC), but it has never been seriously regulated, because it has been considered necessary to keep markets “liquid.”

Keiser’s “Virtual Specialist Technology” (VST) was developed for the Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in which players use virtual money to buy and sell “shares” of actors, directors, upcoming films, and film-related options. The program determines the true market price automatically, by comparing “bids” with “asks” and weighting the proportion of each. Keiser and HSX co-founder Michael Burns applied for a patent for a “computer-implemented securities trading system with a virtual specialist function” in 1996, and U.S. patent no. 5960176 was awarded in 1999.

But things went awry after the dot.com crash, when Keiser’s company HSX Holdings sold the VST patent to investment firm Cantor Fitzgerald, over his objection. Cantor Fitzgerald then put the part of the program that would have eliminated front-running on ice, just as drug companies buy up competing patents in order to take them off the market. Instead of preventing front-running, the program was altered so that it actually enhanced that fraudulent practice. Keiser (who is now based in Europe) notes that this sort of patent abuse is illegal under European Intellectual Property law.

Meanwhile, the design of the VST program remained on display at the patent office, giving other inventors ideas. To get a patent, applicants must list “prior art” and then prove that their patent is an improvement in some way. The listing for Keiser’s patent shows that it has been referenced by 132 others involving automated program trading or HFT.

Since then, HFT has quickly come to dominate the exchanges. High frequency trading firms now account for 73% of all U.S. equity trades, although they represent only 2% of the approximately 20,000 firms in operation.

In 1998, the SEC allowed online electronic communication networks, or alternative trading systems, to become full-fledged stock exchanges. Alternative trading systems (ATS) are computer-automated order-matching systems that offer exchange-like trading opportunities at lower costs but are often subject to lower disclosure requirements and different trading rules. Computer systems automatically match buy and sell orders that were themselves submitted through computers. Market making that was once done with a “specialist’s book” -- something that could be examined and audited -- is now done by an unseen, unaudited “black box.”

For over a century, the stock market was a real market, with live traders hotly bidding against each other on the floor of the exchange. In only a decade, floor trading has been eliminated in all but the largest exchanges, such as the New York Stock Exchange (NYSE); and even in those markets, it now co-exists with electronic trading.

Alternative trading systems allow just about any sizable trader to place orders directly in the market, rather than routing them through investment dealers on the NYSE. They also allow any sizable trader with a sophisticated HFT program to front run trades.

Flash Trades: How the Game Is Rigged:

An integral component of computerized front running is a dubious practice called “flash trades.” Flash orders are permitted by a regulatory loophole that allows exchanges to show orders to some traders ahead of others for a fee. At one time, the NYSE allowed specialists to benefit from an advance look at incoming orders; but it has now replaced that practice with a “level playing field” policy that gives all investors equal access to all price quotes. Some ATSs, however, which are hotly competing with the established exchanges for business, have adopted the use of flash trades to pull trading business away from the exchanges. An incoming order is revealed (or flashed) to a trader for a fraction of a second before being sent to the national market system. If the trader can match the best bid or offer in the system, he can then pick up that order before the rest of the market sees it.

The flash peek reveals the trade coming in but not the limit price – the maximum price at which the buyer or seller is willing to trade. This is what the HFT program figures out, and it is what gives the high-frequency trader the same sort of inside information available to the traditional market maker: he now gets to peek at the other player’s cards. That means high-frequency traders can do more than just skim hefty profits from other investors. They can actually manipulate markets.

How this is done was explained by Karl Denninger in an insightful post on Seeking Alpha in July 2009:

“Let’s say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower.

“So the computers, having detected via their ‘flash orders’ (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) ‘immediate or cancel’ orders - IOCs - to sell at $26.20. If that order is ‘eaten’ the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

“Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become ‘more efficient.’

“Nonsense; there was no ‘real seller’ at any of these prices! This pattern of offering was intended to do one and only one thing -- manipulate the market by discovering what is supposed to be a hidden piece of information -- the other side’s limit price!

“With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this -- your order is immediately ‘raped’ at the full limit price! . . . [Y]ou got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.”

The ostensible justification for high-frequency programs is that they “improve liquidity,” but Denninger says, “Hogwash. They have turned the market into a rigged game where institutional orders (that’s you, Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are routinely screwed for the benefit of a few major international banks.”

In fact, high-frequency traders may be removing liquidity from the market. So argues John Daly in the U.K. Globe and Mail, citing Thomas Caldwell, CEO of Caldwell Securities Ltd.:

“Large institutional investors know that if they start trying to push through a large block of shares at a certain price – even if the block is broken into many small trades on several ATSs and markets -- they can trigger a flood of high-frequency orders that immediately move market prices to the institution’s disadvantage. . . . That’s why institutions have flocked to so-called dark pools operated by ATSs such as Instinet, and individual dealers like Goldman Sachs. The pools allow traders to offer prices without publicly revealing their identities and tipping their hand.”

Because these large, dark pools are opaque to other investors and to regulators, they inhibit the free and fair trade that depends on open and transparent auction markets to work.

The Notorious Market-Rigging Ringleader, Goldman Sachs:

Tyler Durden, writing on Zero Hedge, notes that the HFT game is dominated by Goldman Sachs, which he calls “a hedge fund in all but FDIC backing.” Goldman was an investment bank until the fall of 2008, when it became a commercial bank overnight in order to capitalize on federal bailout benefits, including virtually interest-free money from the Fed that it can use to speculate on the opaque ATS exchanges where markets are manipulated and controlled.

Unlike the NYSE, which is open only from 10 am to 4 pm EST daily, ATSs trade around the clock; and they are particularly busy when the NYSE is closed, when stocks are thinly traded and easily manipulated. Tyler Durden writes:

“[A]s the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT’s that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale.”

HFT rigging helps explain how Goldman Sachs earned at least $100 million per day from its trading division, day after day, on 116 out of 194 trading days through the end of September 2009. It’s like taking candy from a baby, when you can see the other players’ cards.

Reviving the Free Market:

So what can be done to restore free and fair markets? A step in the right direction would be to prohibit flash trades. The SEC is proposing such rules, but they haven’t been effected yet.

Another proposed check on HFT is a Tobin tax – a very small tax on every financial trade. Proposals for the tax range from .005% to 1%, so small that it would hardly be felt by legitimate “buy and hold” investors, but high enough to kill HFT, which skims a very tiny profit from a huge number of trades.

That is what proponents contend, but a tiny tax might not actually be enough to kill HFT. Consider Denninger’s example, in which the high-frequency trader was making not just a few pennies but a full 29 cents per trade and had an opportunity to make this sum on 99,500 shares (100,000 shares less 5 100-lot trades at lesser sums). That’s a $28,855 profit on a $2.63 million trade, not bad for a few milliseconds of work. Imposing a .1% Tobin tax on the $2.63 million would reduce the profit to $26,225, but that’s still a nice return for a trade that takes less time than blinking.

The ideal solution would fix the problem at its source -- the price-setting mechanism itself. Keiser says this could be done by banning HFT and installing his VST computer program in its original design in all the exchanges. The true market price would then be established automatically, foreclosing both human and electronic manipulation. He notes that the shareholders of his former firm have a good claim for voiding out the sale to Cantor Fitzgerald and retrieving the program, since the deal was never consummated and the investors in HSX Holdings have never received a penny for the sale.

There is just one problem with their legal claim: the paperwork proving it was shipped to Cantor Fitzgerald’s offices in the World Trade Center several months before September 2001. Like free market capitalism itself, it seems, the evidence has gone up in smoke.

Goldman Sachs E-mails Show Bank Sought To Profit From Housing Downturn:

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/24/AR2010042401049.html

By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, April 24, 2010; 11:43 AM

A Senate investigation into the financial crisis has found that Goldman Sachs, the storied Wall Street investment bank, sought to profit from the historic decline in housing prices by betting against the U.S. mortgage market.

The documents show that Goldman, at times, made big, profitable bets against the housing market -- sometimes betting against mortgage investments that it had sold to investors.

Sen. Carl Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, said four internal e-mails released Saturday contradict Goldman's assertion that it didn't seek to profit from the housing downturn. "Goldman made a lot of money by betting against the mortgage market," Levin said.

In a November 2007 e-mail, Goldman chief executive Lloyd Blankfein wrote that the firm "lost money" on the housing market, "then made more than we lost because of shorts."

The release of the documents comes as Goldman Sachs is preparing its most detailed defense yet to allegations that it misled clients in its mortgage securities business, arguing that the firm was unsure whether housing prices would rise or fall and did not take any action at odds with the interests of its clients.

An internal Goldman document, prepared for senior executives and obtained by The Washington Post, describes debates among top executives in 2006 and 2007 over whether the firm should make investment decisions based on the belief that the mortgage market would continue to prosper.

The document details meetings and e-mails that ultimately resulted in a decision to reduce the company's exposure to the mortgage market, especially subprime loans, by making new investments that would pay off if housing prices fell.

Goldman has been widely criticized for investing its own money to bet against the housing market while simultaneously urging clients to invest in securities that would increase in value only if the housing market did.

Those concerns over possible double-dealing spiked a week ago as the Securities and Exchange Commission filed a fraud suit against Goldman, alleging that it misled clients by selling them mortgage-related securities secretly designed to fail.

The Senate panel will hold a hearing on investment banks and the financial crisis Tuesday. Blankfein and other executives are scheduled to testify.

In one of the e-mails obtained by the committee, Goldman chief financial officer David Viniar responded to a report that the firm earned $50 million in one day with bets that the housing market would decline.

"Tells you what might be happening to people who don't have the big short," Viniar wrote to his colleagues.

In another e-mail, Goldman executives discussed how one subprime mortgage lender the company worked with was facing "wipeout" and another's collapse was "imminent." Goldman helped these lenders bundle and sell their loans to investors.

But one executive, Deeb Salem, wrote, the "good news" was that Goldman would profit $5 million from a bet against the very same bundles of loans it had helped create.

In an October 2007 e-mail, Goldman Sachs mortgage trader Michael Swenson was gleeful at news that credit-rating companies downgraded mortgage-related investments, which caused losses for investors.

"Sounds like we will make some serious money," the executive wrote.

"Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," Levin said. "They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."

The e-mails released Saturday portray a different narrative than the one Goldman has given about its role in the mortgage market.

According to Goldman's 11-page defense, while the firm moved to significantly reduce its losses when the housing market cratered, the bank was confused, like many other financial firms, over how bad the collapse would be and suffered losses as a result.

The document also reprises Goldman's frequent explanation that it was not investing its own money in financial transactions to make a trading profit but to help investors who wanted to do a deal and could not easily find someone to trade with. That role, commonly played by investment banks, is known as being a market maker.

In the paper, Goldman argues that it was a relatively small player in the mortgage market, bringing in only $500 million from its residential mortgage business in 2007, less than 1 percent of the firm's overall revenue.

Still, the bank's mortgage investments were large enough that executives began to worry in 2006 that it was betting too heavily on the health of the housing market.

According to the document, the concerns arose in late 2006, when Dan Sparks, the head of the mortgage unit, wrote to top executives that the "subprime market [was] getting hit hard," with the firm losing $20 million in one day.

On Dec. 14, 2006, chief financial officer Viniar called Goldman's mortgage traders and risk managers into a meeting to discuss investing strategy. They concluded that they would reduce the firm's overall exposure to the subprime mortgage market.

But the prevailing view of executives, as described in the paper, was not that the housing market was headed into a prolonged decline. They were not looking to short the market overall. That would have entailed making such large bets against mortgage securities that the firm would turn a profit if the market as a whole collapsed, which in fact it did.

The document acknowledges that Goldman at times shorted the overall market but describes those periods as temporary while the firm was rebalancing its portfolio to limit losses if mortgage securities were to lose more value.

At some moments, executives were actually considering making new bets, buying potentially undervalued securities that could pay off when the mortgage market turned around. A day after Viniar met with traders and risk managers, he wrote to Tom Montan, co-head of the securities division, saying, "There will be very good opportunities as the markets goes into what is likely to be even greater distress and we want to be in position to take advantage of them."

The back-and-forth over which way the market would go, and how to invest in it, continued into 2007.

On March 14, Goldman co-president Jon Winkelried e-mailed Sparks and others asking what the bank was doing to protect itself from a decline in prices of not just subprime loans, but also other loans traditionally considered less risky. Sparks replied that the firm was trying to have "smaller" exposure to those loans also.

But managing director Richard Ruzika took issue with that answer a few days later, saying that Goldman might be overestimating the decline in housing. "It does feel to me like the market in general underestimated how bad it could get. And now could be overestimating where we are heading," he wrote in an e-mail. "While undoubtedly there will be some continued spillover, I'm not so convinced this is a total death spiral. In fact, we may have terrific opportunities."

Sparks later endorsed that optimistic view, suggesting as late as August 2007 that Goldman begin buying more mortgage securities.

The bank did not immediately follow that path, and by Nov. 30, 2007, Goldman had largely canceled out its exposure to subprime mortgages by increasing its bets that the market would continue to slide, according to the document.

But by that account, Goldman also continued to have $13.5 billion in exposure to safer, prime mortgages. That cost the bank. In 2008, the firm lost $1.7 billion on investments in residential mortgages.

John Paulson Needs A Good Lawyer:

Written by Simon Johnson
April 18, 2010 at 9:00 am

http://baselinescenario.com/2010/04/18/john-paulson-needs-a-good-lawyer/#more-7214

Of all the reactions so far to various dimensions of Goldman fraudulent securities “Fab” scandal, one stands out. On Bill Maher’s show, Friday night, I argued that John Paulson – the investor who helped design the CDO at the heart of the affair – should face serious legal consequences.

On the show, David Remnick of the New Yorker pointed out that Paulson has not been indicted. And since then numerous people have argued that Paulson did nothing wrong – rather that the fault purely lies with Goldman for not disclosing fully to investors who had designed the CDO.

But this is to mistake the nature of the crime here – and also to misread the legal strategy of the SEC.

The obvious targets are Goldman’s top executives, whom we know were deeply engaged with the housing side of their business in early 2007 – because it was an important part of their book and they were well aware that the market was in general going bad.

Either Goldman’s executives were well aware of the “Fab” and its implications – in which case they face serious potential criminal and civil penalties – or they did not have effective control over transactions that posed significant operational and financial risk to their organization.

They will undoubtedly pursue the “we did not know” defense – which of course debunks entirely the position taken by Gerry Corrigan (of Goldman and formerly head of the NY Fed) when I pressed him before the Senate Banking Committee in February. Corrigan claimed that Goldman’s risk management system is the best in the business and simply superb; the former may be true, but the latter claim will be blown up by Lloyd Blankfein’s own lawyers – they must, in order to keep him out of jail. (Aside to Mr. Blankfein’s lawyers: the people you are up against have already read 13 Bankers and may put it to good use; you might want to get a copy.)

And don’t be misled by the purely civil nature of the charges so far – and the fact that the announced target is only one transaction. This is a good strategy to uncover more information – for broader charges on related dimensions – and it allows congressional enquiries to pile on more freely.

As for John Paulson, the issue will of course be the “paper trail” – including emails and phone conversations. A great deal of pressure will be brought to bear on the people who have worked with him, many of whom now faced permanently broken careers in any case.

Here’s the legal theory to keep in mind. Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed. In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud. The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally.

John Paulson was not the trigger man – it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea – if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) – then we are looking at potential conspiracy to commit fraud. And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting - so of course all relevant phone records will now be subpoenaed.

Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.

There is fraud at the heart of Wall Street. It is time to end that.