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.

VIDEO - Fundamental & Technical Analysis of the S&P 500's Daily & Weekly Charts:

Here is the end of the week analysis of the S&P 500's daily and weekly charts, with comments about important economic reports due out next week...

Happy Trading this week...
zigzagman

The Predatory Partnership of Wall Street and the State:

* April 23, 2010

http://www.oilprice.com/article-the-predatory-partnership-of-wall-street-and-the-state-303.html

The Central State and Financial Plutocracy are bound in a mutually beneficial, highly predatory partnership.

The Mainstream Media is missing the Big Story in the SEC/Goldman Sachs filing: the Central State needs the predatory "too big to fail" investment bankers to churn out the credit, leverage and insider deals the State needs to survive in an era of exponentially rising debt.

There are adverse ethical and financial consequences of this partnership; in the short-term, the rot has been papered over, and simulacrum "reforms" to sooth public anger will be passed. But the partners each depend on the other for their very existence, and threatening one threatens both.

Two long-time contributors recently checked in with insightful commentaries on this issue. We start with Zeus Y.:

I'm sad to say, I find myself agreeing with your comments about gaming the system becoming the system. The WSJ article you cited (An Economy of Liars) uses a libertarian argument to push for deregulation with enforcement of key staples/norms of capitalism. However, if enforcement is captured by the same forces that give rise to crony capitalism, which is an elephant in the room the current "reform" bill fails to address, neither regulation nor de-regulation will matter. Regulation will be ignored because there are no enforcements or consequences. De-regulation will only allow market mechanisms to be more distorted and shrouded. This is what people talk about when they say "regulatory capture."

But when you have "capture of culture" so that norms are so skewed as to bail out the perfidious and punish the responsible, how can one expect healing and growth of the economy? That is what we have now, and taking a pain pill in the form of borrowing or lowering interest rates will not address the underlying disease. Indeed as with taking pain relievers to cover up the pains caused by a devastating disease, you will only ensure your demise. We require not only transparency and accountability but awareness and viable responses about what to do, not only with the fraud and its perpetrators, but the damage they have left in their wake once we turn up the rot.

This is why no one seems interested in real investigation, enforcement, justice, fairness, or even free enterprise at all. They sense the rot and don't want to be pinned with cleaning it up once they are made aware. Our own landlords will not sign on for a free lead test for our house by the county with our two-year old in it, because if they knew, they would have to be responsible and disclose this fact to future renters. They simply will not agree to do it because short-term self-interest is more important than doing the right thing. Short-term self-interest, for them, has become the "right thing." The moral decay is evident, and that is what really makes your assessment uneasingly accurate. If there is one thing we have learned is that people without moral guidance will only see what they are incentivized to see in terms of their short term personal interest.

Without a moral compass, short term, cannabalistic greed presides, and I have not known any economy to thrive on that premise for long. I don't know what form the downfall takes, but until we give a hoot about something greater than our personal fear and comfort we can assure that we keep falling.

Thank you, Zeus. Next up, Harun I. who refers to this chart I recently posted, which shows total credit as a percentage of U.S. GDP exceeds the extremes of World war II.



Here is Harun's commentary:

I couldn't help but wonder how people thought this would turn out? Did they really believe that coming out of college with a student loan the size of a mortgage for an education in basket weaving would leave them discretionary income or a balance sheet that was able to expand much further (I have a family member with $80,000 in student loans for a degree in journalism. She cannot afford the payments with her salary so what does she do? She defers the payments while she runs up more debt going to grad school! Insanity at its finest).

Of course upward mobility is stunted proportionate to the level of debt carried, debt is a claim on future earnings. What did they think would happen when they bought into a monetary system that demands that future demand be brought forward on a compounding basis? Did they not understand that this must come at the expense of future generations?

More to the point, in a sphere of finite resources, who thought or thinks that consumption at an exponential rate and therefore depletion at an exponential rate would leave room for future generations to keep consuming more? Only someone disconnected from reality could think this could continue indefinitely. But that is what mass manias and delusions are all about.

Is it any wonder that the 1% are doing so well? They are the writers of the debt everyone else is buying...and we allow them to do this without a dime of their own capital. As an aside, I am completely confounded that the majority of the retail market buys options when over 80% of options expire worthless. Who do they think is writing the majority of those options? Institutions and the very wealthy are writing those options. And when those options even look like they may produce a loss for the writers the sheer power of their actions protecting those positions makes sure they expire worthless. But the public willingly continues to take the long odds. The masses keep buying the debt and the long odds, do not understand the rules of the game and wonder why they are losing.

Buying a home does not make one wealthy because home equity does not really exist. All of this has been one grand illusion that has turned into a slow motion train wreck as it hits the immovable object of reality. How can it be that a home is the "middle class generator of wealth" when 66% of people retire into poverty and 65% of Americans are homeowners? I know of all the elegant equations but the simple fact is that they are not borne out in reality.

If I sell a stock, bond, or commodity I can take that money and do as I please. I don't have to downsize my standard of living or borrow (encumber future earnings) to get at the equity in those instruments. A house is a peculiar beast in terms of "equity". It either has to be sold and its occupant goes to live in a much smaller dwelling in order to enjoy the "equity", or one must borrow (create a liability) to get at that "equity". Either way the standard of living will decline. Therefore, I find the notion of home "equity" quite absurd.

People in general need to educate themselves on Present Value. They must understand its implications to what their money is worth now and at any point in the future. When they do, a much clearer picture will arise pertaining to debt, interest rates, inflation and "equity".

I would like to see the "too big to fail" institutions fail but when the reality of what that means starts to impact pensions and 401K's, federal, state, and municipal income streams, and it is realized that the government cannot borrow enough to support a destitute population, I think the 99% will sing a different tune.

The more I watch this debacle the more I am convinced that Cheney's "deficits don't matter" comment was not arrogance but candor based upon his understanding of the futility of the situation.

Additional commentary 2

It is essential (in a Ponzi scheme) that there be ever growing amounts of new capital to make payouts. Remember, not too long ago everyone was crooning about growth. Every fraud and swindle was counted as GDP growth, now we are beginning to realize that it was all one big fraud.

Bernanke tells us point blank in his famous helicopter speech that he can "theoretically" make us spend by making it unprofitable to save. Greenspan spoke of the "global savings glut" that caused the bubbles. Pensions, 401K's, sovereign wealth funds are all pools of savings that had to be eaten to keep the debt as money scheme expanding. And with high quality risk exhausted there had to be a way to sell the low quality risk.

If we want to understand, very clearly, the rise and fall of the middle class and how debt has affected this, all we need to do is look at the Credit Market Debt as a Percentage GDP you recently posted. The post WW II bull market that ended in 1968 occurred with very low debt levels and the middle class thrived. The 1982 -2000 bull market saw debt levels soar and the middle class lost ground (it took two incomes and high levels of debt to accomplish what once took one income and very low levels of debt).

Two financial WMD's have gone off in less than a decade and from a logarithmic perspective it just looks like a mild consolidation when, in real terms, stocks and bonds have lost more than half their purchasing power and still are not at their historic relative lows. Structurally, debt is proportionately higher that at the start of the Great Depression and getting worse at an increasing rate, unemployment, if recorded properly would be exploding, and government spending (expanding debt) is the only driver of GDP. Fraud is now a way of life, it is SOP.

There is not enough money in the hands of consumers to create the stupendous growth that is required by all the obligations (entitlements) that have been created. It is not a matter of desire, it is a matter of capability. We cannot produce and consume enough at a rate necessary to keep up with exponentially exploding entitlements. CDO and CDS, before they were given legal certainty in the CFMA of 2000, went from about $60 billion to over $600 trillion. Without this explosion of credit money system death would have occurred some time ago. We need the tremendous leverage that only Wall Street can create to keep from this farce from disintegrating rapidly. If not, we have what we have now: an exploding public balance sheet.

In the post industrial age in a country that produces nothing but hands out entitlements to everybody how do you generate returns to satisfy this? Not only is GS necessary to maintain status quo but so are the rest of the TBTF banks. In the end this will fail spectacularly, it has already started. The end game is the Casino Economy where gaming the system is the way to produce returns needed (at least for a time) to maintain our illusory state. Just think, after the greatest credit expansion in history, we are still broke and continuing to lose ground.

Thank you, Harun. Here is a bonus chart of the inflation-adjusted Dow Jones Industrial Average, which shows the Bull Market of the last decade was as illusory as the "prosperity" built on the sand of home equity lines of credit and bogus mortgage-backed securities.

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.

Wharton: If Spain Goes Down, The ENTIRE Global Economy Is In Trouble:

http://www.businessinsider.com/wharton-if-spain-goes-down-the-entire-global-economy-is-in-trouble-2010-3

Vincent Fernando, CFA
Mar. 18, 2010, 6:36 AM

Wharton is warning markets to keep a very close eye on Spain right now. That's because while a Greece or Portugal financial meltdown might be manageable, a Spanish one could have massive negative repercussions for both Europe and the global economy.
This is due to the massive size of both Spain's economy and debt:

If Spain fails to execute a credible plan to cut its budget deficit, the worries over sovereign solvency will spread quickly beyond the small, peripheral countries currently making the most headlines, experts warn.

A Spanish default could herald the breakup of the euro and a rise in retaliatory protectionism around the world.

According to an analysis by consultants at McKinsey, the sum of Spanish government, corporate and household debt relative to the size of the overall economy surpasses all developed countries except the U.K. and Japan. Correcting the imbalance has grave implications for the public purse.

For that reason, observers worry about Spain's ability to service its debts. Bailouts of Greece and Portugal, if necessary, would be "not inconsequential but manageable," according to Witold Henisz, a professor of management at Wharton. The EU-led rescues would probably knock tenths of percentage points off of European growth, he adds. It's a different story with Spain.

The need for a Spanish bailout could drop us into a second phase of the global financial crisis, one where the euro could end and the world could entrench into deadly trade-destroying protectionism:

Italy, for example -- facing default as they became unable to fund budget deficits. The viability of the euro currency would come into question, as the union's stronger members could eventually refuse to prop up weaker members and decide that their destiny would be better served by monetary independence.

Spanish officials' lashing out at indistinct foreign culprits is a precursor of what to expect, Henisz says. The risks of a "spiral into protectionist isolationism" would rise. "Political parties that espouse nationalism and xenophobia could get some serious purchase under these conditions."

Check out the video from Wharton below...

U.S. MBA Mortgage Applications Index Rose 13.6% Last Week:

http://www.businessweek.com/news/2010-04-21/u-s-mba-mortgage-applications-index-rose-13-6-last-week.html

By Shobhana Chandra
April 21, 2010, 7:16 AM EDT

April 21 (Bloomberg) -- Mortgage applications in the U.S. rose by the most in seven weeks as the looming end of the homebuyer tax credit helped spark the biggest rise in purchases since January.

The Mortgage Bankers Association’s index increased 13.6 percent in the week ended April 16. The Washington-based group’s gauge of purchases climbed 10.1 percent and a drop in mortgage rates boosted the refinancing measure by 15.8 percent, the first gain since the end of February.

The tax credit, which requires contracts to be signed by the end of the month, is bringing buyers back to the market. Reports this week on March sales of new and previously owned homes may add to evidence that housing has stabilized, even as 9.7 percent unemployment and mounting foreclosures limit gains.

“We expect the improvement in sales to continue through the spring, peaking in June when the tax credit expires for closed contracts,” Michelle Meyer, a senior economist at Barclays Capital Inc. in New York, said in a note to clients.

The average rate on a 30-year fixed loan dropped to 5.04 percent from 5.17 percent the prior week, the group said.

At the current 30-year rate, monthly payments for each $100,000 of a loan would be $539, up from $520 a year ago, when the rate was 4.72 percent.

The average rate on a 15-year fixed mortgage declined to 4.34 percent last week from 4.45 percent the previous week. The rate on a one-year adjustable mortgage decreased to 6.95 percent from 7.02 percent.

As borrowing costs dropped, the share of applicants seeking to refinance a loan rose to 60 percent last week from 58.9 percent.

Home Sales

An April 23 report from the Commerce Department may show purchases of new houses increased 5.5 percent, according to the survey median.

The figures show the extension of the credit for first-time buyers and its expansion to include some current owners is beginning to stoke demand. At the same time, the real estate market faces hurdles, including rising foreclosures.

Lenders repossessed or delivered a default or auction notice to 932,234 homes, or one out of every 138 households, during the first quarter, according to RealtyTrac Inc. That marked a 16 percent increase from a year earlier.

CYCC - Cyclacel's Innovative and Diverse Oncology Targeted Pipeline Highlighted in Six Presentations at AACR Annual Meeting:

http://finance.yahoo.com/news/Cyclacels-Innovative-and-pz-4211853147.html?x=0&.v=1

BERKELEY HEIGHTS, N.J., April 20, 2010 (GLOBE NEWSWIRE) -- Cyclacel Pharmaceuticals, Inc. (Nasdaq:CYCC - News) (Nasdaq:CYCCP - News), a biopharmaceutical company developing oral therapies that target the various phases of cell cycle control for the treatment of cancer and other serious disorders, today announced the presentation of preclinical results for several of its pipeline compounds during the American Association of Cancer Research (AACR) 101st Annual Meeting 2010 in Washington, DC.

"Among the six abstracts, we are pleased to have data presented for the first time with regard to CYC065, our second generation inhibitor of cyclin-dependent kinases (CDKs). CYC065 is an oral multikinase inhibitor with the same CDK targeted profile as our seliciclib clinical-stage drug. Data presented at AACR show that CYC065 has promising anti-tumor activity in models of breast cancer and hematological malignancies," said Spiro Rombotis, President and Chief Executive Officer of Cyclacel. "In addition, translational studies highlighted the unique mechanisms of action and new potential clinical applications for sapacitabine and seliciclib, both of which are currently in multiple Phase 2 clinical trials. We are also encouraged by preclinical data with our recently discovered, oral, small molecule, anti-mitotic inhibitors of polo-like kinase 1 (Plk1), suggesting that they are suitable for further development."

CYC065 and Second Generation CDK Inhibitors

Abstract No. 22: "Cyclin E amplification, a novel mechanism of resistance to trastuzumab in HER2 amplified breast cancer"

In an oral presentation at AACR, investigators from Vall d'Hebron University Hospital (Barcelona, Spain) and Memorial Sloan-Kettering Cancer Center (New York, NY) reported that HER2 positive breast cancer cell lines refractory to the anti-proliferative effects of the therapeutic antibody trastuzumab (Herceptin(R)) were killed by CYC065. The investigators found that resistant cell lines were addicted to and overexpressed cyclin E, a component of the CDK/cyclin target of CYC065. Cyclin E overexpression has been observed in patients positive for HER2, a protein that is the target of trastuzumab. The discovery that cyclin E amplification decreases sensitivity of breast cancer cells to trastuzumab provides a rationale for exploring the efficacy of CDK2/cyclin E inhibitors, such as CYC065 and seliciclib, in this patient population.

"We have determined that breast cancer cells resistant to therapeutic agents targeting HER2 are highly sensitive to CDK inhibition by CYC065," said Jose Baselga, M.D., Ph.D., chairman of the Medical Oncology Service and director of the Division of Medical Oncology, Hematology and Radiation Oncology at the Vall d'Hebron Institute of Oncology, and lead investigator of the study. "Amplification and overexpression of cyclin E is a mechanism by which breast cancer cells develop resistance to trastuzumab. Targeting such cells with siRNA against cyclin E reduces cell growth and restores sensitivity to trastuzumab. Engineered overexpression of cyclin E in parental breast cancer cells markedly reduces trastuzumab's effectiveness. In contrast, Cyclin E overexpressing, trastuzumab-resistant cells are more sensitive to pharmacological inhibition by CDK inhibitors, such as seliciclib or its more potent derivative, CYC065. CYC065 induces more apoptosis in cyclin E overexpressing than in parental breast cancer cells. CYC065 has promising in vivo activity in xenograft models of the resistant cells, which appears to be enhanced by the action of trastuzumab."

Approximately 15 to 20 percent of breast cancers have an amplification of the HER2/neu gene or overexpression of its protein product, which is associated with increased disease recurrence and worse prognosis. Therapeutic agents targeting HER2 have been shown to improve survival. However, resistance to these agents is a major barrier to the effective treatment of breast cancer.

Cyclacel has developed CYC065 and other novel derivatives of seliciclib in collaboration with the Cancer Research UK Centre for Cancer Therapeutics at The Institute of Cancer Research (ICR), London, UK. CYC065 and related derivatives inhibit the same CDK/cyclin complexes, retaining the specificity and mechanism of action of seliciclib, but with increased anti-proliferative potency and improved pharmaceutical properties. Investigational new drug (IND) enabling studies for CYC065 are underway.

In 2001, the Nobel Prize in Physiology and Medicine was awarded for the discovery of cyclins and CDKs, key regulators of the cell cycle. By selectively modulating cell cycle regulation in cancer cells, inhibition of CDK/cyclin complexes represents a promising strategy for cancer therapy. Seliciclib (CYC202, R-roscovitine), a novel, first-in-class, orally available CDK inhibitor, currently in Phase 2 clinical trials, selectively inhibits multiple CDK/cyclin targets, in particular CDK2/cyclin E, CDK2/cyclin A, CDK5, CDK7 and CDK9. Seliciclib also induces apoptosis in neutrophil granulocytes that mediate inflammation, indicating that CDK inhibitors may also hold promise in applications outside oncology, such as the treatment of chronic autoimmune and inflammatory diseases including arthritis or asthma.

Abstract No. 3886: "Therapeutic potential of CDK inhibitors in MLL leukemias"

Chromosomal rearrangements involving the human mixed-lineage leukemia (MLL) gene are associated with the development of de novo acute myeloid leukemia (AML) and acute lymphoblastic leukemia (ALL) as well as in therapy-related AML. In a study reported at AACR, Cyclacel investigators studied the effect of CYC065, a second generation CDK inhibitor, on AML cell lines with and without MLL rearrangements. MLL-rearranged cells required 24 to 72 hours exposure to cytarabine for maximal response. In contrast AML cells, with or without MLL rearrangements, were exquisitely sensitive to short CYC065 treatments (5 to 8 hours) which completely inhibited proliferation. Rapid induction of p53 and downregulation of Mcl-1, Meis1 and Hoxa1 followed by apoptosis were observed. The high sensitivity of AML cell lines with MLL rearrangements was also confirmed in vivo. A highly potent and durable effect was observed in an AML mouse xenograft model after oral administration of CYC065 resulting in 97% tumor growth inhibition. The data suggest that both AML and MLL-rearranged leukemias are very sensitive to CYC065 and justify further exploration of its therapeutic potential in these indications.

Abstract No. 4431: "A novel derivative of the CDK inhibitor roscovitine that induces apoptosis in CLL and overcomes stromal cell-mediated protection"

Chronic lymphocytic leukemia (CLL) is characterized by the accumulation of malignant, apoptosis-resistant B-cells. In a study reported at AACR, investigators led by William K. Plunkett, Jr., Ph.D., Professor and Chief, Section of Molecular and Cellular Oncology, Department of Experimental Therapeutics at The University of Texas M. D. Anderson Cancer Center (Houston, TX) studied the effect of CYC065 in CLL. Similarly to seliciclib, CYC065 induced apoptosis in CLL cell lines in vitro by reducing CDK9-dependent transcription resulting in a rapid loss of short lived mRNAs or anti-apoptotic proteins such as Mcl-1. Loss of Mcl-1 was associated with induction of cancer cell death by apoptosis. CYC065 demonstrated approximately 30 times greater potency than seliciclib, its parent compound. The data suggests that CYC065 is also a promising candidate for clinical development in CLL.

Sapacitabine:

Abstract No. 3502: "Understanding the pathways involved in the repair of CNDAC induced DNA damage"

CNDAC is the main active metabolite of sapacitabine, Cyclacel's orally available nucleoside analogue, currently in Phase 2 trials in hematological and solid cancer. Unlike other nucleoside analogues, CNDAC causes the formation of double-stranded (ds) DNA breaks that activate the dsDNA damage checkpoint and cause arrest in the G2/M phase of the cell cycle. CNDAC-induced dsDNA damage is repaired by the homologous recombination (HR) DNA repair pathway. The work described in the poster discusses different methods of targeting the HR pathway to enhance CNDAC's potency against cancer cells.

Breast cancer susceptibility proteins BRCA1 and BRCA2 are tumor suppressors that ensure the stability of the cell's DNA and prevent uncontrolled cell growth in normal cells. BRCA gene mutations are common in breast and ovarian cancer. The BRCA1 and 2 proteins are involved in the HR DNA repair pathway. Recently published clinical data have validated that BRCA mutations can sensitize tumors to DNA damaging agents such as PARP inhibitors or cisplatin.

Investigators from Cyclacel reported that inactivation of BRCA1 or 2 by siRNA leads to a significant increase in the cancer cell cytotoxicity of CNDAC. In an isogenic cell line pair differing only in BRCA2 status, the BRCA2 deficient cell line was 50 times more sensitive to CNDAC than the parental cancer cell line with normal BRCA2 function. Importantly there was no difference in the sensitivity of both cell lines to gemcitabine, demonstrating that sapacitabine and gemcitabine work by different mechanisms. In the BRCA2 deficient cell line, CNDAC was more potent than gemcitabine. This data indicates that evaluation of sapacitabine in patients with either triple negative breast cancer or ovarian cancer would be advisable as patients with either of these tumors have a high proportion of BRCA mutations.

Depletion of CHK1 kinase, a regulator of the G2/M damage induced checkpoint, was also shown to increase the sensitivity of cancer cells to CNDAC. This finding was supported by demonstrating that CNDAC is synergistic in combination with CHK1 inhibitors. The strongest synergy was observed between CNDAC and the CHK inhibitor PF477736, with the combination producing a very significant increase in cell death compared to either single agent alone. As a number of CHK inhibitors are now in Phase 1 clinical trials, this combination also represents an attractive opportunity for clinical evaluation.

Anti-mitotic Therapies:

Anti-mitotic drugs that target tubulin, such as vinca alkaloids and taxanes, are widely used for the treatment of cancer, but have limitations related to the role of tubulin in the cytoskeleton of normal cells. Cyclacel has discovered and is developing new compounds that inhibit targets with specific functions in mitosis, such as Aurora kinases and polo-like kinases (PLKs), which show promising anti-tumor activity in preclinical models. These targets are only expressed in dividing cells and specific drugs are designed to avoid damaging non-dividing cells, thereby enabling an improved therapeutic index compared to existing anti-mitotic drugs that target tubulin.

Abstract No. 633: "Tumor cell resistance mechanisms to aurora kinase inhibitors"

CYC116, an Aurora kinase inhibitor discovered and developed by Cyclacel, is currently in a Phase 1 clinical trial in patients with advanced solid tumors. While CYC116 has demonstrated significant anti-proliferative activity in preclinical studies, induction of acquired resistance to this Aurora kinase inhibitor has not been established.

In a study presented at AACR, researchers identified the molecular basis of acquired tumor resistance to CYC116 in vitro. The group led by Marian Hajduch, M.D., Ph.D., Associate Professor of Oncology and Head of Laboratory of Experimental Medicine, at Palacky University and University Hospital (Olomouc, Czech Republic) has developed resistant clones of colon carcinoma cell lines to study mechanisms of CYC116-induced resistance. Data were presented on characterization of the derived clones in relation to their resistance toward CYC116, cross resistance to other Aurora kinase inhibitors and chemotherapeutic agents, cell cycle profile, biomarker modulation, important drug transporters, and expression profiles of Aurora kinases. Data show that all CYC116 resistant clones became stably tetraploid and displayed high cross-resistance to other Aurora kinase inhibitors. No over expression of Aurora kinases or up regulation of P-glycoprotein (PgP) drug transporter was observed. Some drug resistant clones over-expressed multidrug resistance-associated protein 1 (MRP1). These studies help understand potential acquired resistance mechanisms and design combination treatment regimens to overcome such resistance.

Abstract No. 4435: "Discovery, biological characterization and oral antitumor activity of polo-like kinase 1 (Plk1) selective small molecule inhibitors"

Activity of the mitotic kinase Plk1 is strongly associated with cancer progression. Several studies have shown correlations between elevated Plk1 expression, histological grade and poor prognosis in several types of cancer. Plk1 may have a role in oncogenesis through its regulation of tumor suppressors such as p53 and BRCA2. The inhibition of Plk1 by small molecules or siRNA has been shown to interfere with several stages of mitosis. Therefore, targeting Plk1 offers an opportunity to treat cancer with a targeted anti-mitotic approach that will inhibit several important regulatory events in tumor cells.

Cyclacel employed high throughput screening, in silico screening and de novo ligand design approaches to discover multiple Plk1 inhibitor series. In a study presented at AACR Cyclacel scientists showed preclinical data for a set of potent and highly selective Plk1 inhibitors with broad anti-proliferative activity across a range of tumor cell lines, independent of tumor cell origin or oncogenic Ras or p53 tumor suppressor status. The poster illustrated use of intracellular biomarkers ensuring on-target activity during lead optimization to deliver preclinical candidate compounds that are highly active in xenograft models of human cancers. Significant anti-tumor efficacy was observed, including tumor regression and tumor free cures after repeated oral dosing. The data reported underline the suitability of these compounds for further development as orally available Plk1 inhibitors for the treatment of human cancers.

Further details of all presentations referenced in this press release can be accessed through the AACR website, www.aacr.org. In relevant presentations CYC065 is denoted as Compound 5.

About Cyclacel Pharmaceuticals, Inc.

Cyclacel is a biopharmaceutical company developing oral therapies that target the various phases of cell cycle control for the treatment of cancer and other serious disorders. Three product candidates are in clinical development: Sapacitabine (CYC682), a cell cycle modulating nucleoside analog, is in Phase 2 studies for the treatment of acute myeloid leukemia in the elderly, myelodysplastic syndromes and lung cancer. Seliciclib (CYC202 or R-roscovitine), a CDK (cyclin dependent kinase) inhibitor, is in Phase 2 studies for the treatment of lung cancer and nasopharyngeal cancer and in a Phase 1 trial in combination with sapacitabine. CYC116, an Aurora kinase and VEGFR2 inhibitor, is in a Phase 1 trial in patients with solid tumors. Cyclacel's ALIGN Pharmaceuticals subsidiary markets directly in the U.S. Xclair(R) Cream for radiation dermatitis, Numoisyn(R) Liquid and Numoisyn(R) Lozenges for xerostomia. Cyclacel's strategy is to build a diversified biopharmaceutical business focused in hematology and oncology based on a portfolio of commercial products and a development pipeline of novel drug candidates. Please visit www.cyclacel.com for additional information.

Forward-looking Statements

This news release contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. Such forward-looking statements include statements regarding, among other things, the efficacy, safety, and intended utilization of Cyclacel's product candidates, the conduct and results of future clinical trials, plans regarding regulatory filings, future research and clinical trials and plans regarding partnering activities. Factors that may cause actual results to differ materially include the risk that product candidates that appeared promising in early research and clinical trials do not demonstrate safety and/or efficacy in larger-scale or later clinical trials, the risk that Cyclacel will not obtain approval to market its products, the risks associated with reliance on outside financing to meet capital requirements, and the risks associated with reliance on collaborative partners for further clinical trials, development and commercialization of product candidates. You are urged to consider statements that include the words "may," "will," "would," "could," "should," "believes," "estimates," "projects," "potential," "expects," "plans," "anticipates," "intends," "continues," "forecast," "designed," "goal," or the negative of those words or other comparable words to be uncertain and forward-looking. For a further list and description of the risks and uncertainties the Company faces, please refer to our most recent Annual Report on Form 10-K and other periodic and current filings that have been filed with the Securities and Exchange Commission and are available at www.sec.gov. Such forward-looking statements are current only as of the date they are made, and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

The Institute of Cancer Research (ICR)

The ICR is Europe's leading cancer research centre and has been ranked the UK's top academic research center. Working closely with its partner, The Royal Marsden NHS Foundation Trust, the two organisations together form the largest comprehensive cancer centre in Europe ensuring patients immediately benefit from new research. Over its 100-year history, the ICR's achievements include identifying the potential link between smoking and lung cancer which was subsequently confirmed, discovering that DNA damage is the basic cause of cancer and isolating more cancer-related genes than any other organisation in the world. Several important anti-cancer drugs used worldwide were synthesized at the ICR. ICR has discovered an average of two preclinical candidates each year over the past five years. For more information please visit www.icr.ac.uk.

Cancer Research UK

For further information about Cancer Research UK's work or to find out how to support the charity, please visit www.cancerresearchuk.org.uk.

(C) Copyright 2010 Cyclacel Pharmaceuticals, Inc. All Rights Reserved. The Cyclacel logo and Cyclacel(R) are trademarks of Cyclacel Pharmaceuticals, Inc. Numoisyn(R) and Xclair(R) are trademarks of Sinclair Pharma plc. Herceptin(R) is a trademark of Genentech, Inc.

On Goldman, Securities Fraud, And Skepticism:

http://market-ticker.org/archives/2214-On-Goldman,-Securities-Fraud,-And-Skepticism.html

By now of course you know that Goldman Sachs was charged by the SEC with civil securities fraud Friday - unless you live under a rock.

The weekend has brought forth several interesting points, all of which I believe our political (and bankster) class had better pay attention to. In no particular order:

The rest of the world is tired of this crap too. Britain and Germany, to name two, are now looking at going after Goldman. This will not end here by any stretch of the imagination.

Goldman may have violated more than one law. Isn't receipt of a Wells Notice a "material event" that requires disclosure via an 8-K filing? I'm sure they'll claim "no", but I wouldn't be so sure of that. Never mind their hasty response on Friday afternoon. We'll see how this plays out.

Goldman was not the only large bank involved in deceptive deals. We should really talk about Magnetar, shouldn't we, and the nine banks that enabled their piece of this (that would be Merrill, Citi, UBS and more.) They were all involved in a number of deals that smell suspiciously like the one the SEC went after Goldman over. Or shall we talk about Jefferson County, Alabama again? You know, where JP Morgan was involved in a deal to "help" the county replace its aging sewer system, and wound up costing them 25 times the original (and actual) price of the work? Oh, and let's not forget that several government officials and private-sector folks have gone to prison already for their involvement in this scandal - for bribery and related acts, while not one indictment has issued against a bank executive or the banks involved themselves.

Jamie Dimon is threatening governments (again), this time in Germany. The people have had quite enough of extortion and blackmail, Mr. Dimon. You might also want to consider that some of those "less-regulated" markets you might flee to, such as China, have a habit of solving regulatory problems not with indictments and juries but rather with summary imprisonment or even execution. Consider the folks in the "basic materials" business who allegedly got caught gaming the system in China recently - and were summarily tried and convicted. Others have simply been shot. We claim to be more civilized here in this country, which is one of the reasons your threat rings rather hollow - in those "unregulated" markets you're more likely to find a disgruntled investor wields an AK-47 rather than a summons or subpoena, and you know it. I double-dog-dare you to take your capital and move to any of those places - I'll be watching for the Youtube of your execution when you screw someone over in East Buoffo as a consequence of their "unregulated market", and promise to chortle when it is posted.

The people don't believe the SEC, Congress or the Obama administration. Bill Clinton is now saying he took "wrong advice" from Larry Summers and Bob Rubin. That "advice" included Gramm-Leach-Bliley, I might add, as well as derivatives. Let the record show that Larry Summers took a clean shot at bankrupting Harvard University, losing $14 billion of its endowment in just over a year's time. I'm sure some of that has come back with the stock market "recovery" (engineered via more phony accounting) but the fact remains that as Harvard's Corporation (in the legal sense) consists of seven members who are accountable to nobody but themselves. Bob Rubin, for his part, was entangled in Citi at the time of the Gramm-Leach-Bliley act's passage. Oh, and Rubin is on Harvard's board.

The people have every right to be skeptical. Indeed, perhaps cynicism is more appropriate than skepticism in this case, in that every step of the last ten years when it comes to financial firms and regulation appears to have been driven by one goal: to allow banksters and their cronies to loot and pillage the American people, who are then supposed to back them up when their fancy games go awry.

I'm tired of it - but I was tired of it back in 1998, 1999, 2000 and onward when I saw the pernicious and outrageous frauds being perpetrated against investors in so-called "new economy" businesses. Nearly all of them went bankrupt in the .COM crash. The simple fact of the matter is that almost none of these firms had any business going public in the first place - they were the starry-eyed dreams of some pimply kid barely out of business school (and sometimes not even that well-versed in the real world) backed by a private-equity or "angel" investor who knew how to game the system and pay off the investment banks via lots of fee-based business to issue "strong buys" on worthless securities.

As just one example I put forward the DSL providers of the day - Covad, Rythms and Northpoint. I talked with all three. All three presented me with a business model for "partnering" with them. A bit of quick math led me to the inescapable conclusion that they didn't have a prayer in hell of ever being profitable on an operating basis, say much less covering equipment depreciation and amortization. I passed on getting involved with any of them for that reason and all three later blew up, vindicating what was in fact a fairly simple set of calculations. So how did the investment banks and others who brought those firms public, all of whom clearly had at least as powerful a calculator as I did, justify their IPOs?

Virtually everyone got screwed by these games, not the least of which were the honest companies. IPOs that doubled on the first day were seen as a strong endorsement of the company instead of what they really were, which is a rip-off of the firm who left literal millions, and sometimes hundreds of millions, on the table to be stolen by the investment banks who exercised their "overallotments" and then sold into the first-day ramps. The underwriting institutions didn't give a damn if there was a sustainable business behind the S-1, so long as that first-day ramp job materialized and they could both earn their fee and the override on the over-allotment - the second often being multiples of the first.

The game never changed in the 2000s - this time we had banks scamming people on the value of so-called "AAA" mortgages and the constructs put together both out of them and referenced off them. Again the securities were worthless or nearly so, but the banks didn't care so long as they got their fees. And like the last time, they basked in the knowledge that they both would not wind up on the wrong end of an indictment and that if things got really bad (as they did this time) they could shove a gun up your nose and force you, the taxpayer, to bail them out.

The important point behind both of these tales is that without the fraudulent securities being issued NEITHER BUBBLE WOULD HAVE INFLATED. That is, neither was simply an "accident" or "starry-eyed dreamers" that got in over their heads. Both bubbles were INTENTIONAL scams fueled by Wall Street's seemingly-unending ability to package up trash and sell it while extracting their fees and "overrides". They then feign ignorance when what THEY KNEW was dead fish starts stinking up the place.

THIS MUST STOP and all the pretending won't do it. Nor will claims that we're writing "euthanasia" bills "for the future." The fact of the matter is that all of these institutions are and have been exercising privileges - the privilege to issue credit on the sovereign wealth of the United States.

That privilege is not the government's to bestow, it is we the people's, and we must withdraw that consent until the scamming is stopped by force of law.

Federally-guaranteed deposit-taking and transaction clearing is a ministerial function. To a large extent so should be lending with guaranteed funds, which I have repeatedly argued should devolve down into "One Dollar Of Capital." Return home mortgages to a 28/36 ratio set and 20% down for all federally-guaranteed loans, and all held or originated by any depository or otherwise-insured institution (including those with access to Fed facilities.)

If people want to gamble - that is, take risk of any sort - let them do it with their own capital but never with the taxpayer's. This means full reinstatement of Glass-Steagall and everything that comes with it. If Jamie Dimon and others don't like these rules then let them take their capital to some other country that doesn't mind having its economy detonated every five to seven years by these scoundrels.

Someone else will take his place and provide the necessary functions; a safe and solid 7-8% return isn't bad, after all, especially when it's government-guaranteed!

Our government and both political parties are severely miscalculating if they believe the anger in society right now is going to let this pass without real reform - not the cock-and-bull games being played by both sides of the aisle at present.

Faux "charges" and SEC "bluster and thunder" are not indictments. We have plenty of information not only in the public record but now irrefutably in the hands of Congress, such as the WaMu disaster, for lawmakers to demand both that existing laws against fraud be enforced and that these institutions all be broken up right here and now, today, with every dollar they stole (that still exists anyway) being clawed back.

There is even hard evidence that members of our government, in some cases, conspired with institutions to falsify accounting (e.g. IndyMac and backdated deposits), a toxic brew of corruption that threatens the vital trust between government and people on which civil order and stability rest.

The people will not sit for less than full enforcement of existing law, restitution for these acts and a reinstatement of Glass-Steagall's proscriptions. Over eight millions jobs were lost in this crash and more than five million additional people failed to find employment during the last so-called "recovery" as they entered the workforce. Even more Americans had their jobs shipped overseas and had their hands (and sometimes head) stepped on as they tried to climb the income ladder. The anger seething under the surface of society is not only palatable it is getting much worse by the day. I overhear conversations almost every time I'm out in public now and most of them are absolutely unsuitable for polite company. This is a marked change from last year as the hope of Obama's election has turned to the anger of recognition, even among Democrats, that we were conned - again.

The people are not talking about which brand of Girl Scout cookie to buy - that much I will assure you, and I'm talking about conversations overheard in the local supermarket - not exactly where you expect to find "nutjobs" of any persuasion talking about various things one doesn't usually think, say much less speak of openly. I shudder at the thought of what's being said behind closed doors where folks like me, who have and continue to preach working within the law, have never been and never will be invited.

How much longer can government get away with the games before something - or someone - snaps? I don't have the foggiest clue, but Friday proved that the stock market hasn't been rising as a consequence of an improving economy but rather on the belief by a handful of speculators that the looting and pillaging that was given free rein and license last spring when FASB was forced to change the accounting rules would not only be allowed to continue but would intensify.

The problem with this philosophy and course of action is that the American People in the main are literally being bled dry by the vampires on Wall Street. The most dangerous man of all is one who has lost everything - home, job, family - and thus has nothing left to lose.

Irrespective of the "pumpers" on Wall Street and in The Media the facts on the ground do not reflect the optimism - consumer "spending" has been held up by people not paying their mortgages, long-term unemployment has ravaged our states and communities while government has simply handed out more and more money via extensions of this and that program, papering over the rot in the economy with borrowed funds we cannot afford.

Government must step in and break these behemoths up. Not because they're too big to fail tomorrow, but because they did too much damage this time around and must not be allowed to get away with it, say much less prosper as a consequence. These acts were not errors of judgment or accidents they were willful and intentional actions taken with full knowledge of the consequences.

Bluntly, these banksters looted the public worldwide through two full cycles of boom and bust, they did it intentionally, and our nation cannot withstand another one of their attacks.

Those of you in Washington DC and State Governments who are reading this, get away from your insular world inside the beltway and state houses and meet with constituents - not as a Representative or Senator, but as an ordinary Joe. Leave the armed goon squad behind and drive a chevy to the local eatery, your local store, the coffee shop or WalMart in your town. Shut your yap for a week and just listen. Note the marked deterioration in mood, attitude and words you hear. That's real, it's dangerous, and you can only deal with it one way - by putting a stop to the looting and start with the prosecuting.

The people are pissed and they're not going to sit still for this. You will either stop it, right here and now, or you will lose your jobs. If you try to lie your way out of it as you have for the last decade you are taking a horrible risk, as this nation and indeed the world is a tinderbox, and little would be required to set off civil unrest or, far worse - war.

Remember, it wasn't just Americans that got screwed and are pissed off.

Do the right thing while there is still time.

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.

VIDEO - Fundamental & Technical Analysis of the S&P 500's Daily & Weekly Charts:

Here is the end of the week analysis of the S&P 500's daily and weekly charts, with comments on important reports due out next week.

Happy Trading this week,
zigzagman

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages:

http://www.sec.gov/news/press/2010/2010-59.htm

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.



The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

For more information about this enforcement action, contact:

Lorin L. Reisner
Deputy Director, SEC Enforcement Division
(202) 551-4787

Kenneth R. Lench
Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4938

Reid A. Muoio
Deputy Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4488

As you can see, shares of GS are down over 13% today. The first chart is a one day chart of today's action, and the second chart is a daily chart that shows how serious the $24.00 drop in share price really is:

Where is $421.8 Billion That Went Out of the Federal Reserve?

http://www.commodityonline.com/news/Where-is-$4218-bn-that-went-out-of-Fed-Reserve-27410-3-1.html



By Dr Jeffrey Lewis
April 15, 2010

The St. Louis Federal Reserve Bank, which documents the inner workings and balance sheets at the nation's central bank, just released new research and data suggesting that the Federal Reserve lent $421.8 billion – with no one knowing exactly where it went.

Where’s the Money?

Each week, the St. Louis Fed releases data regarding the Federal Reserve's activity and public balance sheets. In ordinary times, this data is usually largely ignored, as the mainstream media has little interest in probing into the “small” $5-10 billion changes in the Total Loans and Leases of Commercial Banks. The week of March 24-31 was different, however, as the Federal Reserve made $421.8 billion in new loans, more than it made in the week following the Fed's big moves to combat the financial crisis in 2008!

Is the Fed Bailing out Greece?

Economists are all but left in the dark on the actual operations behind the scenes, and they have minimal data to investigate other than what the Federal Reserve is willing to release to the public. However, the timeliness of this most recent surge in lending activity suggests that the Federal Reserve may be taking a hand in bailing out foreign nations, or Greece in particular, by shoveling funds through commercial banks.

This wouldn't be the first time a bank was used to bail out foreign debtors. AIG, the leading recipient of TARP funds, was used as a gateway to transfer US taxpayer funds to foreign banks owed money. Of course, the ailing insurance company virtually collapsed nonetheless, but long after the funds were delivered from the US Treasury to foreign institutions.

Pull the Alarms!

Rarely are large monetary policy decisions made without an explanation from the Federal Reserve, and even more rarely are they conducted in just one week. To put the recent lending in perspective, $421.8 billion is more than the total increases in lending throughout 2005. There has never in the history of the Federal Reserve been such a massive increase in total lending. And never should anyone expect that lending of this magnitude would be done without any explanation. To put it simply, there is big money moving, and no one knows where it's going, for better or for worse.

Timing is Everything

The huge jump in lending comes just days after the Federal Reserve ends its operations to buy agency and other US debt, and just a few weeks after the looming European debt crisis emerges. Clearly, the timing couldn't be any more interesting, as the Federal Reserve is either indirectly financing international bailouts or continuing to expand the money supply without any prior knowledge.

Gold and Silver Set to Soar

Either explanation for the gross increase in the money supply is a boon for precious metals, which have experienced an even more impressive month as manipulation comes to light. If the Federal Reserve is acting to bail out foreign nations, or to buy up Treasuries or other Agency debt, it should be clear that inflation is sure to run rampant. Head for the hills – unprecedented monetary policy is taking place without any authorization, explanation, or (from what we can tell) causation.

How Financial Reporters Create Illusion to Cover Up Wall Street's Scams:

http://www.alternet.org/story/146414/how_financial_reporters_create_illusion_to_cover_up_wall_street%27s_scams/

By Scott Thill / AlterNet
April 13, 2010

The corporate media's job is to sell confidence on Wall Street's numbers, rather than tempered or even depressed expectations, no matter how realistic they may be.

As Charles Dickens reminded us in his classic novel Great Expectations, the line between crime and cash is a continually blurry one. And it's easily manipulated by language and narrow self-interest.

For example, let's just consider the overly extensive use of one term: "Unexpectedly." It is especially ubiquitous in finance journalism, where it is repeatedly used to console a rightfully nervous readership that, while good news is a great expectation, bad news just seems to comes out of nowhere. Although I've been informally following this clumsy usage for years now since diving into the hazy, crazy world of finance, I've never run out of daily examples. Just plug the term "unexpectedly" into Google News on any given day, and neither will you.

Here's a few that Google coughed up during this writing: "U.S. Home Sales Fall Unexpectedly in Feb.,"ABC News reported. "French Consumer Confidence Unexpectedly Falls On Job Concern," Bloomberg News reported. "South Africa Unexpectedly Cuts Rates to 6.5%," the Wall Street Journal reported.

Unpacking any of these headlines should be simple enough for those who aren't economists, even without the benefit of reading the stories themselves. Nothing in the average American's life and salary, to say nothing of the lenders and companies he or she has to deal with, warrants the surveyed optimism of economists who think home sales should be going up, rather than down, in any given month.

Meanwhile, France isn't immune to our continuing global recession, which is being further enhanced by deepening unemployment and rising corporate profits. So it's no wonder the French don't feel like spending money, when they don't have jobs. And although you need to be somewhat savvy on international currencies and markets to suss out the meaning of South Africa's rate cut, it's not a stretch to look at the headline and guess, correctly, that the nation is trying to encourage demand for its stocks and bonds. In other words, none of these things are unexpected. They make sense and cents.

Except to economists and the traders they enable, both of whom lately have been blowing calls with incorrect predictions, at a major cost to all of us.

"We always use the terms 'expected' and 'unexpected' when a rate decision, earnings and other data emerge counter to our surveys" of economists, Bloomberg spokesperson Judith Czelusniak told AlterNet.

"For better or for worse, Wall Street is all a game of expectations," Paul La Monica, editor-at-large for CNN Money online, explained to AlterNet. "Stocks move based on how a number, be it an economic report or corporate earnings report, looks compared to expectations. That's an admittedly myopic point of view, but that's the way trading works."

Or doesn't. From ex-hedge funder Jim Cramer screaming at CNBC's Mad Money viewers to keep buying Bear Stearns stocks on the eve of its collapse, to the consensus of top politicians and economists totally missing the recession, and down to the current cheerleaders for our so-called economic recovery, the market has been a volatile mess for years because of suspicious expectations. Those unreliable sources and a great many other drinkers of guilt-free derivatives Kool-Aid thought they could keep shuffling stratagems and paper, and the market would just keep inflating. But anyone with an understanding of just the term "bubble" understands that it is defined not by its inflation, but its annihilation. If it doesn't pop, it isn't a bubble. End of lesson.

This unsustainable desire for prophets and profits has led us down some dark alleys, where reality has administered ceaseless beatings to our integrity and accounts. But not our perception, which as advertisers often say, is reality itself. For some reason, that desire for great expectations unmoored from reality perseveres, and remains enchanted by a political and economic paradise that is not only incorrect, but impossible. Instead of continuing to rely on those who can't seem to separate their perception from reality, we should be ignoring them outright. If anything, we shouldn't keep paying them for being wrong when it literally counts, which starts with the headlines and ends with our wallets.

"How someone can read a collection of forecasts, and from that deduce a lack of evidence of potential recession is far beyond me," said Barry Ritholz, financial analyst at the Big Picture and author of Bailout Nation, after Briefing.com's president Dick Green analyzed the prediction of "top Wall Street economists" in November 2007 and concluded that "there is no evidence of recession...there is no evidence of a broad credit crunch." That was mere months before the failure of Lehman Brothers and Bear Stearns. "It's disingenuous beyond belief," Ritholz added.

Why Are 25 Hedge Fund Managers Worth 658,000 Teachers?

http://www.huffingtonpost.com/les-leopold/why-are-25-hedge-fund-man_b_531420.html?view=print

In 2009, the worst economic year for working people since the Great Depression, the top 25 hedge fund managers walked off with an average of $1 billion each. With the money those 25 people "earned," we could have hired 658,000 entry level teachers. (They make about $38,000 a year, including benefits.) Those educators could have brought along over 13 million young people, assuming a class size of 20. That's some value.

Apparently the 25 hedge managers did something that is even more valued in our society. But how valuable was it, really? To assess that, we need to answer a few basic questions:

1. What do hedge managers do?

They run funds into which very rich people put money to make even more money. Hedge fund managers move the money around in very risky ways to get the most enormous yields possible. (Wealthy investors believe they are entitled to double digit and even triple digit returns.)

Because hedge funds are considered playthings for the rich, who presumably are fully aware of all the risks, they are exempt from most financial regulations. (We'll soon see if the financial reform bill now moving through the Senate changes this in any substantial way.)

The wealthy will have placed an estimated $2 trillion into hedge funds by the end of this year. (That's about $6,500 for every man, woman and child in the U.S.)

2. Where does all that hedge fund money come from?

It's mostly excess cash the super-rich have in hand now that their tax rates have dramatically declined. In the 1970s the marginal rate on those with incomes above $3 million (in today's dollars) was 70 percent. Today, the effective rate on the 400 richest Americans is 16 percent, according to the most recent IRS data.

The wonderful thing about putting your money in a hedge fund (or managing one) is that the income you get from it is not taxed as income (say, officially at the rate of 35 percent). Instead, it is treated as a business investment, something that's good for the economy and that we need to encourage through a low tax -- a "capital gain." The tax rate on capital gains is 15 percent. This is one reason that Warren Buffett can say that he pays a smaller percentage in taxes than his secretary.

3. How do hedge funds make money?

Some hedge fund managers use computerized modeling to decide where to invest or to make investments automatically. Other managers claim they just make good judgment calls. They also make enormous bets using lots of leverage and deploy an arsenal of derivatives.

It's a dicey business, but it's not supposed to put the larger system at risk... until it does. In the late 1990s, the hedge fund known as Long Term Capital Management, run by the brightest bulbs in the financial universe (including a couple of Nobel laureates), found itself with over $100 billion in assets but only $4 billion in capital. When that upside down pyramid began to crumble, the effect was systemic. So systemic that the Federal Reserve, fearing a major meltdown of the financial markets, forced Wall Street banks and investment houses to bail out the fund's investors. Some economists argue that risky gambling by hedge funds did not cause the current crisis. But no one has conducted an impartial investigation into that question.

The $1 billion each those 25 hedge fund managers netted (for themselves) was impressive -- but doing it in the year 2009 was also slap in the face of struggling Americans. That's because hedge funds would have earned little or no money at all in 2009 had the government not bailed out the financial sector with trillions in loans, asset guarantees and other forms of financial assistance. It was, in effect, a generous gift from we the taxpayers. Much of that money was "earned" by betting that the government would not let the financial sector collapse. Smart bet.

In principle hedge funds would do little harm if they were not implicitly backstopped by the taxpayer in this way. Here's how one sage financial expert put it to me recently:

Personally, I do not care whether hedge funds and other pools of unregulated funds gamble in opaque derivatives rated by incompetent ratings agencies. But I do want them to fail when their bets go bad. Nor do I want them to be rescued in the event of a run to liquidity. If they are leveraged and cannot come up with cash, they should fail. It will be painful for their creditors. So be it, the more pain, the better. That is the downside to private property. Greed is good, but must be balanced by the fear of failure. Without failure there is no fear.

On the other hand, I want to have a protected and closely regulated portion of the financial sector for those who do not want to take excessive risks. And any institution that bets with "house money"--that is, that has access to the Fed in the case of a liquidity problem and to the Treasury in the case of insolvency--must be constrained. That is the direction that true reform ought to take.

4. Do hedge funds create real value that is essential for our economy and our society?

Here's a test: Imagine what would happen if they disappeared entirely. People working at the 8,000 or so hedge funds -- a relatively small number of people -- would lose their jobs. But it's unlikely that the national or world economy would suffer at all. The wealthy would simply move their money to other investments. They might even decide to make longer term investments that would be used to produce real goods and services.

But wait, aren't these piles of money a valuable source of funds for investment in the real economy? Don't hedge funds make our markets work more efficiently? By betting against overvalued currencies and bogus balance sheets of toxic-chocked banks, don't hedge funds police the bad guys? Aren't they the essential glue for rebuilding America?

If any of those good things happen, they're an accidental byproduct. The real job of hedge funds is to allow very rich people to make more money as quickly as possible, preferably without tying up the cash for too long. Use hedge fund money for a leveraged buyout that can be flipped quickly for big profits? Sure. Use it to speculate on the value of currency or to make a quick dash in and out of a credit default swap? You betcha.

If we step back and look at the big game, we can see that hedge funds are hard at work skimming profits from the financial sector, which in turn is living off the largess of the American taxpayer. It's all part of the great financialization of the U.S. economy that began in earnest when the financial sector was deregulated in the late 1970s. Over the years, financial sector profits have risen to nearly 40 percent of all corporate profits. And sadly, it's not because financial firms helped our economy grow. It's because they figured out how to run a very profitable casino for the wealthy. And then hedge funds came along and figured out how to skim the skim from those casinos.

5. So how can 25 hedge fund managers be "worth" $658,000 new teachers?

They aren't. And I bet the leading hedge managers themselves would admit it.

But our economic system isn't rewarding real value. While the hedge fund 25 are living large, teachers everywhere are getting the axe. Why the layoffs? Because state and local governments aren't collecting enough taxes -- not since Wall Street investors crashed the economy.

In our New Jersey town, we are laying off 85 teachers. Instead we ought to be hiring 85 more to reduce class size and improve support programs for those students who desperately need them. It's obscene that we're shoveling money to the super-rich even as we force teachers to join the ranks of the unemployed. Already 29 million Americans are without work or forced to work only part-time.

How to tame these runaway paydays? Just institute a financial transaction tax or a windfall profits tax. The fix is technically simple but politically complex. It's going to take a lot of political will -- over a long period of time -- to reorder our most basic economic values.

In the meantime, try explaining to your kids why school programs are being cut while 25 shrewd gamblers are living like Pharaohs.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.