link01

another small gem from bill gross: <<...My last month’s Investment Outlook commentary on the significance of wage and employment trends remains the key focus. Common sense tells us that consumer spending growth comes from highly employed, well-compensated labor, and we are far-far from even approaching that elemental condition. The fact is that near double-digit unemployment has resulted from numerous business models that are now broken: autos, home construction, commercial real estate development, finance, and retail sales. Construction of a new Humpty Dumpty capitalistic “oeuf” will be a herculean task. Potion hunters, however, should also understand the following macro concept that will dominate the indefinite future, one which I will humbly try to explain in the next few pages in 500 words or less: Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers. If they can do that, then employment and economic stability may ultimately follow. To explain: A country’s GDP or Gross Domestic Product is really just an annual total of the goods and services that have been produced by its existing stock of investment (capital in the form of plant, equipment, software and certain intangibles) and labor (people working). Over the last 15 years or so in the U.S. that annual production (GDP) has increased in nominal (real growth and inflation) terms of 5-7% as shown in Chart 1. Not every year, certainly not in boom or recessionary years, but pretty steadily over longer timeframes, and consistently enough to signal to capitalists that 5% was the number they could count on to justify employment hiring, investment spending plans, and which would serve as well as a close proxy for the return on capital that they should expect. Nominal GDP is in fact a decent proxy for a national economy’s return on capital. If each and every year we grew by 5%, then that would be sort of like a stock whose earnings grew by the same amount. Companies and investors then would be able to estimate the present value of those cash flows, and price investment and related assets accordingly – a capital asset pricing model or CAPM based on nominal GDP expectations.>> the rest here, with its somber forecast of a 'new mormal' of 3% US GDP growth going forward. no wonder economic forecasting is known as the dismal science. http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+August+2009+Gross+Investment+Potion.htm are there any silver linings on the near horizon? the more optimistic pundits of the macro scene point to the inventory rebuild surely right around the corner. they cite the steep fall in inventories over the last 8 months to record lows as being unsustainable, ready to snap back like a coiled spring. but what does the inventory to sales ratio look like? well, its still hovering near recent highs of the last decade, as sales have been falling in lockstep with inventory drawdowns thanks to rising unemployment & a deleveraging consumer. logic makes one wonder if the much bally-hooed green shoots will wither before they bloom, but at times its psychology, not logic, that gets the upper hand & sways outcomes. tho most of the experts/commentators i admire most are skeptical of 'green shoots' & cautious to gloomy on the near term prospects for recovery, this is one time i'm anxiously hoping they are collectively WRONG! this is getting scary, let alone painful. and its why i'm watching the well regarded guys at ECRI & their call of an imminant end to the recession amidst a synchronized global surge in their leading indicators. too bad its all 'proprietary' (blackbox). i'd like to a peek at their methodology. i'd hate to be pinning my hopes on someone that could be playing with tarot cards, for all i know. http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/

i think you're right. but remember that this was the most "forecast" recession we've had. everyone was predicting it. here was a cnn panel discussion back in jan08, Are We in Recession? http://edition.cnn.com/TRANSCRIPTS/0801/13/cnnitm.01.html and as late as apr08 the principles of ERCI said we were on track for a recession but they felt there was a uniquie window of opportunity to avert it: http://sify.com/finance/fullstory.php?id=14635339 http://www.businesscycle.com/

in the interest of a balanced debate here's an optimist with a good track record & credentials: <<Good news, everyone: The recession will end this summer. The economic forecasting gauge with the best track record was positive in the past two weeks for the first time in nearly two years. The Weekly Leading Index from the Economic Cycle Research Institute was up 2.1 percent when it came out June 25 and then up 4 percent Thursday. "We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts." Achuthan said the recovery is also showing up in the longer, shorter and coincident indexes maintained by ECRI - plenty of evidence that it has a life of its own. "When you have a pervasive move in the leading index as we have now, it suggests a more virtuous cycle that feeds on itself has begun," he said. >> http://www.pressofatlanticcity.com/business/article_48d2aa2d-bab0-57b7-b070-96c8e4697a9d.html then again, martin feldstein is no slouch either: Harvard’s Feldstein Sees Risk of ‘Double-Dip’ Recession in U.S. http://www.bloomberg.com/apps/news?pid=20601087&sid=a3IpfKeeveVM

good article that came out of a privat equity conference sponsored by wharton. here are the topics: The Coming 'Wall' of Refinancings: A Trial for Private Equity Firms -- and Their Portfolio Companies Continuing Defaults by Private Equity Portfolio Companies Transform the Middle Market 'True Turnaround Specialists' Are Poised to Survive in Today's Challenging Private Equity Market Private Equity Secondary Funds: Are They Players or Opportunistic Investors? India and China Offer Attractive Private Equity Opportunities, but Without Majority Control the topic that caught my eye was 'True Turnaround Specialists' because i've suspected for a long time that there are alot of cowboys & pretenders in the PE space who it would still be more accurate to call LBO firms & pseudo activists. <<...Michael Psaros, managing director at KPS Capital Partners, pointed out that cash usually isn't available to leverage in distressed situations. Most of the companies that his firm looks at have managers who are "catastrophic failures" and need to be replaced with new leadership, or a chief restructuring officer, to begin to create value. "That's our world," said Psaros, who added that after 20 years in the corporate restructuring field he had never seen so few true competitors in the business. "That's because it is hard. It is as different from the traditional LBO model as you can imagine." ...Psaros notes how, in many cases, a management change can drastically alter a company's prospects. "Sometimes all we have to do is change out a CEO and everybody below him just blossoms. On the other hand, we have literally had to fire everybody down to the shop floor level. Those two extremes are fascinating." He warned against buying into stereotypes about the management style of turnaround specialists. "Most people assume that the successful manager of a turnaround is a high-testosterone, chest-pounding professional. We have seen individuals with that kind of personality be successful, but we have also seen bookish, cerebral and methodical managers be equally successful. There's really no pattern." The key to managing a turnaround, he said, is to develop a plan and stick to it day by day, to ratchet up expectations. "Big-picture professionals have no place in a turnaround." >> http://knowledge.wharton.upenn.edu/special_section.cfm?specialID=89

well, i certainly had no gift for unlocking any worthwhile $-making secrets. better luck to you, tho. and i hear what you're saying re the market makers & inefficiencies. tho i'm more than a little hazy on my option theory nowadays i seem to remember that puts & calls on the underlying rarely get too far out of whack with each other because of the inherent risk free conversion arbitrage opportunity to be had if they did. for instance buying calls at strike x & selling the same no. of overpriced puts of the same strike & month to create a synthetic long stock position. because of the overpriced puts relative to the same stike calls you're essentially buying that synthetic long stock position at a discount to the market price of the stock existing at the same moment in time, which you could then 'lock in' by simultaneously shorting an equal amount of that stock & waiting for expiration to realize the spread on your synthetic. but thats all much easier to do in theory than in practice. and its the supercomputers that would get there first to claim the spoils in any case.

i'll second options by natenburg. another excellent one is fundamantals of the options market by michael williams & amy hoffman. i used to trade options back in the day, hoping i could unlock their secrets. i could never find a way to make enough to pay for the hrs upon hrs spent concocting strategies both simple & complex, screening for ideal setups, monitoring position gamma, delta, theta, implied volatility, etc. and if i could console myself that at least i was enjoying the challenge, that quickly evaporated come tax preparation time at yrs end! what a headache!! i did come across 2 instructional instances at 2 different options websites where both utilize the same strategy of selling iron condors on equity indexes but with different spins if similar results. you might find it interesting: https://www.thinkorswim.com/tos/displayBlog.tos and http://www.condoroptions.com/index.php/performance/

yup, bullseye, imo. i enjoy reading his letters. they're full of interesting insights & unique, inter-disciplinary perspectives. its just that the conclusions that he sometimes draws & anchors his investment choices to are REALLY fuzzy-wuzzy. this part of his letter for instance strikes me as being group-think, tho miller believes it is a contrarian view: <<Our friends at GaveKal Research3 have reminded us there is a certain rhythm to the remarks surrounding recessions and recovery. The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained. The data from the recent ISM4 reports on employment and production are consistent with an economy that has stabilized and should turn higher this quarter. The very dramatic inventory liquidation of the past nine months could set the stage for a considerably stronger set of GDP5 numbers than currently forecast as inventories are rebuilt. This should in turn lead to better payroll numbers and underpin a stock market that appears poised to move higher.>> miller might be right here, but i dont think he gives enough weight to the opposite scenario. i think this commentary from The Contrary Investor pinpoints the risks brilliantly: <<We’ve been discussing this with regularity and continue to believe it’s a key focal point ahead, so it should be no surprise to anyone that household leverage contracted again in 1Q. We now have the two largest quarters of back-to-back contraction in nominal dollar household leverage on record. In fact, at least over the near six decades shown in the chart below, this has never happened two quarters in a row. We continue to believe and emphasize that THE most important watch point in the current cycle is the character of the household balance sheet recession. And as we have maintained for many a moon now, the household deleveraging cycle is still in its early stages. Unfortunately labor market and wage pressure of the moment make it very tough for households to "hurry" the needed deleveraging process. The longer the labor markets remain weak, the more drawn out will be the household deleveraging process, and by default the longer it will take for the rate of change in consumption to recover adequately to spur self-sustaining macro economic growth. Throwing in an increased household savings rate does nothing to brighten the consumption picture. As marked in the bottom clip of the above chart, never in the history of the data have we seen the year over year change in household debt fall into negative territory. 1Q was a record breaker on that front. This is completely unique to post war US economic experience. We’ve asked the question a number of times in the recent past as to whether the US has encountered a point of secular change in US consumption patterns. The bottom clip of the above chart simply reinforces this curiosity. Consumption that quite necessarily has been intertwined with and dependent on household leverage. The retail sales increase for May at the headline level was completely driven by rising gasoline sales due almost entirely to price. Core non-auto and gas retail sales did not look good. The discretionary components of the retail report were collectively weak at best. We need to keep a very sharp eye on the following relationships as we move into 2H 2009. Historically consumer confidence has led rate of change improvement in core retail sales by literally a month or two. We have the upturn in confidence. The rate of change upturn in retail must come now, or we are looking at perhaps what would be one of the most important divergences we can think of in terms of implication for forward US macro economic expansion. You already know personal consumption expenditures account for 70% of recent GDP. Likewise another corroborative relationship of importance is between that of the year over year change in non-auto and gas retail sales and monthly nominal body count payroll employment trends. The two have moved in directional harmony over time. For now, headline payrolls have been getting less bad, but we have not yet seen the character of less bad in core retail sales trends. Again, this needs to improve now or the divergence relative to historical experience will be all too apparent. Just a quick very long-term picture of life update below and we’ll move on. We’ve never seen anything like current experience over the past six decades. A secular demarcation line? We'll see. You’ll remember that above we mentioned the importance of the inventory rebuild issue. Sorry to drag you through the household debt and retail sales trends above, but this is what we have been leading up to. First, it’s the underpinning to the “green shoots” concept and the bedrock upon which the “second half recovery” hopes have been pinned upon by a good number of Street cheerleaders for well on a number of months now. But more importantly, we believe it’s a fundamental driving force for emerging market equity performance. Let’s face it, who would benefit most from a macro domestic and really global inventory rebuild cycle? The emerging market manufacturing community. Emerging market equities were blown from the sky last year anticipating and discounting an inventory cleansing cycle of meaning. This year they have risen from the ashes trying to strongly discount a global inventory rebuild cycle of substance. Although this is a pretty darn simple statement, emerging equities and commodity sectors in general are dependent fundamentally on the whole issue of an inventory rebuild. So, as we look into the second half and try to assess potential change in equity sector leadership, or reinforcement of what is existing leadership, following the character of inventories and sales becomes critical. As you can see in the bottom clip of the chart below, yes, inventories have been and continue to be drawn down meaningfully by the month over the last seven months. The ultimate reversal of this is the case for the inventory rebuild so widely anticipated by investors as of late. But the top clip suggests the potential for a different outcome that we believe relates directly back to household deleveraging. Yes, inventories are falling, but sales are falling right alongside inventories, leaving the inventory to sales ratio to this day quite near the highs of the current decade and not far off the recent spike peak.>> unfortunately i cant post the fantanstic charts that accompany the above. but you can see them & read the rest here: http://www.contraryinvestor.com/mo.htm its a great site.

i'll oblige. iaac. i'm not sure i'm finished buying, but for now i want to keep about 15% cash at the ready. so i probably wont consider adding more unless & until iaac declines to under 12. my avg cost right now is 13.75. i think there's a good chance it goes lower, but at this price i'm content with waht i own. briefly: i'm tipping my toe back in the iaac waters after a long hiatus. this acquisition of fcsx looks like a potential gem a couple of years out. i used to keep an occassional eye on fcsx when i was an iaac shareholder because their biz was the closest to iaac's commodities & forex divisions i could find. i never could warm to them tho...i was never comfortable with their risk profile. and voila! iaac says fcsx will continue as an independantly run division of iaac, with only the risk management component ceded to iaac. if that's the case then iaac has made a sweet deal at a sweet price. without iaac's risk mngt expertise & the agreement between them to give it over to iaac its not a deal i would have liked at any price! its no wonder fcsx has had its share of funding problems & iaac has credit relationships that would make the competition green with envy. it looks the the combined post merger iaac will have a net worth of 252 mil & a book val per share of 13.40 or there about. thats based on 18.85M post merger shares mil shares outstanding post merger. ofcourse, there could be some asset/goodwill writedowns from fcsx & significant merger related expenses that takes my est of book val down. but also according to the iaac/fcsx presentaion given, fcsx is due 54 mil in tax refunds. that would take post merger book val up to about 16 a share. http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6698739-7591-122009&type=sect&dcn=0001193125-09-149046 i'm generally not enamored of co's whose fortunes are tied too closely to the whims or buoyancy of the capital markets, but iaac has a large & growing larger physical commodity trading business in addition to international equity market making, forex, & debt divisions. and importantly they are truly customer driven. iaac is fully hedged & does almost no trading for their own account, unlike just about all the other big guys. thus conflicts of interest & exposure to directionality of the markets are minimal. they are sensitive to the geaneral direction of economic trends, however. iaac also conducts its business with less risk in terms of the avg assets to equity ratio. it fluctuates, but is generally around 5 to 1 (last Q 365 to 79). return on equity has been outstanding since o'connor & branch, pres & vp respectively, assumed control in 2002. if anyone has read this far, you can look for yourselves...i'm all thumbs at the keyboard. last note & a caveat: iaac is subject to some screwy fasb accounting rules due to the physical component of their commdities div which essentially forces them to mark to market their derivative hedges (puts, forwards, futures) at all times while carrying their physical commodities inventory pending delivery to their customers at the lower-of-cost or market. as you can readily see this creates a disconnect in a rising price envirement...accounting wise, not economically. keep this in mind when reviewing their reported headline no.'s. you'll need to adjust for the unrealized but unaccounted/unreported carrying val of their inventory, which you'll find in the footnotes of the 10Q's.

i especially found this paragraph interesting: <<The third strategy where the Buffett Partnership concentrated was control situations. These were events where the partnership would initiate a large enough position in a company and try to influence corporate policy. A famous control situation is Berkshire Hathaway (BRK.A), which started out as an undervalued position.>> shades of west, maybe? still too early to tell with a high degree of confidance, but i'm not waiting for for till the story becomes obvious one way or the other. i've hitched my wagon, despite all the nagging questions, controversy, & second guessing, my own included... http://seekingalpha.com/article/150108-buffett-partnership-letters-still-helpful-today?source=yahoo http://www.ticonline.com/buffett.partner.letters/1962.01.24.pdf

all jockey stocks, like partner. tho i think he'd & a few others disagree that west & sns are worthy of the name ;) west-30% (been buying in dribs & drabs for 3 yrs) sns-30% ffh-15% iaac-3% (just started rebuying this after having sold in 2008) orh, brk, luk-less than 2% cash-15-20% my whole family-mother, brother, & sister- are in the same stocks too...they dont like the interest rate on their savings account, & are willing to hitch up to the same caboose

i'd be more worried about the upswelling of political risk & public backlash more than anything. its hugely unquantifiable, imo. http://online.barrons.com/article/SB124786956635760403.html http://www.nytimes.com/2009/07/17/opinion/17krugman.html?_r=2 http://trueslant.com/matttaibbi/2009/07/16/on-goldmans-giganto-profits/ http://borowitzreport.com/article.aspx?ID=7047 http://thereformedbroker.com/2009/07/17/lucas-van-praags-to-do-list/ http://www.epi.org/analysis_and_opinion/entry/behind_goldman_sachs_second_quarter_profit/#When:00:27:45Z http://zerohedge.blogspot.com/2009/07/why-does-goldman-need-fed-exemption-for.html http://www.ritholtz.com/blog/2009/07/max-keiser-takes-offense-to-goldman-sachs-story/ and that's just a small sampling! the only 2 i feel comfortable with are jeffries (jef) & international assets holdings (iaac). the latter is one i've been buying again after owning it for a couple of years in 2006. but if gs & the other big boys come under increasing political & public attack, the babies will be thrown out with the bath water.

well, i'll be. i never thought we'd see such an unequivacably personal view expressed ever since you became a money manager, with all the attendant concerns about conflicts of interest & talking your book that comes with it. but certainly i'm happy to see your enthusiasm for him remains undiminished, despite controversy & criticism sardar has attracted recently.

more great stuff from "Audit Interview: James L. Bothwell The author of a definitive ‘94 GAO derivatives report talks about industry pushback and financial-press complacency" [hope i'm not eating up too much board space with this] <<You saw a marketplace there that was highly concentrated in six major dealers. You saw a marketplace where there was no transparency. Those dealers knew who their counterparties were, but did not know who their counterparties’ counterparties were. There was nobody with the overall view of what that credit concentration and credit risk was. That’s what we were calling for regulation to do—to get information about all these counterparties’ exposures. Who was exposed to whom? It was obvious to me. We have this system of bank examiners—I don’t mean to disparage bank examiners, but they can be focused on the minutiae: “Are these forms being filled out correctly?” and they just miss the big picture of the big risk exposure and the functioning of a bank and its risk management. And the central banks allowing the capital to be set by the banks’ own internal models is just incredible. TA: What would have happened had your recommendations been implemented in ‘94? JB: AIG wouldn’t have happened. TA: If AIG hadn’t happened—they were taking much of the super-senior risk and concentrating it in one place, you can follow it down the line, you would have much less lending to subprime housing, for instance. But you guys at that point were talking about interest-rate swaps: JB: The credit-derivatives market was just being developed as we issued our report. We knew about it and we knew about AIG. Matter of fact, when you read about the regulatory gaps with the insurance companies, that’s what we had in mind. We went up to meet with (CEO) Hank Greenberg up at his office at AIG to talk about our report and what we were recommending. He said “You can’t tell me anything about risk management. I’ve got control of this. It was out of control, but I’ve got control of it now. I have nothing to learn from you.” The other thing that kills me—after our report came out and I was director of this group of about 120 people—some people in New York, Chicago, San Francisco—most in Washington. They did an amazing amount of work in the four or five years I headed that group. When Republicans took over the House, they cut GAO’s budget like 40 percent, partly I think as payback. They pretty much gutted the GAO’s ability to do this kind of work. TA: Has it ever recovered? JB: No. TA: So if you were at GAO right now and were asked to do this kind of report you couldn’t do it? JB: No, I don’t think you could do it, unfortunately. One of the immediate fallouts from the big budget cut of the GAO was that we lost the New York office. I lost the people up there who helped do a lot of this work. I always gave them two directions: one, we want to be focusing on where the assets are—the big markets—and two, we want to focus on where the risk is. And that’s the way this derivatives report came about. It was growing rapidly, lot of exposure and big risk that no one was looking at. TA: What do you think about how the press covers regulation? JB: I think over the years the press, with a couple of key exceptions, the finance press is heavily influenced by industry. They take their side. To write their stories, financial reporters need to develop and maintain knowledgeable sources willing to speak on the record. These sources almost all come from the industry and naturally present the industry’s point of view. It is much more difficult for reporters to find informed, unbiased analysts willing to speak on the record. There is usually nothing in it for them to do so. TA: Is the press more or less influenced than the regulators? Regulators from the last couple of administrations have identified with the industry and come from the industry… JB: And this administration, too. You get Larry Summers. You get Gary Gensler, who is actually the one who actively put in the deregulatory measure (Gensler, along with Phil Gramm, pushed the infamous Commodity Futures Modernization Act, which prevented the regulation of derivatives, most crucially the credit-default swaps that helped create the financial crisis). Then you’ve got their understudies. You’ve got Geithner. And then to take Geithner’s place at the Federal Reserve Bank of New York you get (William C.) Dudley. Well, Dudley is a former chief economist at Goldman Sachs. President Obama needs to get away from this Wall Street-captured stuff. TA: If the press identifies too much with the industry, what stories should it be doing now? What’s it missing? JB: I think they’re concentrating too much on the proposals du jour without understanding or pointing out the fact that no one really understands what caused this financial collapse in this country and this incredible loss of wealth and this pain. And until you understand those causes you’re not going to be able to craft the correct solution. But I don’t think the press can get at it. Unless you can get some examiner at Citigroup to talk on the record about “My God, we knew this place was a disaster, but Comptroller Dugan wouldn’t let us do anything about it. TA: Which is unlikely. JB: Extremely unlikely. TA: Inside these agencies are people afraid to speak out? JB: Oh, sure. You can pay a big price. TA: How optimistic are you that the necessary reforms will be made? JB: I think the same thing that happened (back in 1994), is going to be the same thing that’s going to happen now. The industry is already fighting back against anything really meaningful, but they’ll—as they did back then—they’ll form a study group and come up with some marginal stuff that won’t impinge upon their fees and upon their profitability. And that will be it.>> ok, i've highjacked enough of this thread. but i keep thinking of patrick byrne & his deep capture sories as i link to these articles, & how much more what he & his staff there write about increasingly resonates!

<<And so this was before Jake DeSantis and his colleagues found themselves suburban-Connecticut outcasts, before their first death threats, before the House of Representatives passed a bill because of them (taxing 90 percent of their large bonuses), before New York attorney general Andrew Cuomo announced he was going after their paychecks, and before Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.”>> overall, this piece by michael lewis represents a more balanced portrayal of AIG financial product division than most. but the level of societal anger & political posturing will be difficult to tame. and articles like this one are frightening in their rabid anger & indignation towards wallstreet & its legion of masters of the universe: snippet <<I keep hearing people say, “Well, so what — it’s only fair that Goldman got paid off for its deals with AIG. After all, AIG was contractually obligated to Goldman. Goldman deserves that money, because it was doing the right thing in buying insurance from AIG in the first place.” That’s bullshit, too. As Rich Bennett over at the hilarious monkey business blog pointed out to me the other day, Goldman was insane and reckless in making those deals with AIG. Goldman wasn’t removing risk from its books by buying CDS protection from AIG, they were exchanging one kind of risk for another kind of risk, counterparty risk. “If you have too much risk to one entity and they go bust, you’re shit outta luck,” Rich says. “They took AIG for a ride, and when the music stopped, they and their partners were going to be taking up the proverbial tookus.” So to review: Goldman makes insane bets, runs wild on AIGFP’s house idiot Joe Cassano for a while, sticking him with $20 billion in risk, and when it all went to shit — as it inevitably had to — they drove a big stake through AIG’s heart and got the government to step in and pay them off using our money. How’s that for market capitalism? Just like Adam Smith drew it up, right? They’re just smart guys! >> http://trueslant.com/matttaibbi/2009/07/16/on-goldmans-giganto-profits/ one of the best articles i've seen recently on the madness of wallstreet innovation & bully-lobbying efforts to maintain the status quo is this: <<A few months back, The Audit’s Elinore Longobardi took a a long look at how the press failed in its coverage of a 1994 report on derivatives regulation from the Government Accountability Office, the nonpartisan investigative arm of Congress. The study, headed by James L. Bothwell, then director of financial institutions and markets issues at the GAO, came on the heels of a series of disasters, including the bankruptcy of Orange County, California, in the fast-growing derivatives markets. The report flashed red about the need to regulate what was (and would, alas, remain) a veritable Wild West of financial “innovation”: Much OTC derivatives activity in the United States is concentrated among 15 major U.S. dealers that are extensively linked to one another, end-users, and the exchange-traded markets… This combination of global involvement, concentration, and linkages means that the sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to the others, including federally insured banks and the financial system as a whole.>> and <<I caught up with Bothwell, who now owns Financial Market Strategies LLC, over lunch in Alexandria, Virginia, to talk about his hard-hitting, clear-eyed report, the reaction to it, and the similarities to today’s crisis. THE AUDIT: I was just reading the new Gillian Tett book about the genesis of credit-default swaps at JP Morgan, and she calls the failure to regulate derivatives in 1994 “one of the most startling triumphs for a Wall Street lobbying campaign in the twentieth century.” What happened? JAMES L. BOTHWELL: This report created a firestorm of industry and regulatory backlash after it was issued. The industry financed and formed a tremendous backlash to defeat our legislative recommendations. This consumed me for almost twelve to eighteen months, talking about this report and defending its recommendations. TA: We’re just now coming out of three decades where a zealot like Alan Greenspan was considered mainstream, celebrated as an oracle, the “maestro”—a financial god, essentially. That’s the environment that your report came out into. Did you think you’d face the resistance that you did from people in power, especially from the Clinton administration? They campaigned in ‘92 as sort of anti-Wall Street. JB: They started lobbying me before the report came out. I knew exactly the extreme resistance we were going to get.>> http://www.cjr.org/the_audit/audit_interview_james_l_bothwe.php?page=1

<< He and the other traders had been required to defer about half of their pay for years, and intertwine their long-term interests with their firm’s. The people who lost the most when A.I.G. F.P. went down were the employees of A.I.G. F.P.: DeSantis himself had just watched more than half of what he’d made over the previous nine years vanish. The incentive system at A.I.G. F.P., created in the mid-1990s, wasn’t the short-term-oriented racket that helped doom the Wall Street investment bank as we knew it. It was the very system that U.S. Treasury secretary Timothy Geithner, among others, had proposed as a solution to the problem of Wall Street pay.>> interesting take on the compensation policy, but too pat by itself. would a similar comp policy at New century mortgage, for instance, have changed their path, their ultimate fate? i doubt it. because that comp policy would have still been grounded in a culture that rewarded employees for selling MORE subprime mortgages at ridiculously inadequate prices. what about risk control, stress testing, & the kind of healthy skepticism that seeks out realistic price discovery & conservative value estimations? and lewis says nothing about persistent allegations that AIG routinely cooked its books. the comp policy he cites above, as rational as it sounds in isolation, would do nothing to solve a sort of institutional imperative to "dress to impress" on the financial reporting front.

>>There was a natural role for a blue-chip corporation with the highest credit rating to stand in the middle of swaps and long-term options and the other risk-spawning innovations. The traits required of this corporation were that it not be a bank—and thus subject to bank regulation and the need to reserve capital against the risky assets—and that it be willing and able to bury exotic risks on its balance sheet. There was no real reason that company had to be A.I.G.; it could have been any AAA-rated entity with a huge balance sheet. Berkshire Hathaway, for instance, or General Electric. A.I.G. just got there first.<< Um, no. That wont wash. Lewis continually views buffett & his actions thru the prism of his own wallstreet, ex-trader mentality.

here is a link to jake de santis' resignation letter referenced in michael lewis' piece. http://www.nytimes.com/2009/03/25/opinion/25desantis.html?pagewanted=1

as a counterpoint to the above opinion piece, which is one apparently shared by WEB, among others, there's this: <<The Recession Is Over By Anirvan Banerji RealMoney.com Contributor 7/17/2009 8:22 AM EDT Back in late April, amid rampant pessimism about the economy, the Economic Cycle Research Institute (ECRI) predicted that the recession would end this summer. The leading indices on which we based that call have since seen a synchronized surge. In fact, the cyclical improvement in the economy is proceeding in a textbook sequence, from long leading indicators to short leading indicators to coincident indicators. In essence, there are now pronounced, pervasive and persistent upturns in a succession of leading indices of economic revival. When approaching a cyclical turning point in U.S. economic growth, the growth rate of the U.S. Long Leading Index (USLLI) typically turns first, followed by the growth rate of the Weekly Leading Index (WLI), growth in the U.S. Short Leading Index (USSLI) and growth in the U.S. Coincident Index (USCI). Notably, the levels of the USLLI, WLI and USSLI are all rising. In fact, the chart below shows that by May, USLLI growth (top line) had already surged to a four-year high. Meanwhile, WLI growth (second line) has spurted to a two-year high, having crossed into positive territory. Following in their footsteps, USSLI growth (third line) has shot up to a one-year high, though it's still in negative territory. Growth Rates (%) of Leading and Coincident Indices Source: ECRI Finally, the USCI is still slipping, indicating that as of June, the U.S. economic recovery had not yet begun. Yet USCI growth (bottom line), which represents the rate of growth of aggregate economic activity, has now risen for three months. While still in negative territory, it's now at a six-month high; almost certainly, the upturn in the growth rate cycle we predicted in April is now in progress. But the sequential upswings in the leading indices aren't just about less negative growth -- we have pronounced, pervasive and persistent upswings in a succession of leading indices of economic revival, the most powerful possible predictor of a business cycle recovery. What's impressive here is the degree of unanimity within and across these leading indices, along with the classic sequence of advances in those indices. Such a combination of upturns doesn't happen unless an end to the recession is imminent. If so, why is there such broad pessimism among analysts? The problem is a widespread inability to distinguish among leading, coincident and lagging indicators, along with the vast majority of economic indicators that don't fall neatly into any of those three categories. Thus, indicators are typically judged by their freshness, not their foresight. Because most market-moving numbers are coincident to short leading, while corporate guidance is often lagging, it's no surprise that analysts don't discern any convincing evidence of an economic upturn. The arguments marshaled by standard-bearers of the pessimistic consensus hold little water. Usually, their "analysis" is based on gut feel, bolstered by any seemingly plausible argument that would support their case. For instance, last month, with oil prices and interest rates staging something of an advance from their lows, skeptics opined that this would nip any potential recovery in the bud. But it's hardly unusual for such indicators to turn up in anticipation of economic revivals, which would never take place if higher oil prices or interest rates were able to head them off. This month, the rise in the jobless rate to a 25-year high is being taken by some as an argument against recovery: Consumers supposedly won't spend when joblessness is mounting. Apparently, many analysts are unaware that even the 1929-33 recession ended when the jobless rate was over 25% -- and still rising! The "second-derivative rally" in equities has provoked much derision, especially from those who missed it. Yet ECRI's leading indices now have positive second derivatives. More important, they've already had positive first derivatives for some months. It's worth reminding calculus-challenged analysts who doubt the significance of these cyclical upswings of the second-derivative test: When the first derivative of a univariate function rises to zero and its second derivative turns positive, it marks the low point of the function. That development is already in the rearview mirror for every one of ECRI's leading indices of economic activity. In sum, the economy has a raft of problems that'll take a long time to resolve. But none of them can head off the imminent economic recovery that ECRI's objective leading indices are promising.

Time to tackle the real evil: too much debt By Nassim Nicholas Taleb and Mark Spitznagel Published: July 13 2009 19:11 | Last updated: July 13 2009 19:11 The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option. Our analysis is as follows. First, debt and leverage cause fragility; they leave less room for errors as the economic system loses its ability to withstand extreme variations in the prices of securities and goods. Equity, by contrast, is robust: the collapse of the technology bubble in 2000 did not have significant consequences because internet companies, while able to raise large amounts of equity, had no access to credit markets. Second, the complexity created by globalisation and the internet causes economic and business values (such as company revenues, commodity prices or unemployment) to experience more extreme variations than ever before. Add to that the proliferation of systems that run more smoothly than before, but experience rare, but violent blow-ups. Our ability to forecast suffers due to this complexity and the occurrence of the occasional extreme event, or “black swan”. Such degradation in predictability should have made companies more conservative in their capital structure, not more aggressive – yet private equity, homeowners and others have been recklessly amassing debt. Such non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events. The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “experts”. Anyone relying on these models for conclusions is deluded. Third, debt has a nasty property: it is highly treacherous. A loan hides volatility as it does not vary outside of default, while an equity investment has volatility but its risks are visible. Yet both have similar risks. Thus debt is the province of both the overconfident borrower who underestimates large deviations, and of the investor who wants to be deluded by hiding risks. Then there are products such as complex derivatives, which in the name of “modern finance” make the system even more fragile. Against this background, we have two options. The first is to deflate debt, the other is to inflate assets (or counter their deflation with a collection of stimulus packages.) We believe that stimulus packages, in all their forms, make the same mistakes that got us here. They will lead to extreme overshooting or extreme undershooting. They lead to more borrowing, by socialising private debt. But running a government deficit is dangerous, as it is vulnerable to errors in projections of economic growth. These errors will be larger in the future, so central bank money creation will lead not to inflation but to hyper-inflation, as the system is set for bigger deviations than ever before. Relying on standard models to build policies makes us all fragile and overconfident. Asking the economics establishment for guidance (particularly after its failure to see the risk in the economy) is akin to asking to be led by the blind – instead we need to rebuild the world to make it resistant to the economist’s mystifications. Invoking the pre-internet Great Depression as guidance for current events is irresponsible: errors in fiscal policy will be magnified by this kind of thinking. Monetary policy has always been dangerous. Alan Greenspan, former Federal Reserve chairman, tried playing with the business cycle to iron out bubbles, but it eventually got completely out of control. Bubbles and fads are part of cultural life. We need to do the opposite to what Mr Greenspan did: make the economy’s structure more robust to bubbles. The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers. It is sad to see that those who failed to spot the problem (or helped to cause it) are now in charge of the remedy. Just as the impending crisis was obvious to those of us who specialise in complexity and extreme deviations, the solution is plain to see. We need an aggressive, systematic debt-for-equity conversion. We cannot afford to wait a day. The writers are with Universa Investments; Prof Taleb is author of ‘The Black Swan: The Impact of the Highly Improbable’ http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html

The Economy Is Even Worse Than You Think The average length of unemployment is higher than it's been since government began tracking the data in 1948. By MORTIMER ZUCKERMAN The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad. The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion. Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates: - June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse. - More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll. - No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey. - The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million. - The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration). - The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high. - The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour. - The goods producing sector is losing the most jobs -- 223,000 in the last report alone. - The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance. Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period. Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook. How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today. About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough. It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn't. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency. Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb. Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011. Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending. This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity. No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time. Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report. http://online.wsj.com/article/SB124753066246235811.html

i'm happy for mohnish. he's one of the really good guys. if he were ever to run a public co i'd be there in spades!

just stumbled across a new blog from annaly dot com that takes a feather from the cap of the bond gurus who do the commentary at pimco. pretty good stuff: <<July 10, 2009 According to Morgan Stanley research, by the end of 2009 there is scheduled to be over $3 trillion of Federal Government market support facilities wound down (even more by February 2010). It’s not crazy to conclude that any unwind of these programs on top of the uncertainty of regulatory initiatives creates a very wide range of potential outcomes (like any patient coming off methadone) which leads to what the bond market colloquially calls FUD (Fear, Uncertainty and Doubt). Historically, large incidents of FUD lead to greater pricing volatility, unstable and wider credit spreads increased macroeconomic uncertainty and steeper yield curves. The equity market measure of FUD is perhaps best represented by the VIX index and it appears to be underestimating the risk of FUD rearing its ugly head in the coming months as it has traded below 40.00 since the beginning of the second quarter and through July 6 is close to 13 points lower than March 31, 2009. In contrast, the fixed income FUD measure, as represented by Merrill Lynch’s MOVE index, shows that across the yield curve expectations for increased pricing volatility have moved markedly higher during the second quarter. Since 1990 these FUD measures in the equity market and the fixed income market have generally moved in the same direction (correlation of over 0.60). However during the second quarter of 2009 this correlation broke down quite handily and in fact has been strongly negative for the second quarter of 2009 (over negative 0.70). Thus there appears to be a big divergence for expectations in volatility between the stock and bond markets not seen in recent history. Who’s right? Our money is on the bond market geeks, but we’re biased.>> and <<July 2, 2009 There are many cross-currents influencing the direction of markets and the economy today. All one needs for proof of this is to look at the Federal Reserve’s balance sheet. The Fed is nominally charged with conducting monetary policy in pursuit of maximum employment, stable prices and moderate long-term interest rates, while at the same time supervising and regulating the nation’s banking institutions. As markets have gotten ever more complicated and stressed, however, the execution of this charter has brought the Fed into a much more diverse and far-reaching set of activities. Since the late summer of 2007, the Fed has deployed an alphabet soup of unorthodox liquidity facilities, overseen and backstopped liquidations and rescues of different institutions and brokered consolidations between entities. Its balance sheet has more than doubled in size as it has evolved from lender of last resort to investor of last resort. And its methods and its leaders have been questioned in a way that is not a little like complaining about the color of the fire truck after the fire has been put out. Indeed, there are so many potentially market moving events on the horizon that an investor can be forgiven for losing his or her head. In no particular order, here are just a few that we at Annaly think about a lot: Housing; household balance sheets and savings; global demand for Treasuries; government activity crowding out private capital; financial regulatory reform and the prospects for its final shape; the dollar and the talk of a new reserve currency; growth in the BRICs and Europe; the health of the banking system and the new paradigm that is taking shape; commercial real estate; return expectations in different asset classes; ramifications of accounting changes…the list goes on and on. If you check on our new blog, Annaly Salvos on the Markets and the Economy, on a regular basis, you can expect to see posts on these and many other subjects. For compliance reasons, what you won’t find is any discussion of Annaly or FIDAC-managed investment vehicles. For this, our debut Salvo, we cut through all the noise and go right to the basics in what we like to call the Econ 101 slide. The four lines on this slide reflect the fundamental factors in determining the health of the economy and the Fed’s reaction to it: the capacity utilization rate (CapU) in white, core CPI in red, the unemployment rate (UER) in yellow and the Fed Funds rate in green. At the moment, the Econ 101 slide is a picture of extremes. CapU is at an all-time low, UER is at a 25-year high, core prices are barely budging. So while there is certainly a lot going on in the world that affects our markets and the Fed is busily putting out fires, Bernanke & Co. are unlikely to move if they are looking at a picture like this. Look how long it took the Fed to start tightening after the peak in unemployment and the trough in CapU.>> <<The Economy The new poster child for excess leverage is the amusement park operator Six Flags Inc., which filed for Chapter 11 protection on June 13, 2009. To us, the bankruptcy is emblematic of what ails the nation. Typically, firms filing Chapter 11 line up debtor-in-possession loans to help provide working capital during the sometimes lengthy bankruptcy process. In the case of Six Flags, they don’t need it. Earnings before interest, taxes, depreciation and amortization (EBITDA) has always covered interest payments, but as the ratio of total debt to total capital ramped up from roughly 60% at the turn of the century to over 100% at the time of the filing, precious little cash remained for operating the business after servicing the debt. It borrowed for growth and ended up with the wrong capital structure for this economic downturn. In other words, Six Flags would be fine if it weren’t for the debt! Relieved of the burden of interest payments, the company estimates that it will have plenty of working capital. If only it were that easy for the U.S. consumer, state and local governments and the U.S. Treasury. But it isn’t so easy. Six Flags had $2.4 billion in debt outstanding at the time of the filing, and while it won’t be pleasant for those creditors, the world won’t miss Six Flags (or its annoying but memorable TV commercials) when it’s gone. On the other hand, the world is surely feeling the effects of a massive debt contraction in the U.S., even as the Federal Reserve and U.S. Treasury heroically step into the breach. According to the Federal Reserve flow of funds data, the whole domestic nonfinancial sector (household, consumer, non-financial corporate, farm and state and local government debt) has shrunk as a percentage of total credit market debt (CMD) from over 70% at its peak in the early 1970s, to just 50% of the total today. In dollar terms, this sector has now declined two quarters in a row; up until now, there had never been even one quarterly contraction. In this bucket are both mortgage debt and consumer credit. Mortgage debt outstanding has fallen over $100 billion since its peak in the first quarter of 2008, and consumer credit has fallen in seven of the last eight months, the worst string since 1991. The domestic financial sector (ie, repo, financial corporate debt, etc.) now makes up over 30% of CMD outstanding, up from less than 3% back in the 1950s, but it contracted over $70 billion during the 1st quarter (the first quarterly drop since 1975).>> more here: http://www.annaly.com/blog/ http://www.annaly.com/mc/AnnalyCommentary0709.pdf

i dont know about ceo of the year, but it woulnd surprise me if patrick got "man" "hero" or "inspiration" of the year. he's one of a kind! btw, doug kass at one of the street dot com sites has an occassional "tell me something i dont know yet" feature in his column there and today he had this: "Tell Me Something I Don't Know 7/9/2009 10:27 AM EDT The feds think they have identified the mastermind of the Madoff fraud. And the person is not a member of the Madoff family. You heard it here first. I recently introduced a new feature. It is a takeoff on Sunday morning's "The Chris Matthews Show," in which there is a segment titled "Tell Me Something I Don't Know." So, Dougie, tell me something I don't know. Here's a very hot one: The feds think they have identified the mastermind of the Madoff fraud, and the person is not a member of the Madoff family. You heard it here first." i know sanjeev has a dim view of anyone associated with the street dot com, but kass has been on the money with this. i still cant believe the stupidity he shows when it comes to his buffett bashing & cramer a**-kissing tho. i guess some people are smart in places, but not in other places.

and: "Here’s something to give the conspiracy buffs a total breakdown: Combine these stories from Bloomberg, Daily Kos, and Zero Hedge, and you can reach a rather unsavory conclusion: • Goldman Sachs’s $100 Million Trading Days Hit Record • FBI Arrest Opens Goldman-Sachs’ Pandora’s Box • Intraday Observations • “Incredibly Shrinking Liquidity” as Goldman Flushed Quant Trading What is the inference of potentially illegality here? “That Goldman Sachs may just possibly have used security access codes and built a system to acquire trading information PRIOR to transaction commit time points at NYSE. The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day. [summary to address complaints with respect to complexity.] GS has special access inside the system from its status assisting the Working Group on Financial Markets (colloquially the Plunge Protection Team) created by Presidential Order two decades ago. GC also acts as Special Liquidity Provider for NYSE. With 60% dominance of NYSE program trading, what’s good for Goldman defines what shows as overall market performance.” There is likely to be more info about this trickling out over the coming days and weeks. Stay tuned . . . > Hat tip Bill King Sources: Goldman Sachs’s $100 Million Trading Days Hit Record Christine Harper Bloomber, May 6 http://www.bloomberg.com/apps/news?pid=20601087&sid=a7HGVAn8w73Y& FBI Arrest Opens Goldman-Sachs’ Pandora’s Box bobswern Daily Kos, Jul 06, 2009 http://www.dailykos.com/story/2009/7/6/750420/-Breaking:-FBI-Arrest-Opens-Goldman-Sachs-Pandoras-Box Intraday Observations Tyler Durden Zero Hedge, JULY 8, 2009 http://zerohedge.blogspot.com/2009/07/intraday-observations.html “Incredibly Shrinking Liquidity” as Goldman Flushed Quant Trading vets74 Daily Kos, Jul 07, 2009 http://www.dailykos.com/storyonly/2009/7/7/750786/-Incredibly-Shrinking-Liquidity-as-Goldman-Flushed-Quant-Trading " http://www.ritholtz.com/blog/2009/07/is-goldman-stealing-100-million-per-trading-day/

"by vets74 Share this on Twitter - "Incredibly Shrinking Liquidity" as Goldman Flushed Quant Trading Tue Jul 07, 2009 at 02:36:37 PM PDT "If ya ain't cheatin', ya ain't tryin'." Apparently, Goldman Sachs has been booted out from doing computerized quant trades at the New York Stock Exchange. -- GS had been making $100,000,000 a day with computerized trades. -- This diary outlines one spectacular and illegal way to succeed at that business. Indeed, GS was "cornering the market" for machine trading as cited from Zero Hedge by bobswern at dkos. New York City's finance sector dropped 25,600 jobs in April. May be that GS charlie-hoteled every last one of them. Then, seems one Sergey Aleynikov got himself arrested. NYTimes says its about "secret sauce" Goldman Sachs quant math. We'll consider Mr. Aleynikov's STORM patent with distributed processing agents. Recalls Triple Hop's text indexing tools. Nothing to do with quant math. The big ticket, the magic wand for a rogue quant shop is technology to grab off FIX PROTOCOL, OCX, or SWIFT messages that precede every transaction_commit at the Exchanges." http://www.dailykos.com/storyonly/2009/7/7/750786/-Incredibly-Shrinking-Liquidity-as-Goldman-Flushed-Quant-Trading Grabbing information is way hotter for conquering Wall Street than owning a crystal ball. MoreBTF :::