We're Sorry (but for what, we will not reveal...)

I have always looked suspiciously upon the concept of Confession, particularly (but not limited to) when the Confession is not supported by deeds and substantive changes in behaviour. Surely, any self-respecting deity, at the very least to keep the others in-line, would kick a bit of ass. So I wondered aloud whether there was some higher spiritual purpose when I read the following...

Goldman Sachs Chief Blankfein Apologizes for Role in Crisis
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By Christine Harper

Nov. 17 (Bloomberg) -- Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., apologized for the firm’s role in some of the activities leading to the financial crisis.

“We participated in things that were clearly wrong and have reason to regret,” Blankfein said at a conference in New York hosted by the Directorship magazine. “We apologize.”

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: November 17, 2009 14:13 EST

(Editors note: Surely Ms Harper of Bloomberg meant to add: Mr Blankfein stopped short of returning profits, contributing them to charitable institutions, or asking for the return of bonuses for charitable contribution (i.e. return to the people via US Govt??) from employees awarded them in activities that Mr Blankfein and Gioldman Sachs now regret and deemed "clearly wrong". No specific list of such activities was provided to give legislators, magistrates, special prosecutors, or omsbudsmen around the world further insight into precisely what they were)

Balderdash (n) - fiddle-faddle, piffle (trivial nonsense), hokum

Macro Man's mediations on (but not limited to) things macro - particularly FX - always deserve a read and careful consideration. His attention was caught by Fed Chairman Bernanke's lightweight waffling at the New York Economic Club last night. I concur with his amusement at the inversion of the Chairman's focus.

But the sentence that caught my attention most was the following, contained as it was in MM's captured excerpt:

When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains.

The question that caused my eyes to blink repeatedly in disbelief and head to uncontrollably nod from side-to-side was: Does The Fed Chairman actual believe this revisionist manure about what occurred? This seemingly unusual take on events (unusual for a Fed Chairman, not a freshly-minted academicwith no market experience) is clearly derived from the same School of Thought as the one spawning the Savings Glut hypothesis for America's large imbalances, and has as much probability of being correct (hint: not much).

So lets be clear about this once and for all. The rally in the dollar, along with the reversal of all trades across the markets from outperformance in highly-shorted securities to the correlation within the entire anti-dollar complex had virtually nothing to do with dollar primacy resulting from premeditated aversion to risk and almost everything to do with systemic deleveraging and consequential reversal of open positions, full-stop. Whether this was driven by pre-emptive attempts to reduce leverage in anticipation of, or reaction to changes in quantities and pricing-spreads of available credit, realized investment losses, and/or in response to firm or provisional demands by end-investors to their speculative agents for their money back, or all of the above and similar flavours of the same is, for all intents, irrelevant. To imagine otherwise (in light of the evidence of price movements across the panpoly trades) is disingenuous at best and ludicrous absurd puerile [please insert derogatory adjective of choice here] drivel at worst, and we should wonder aloud, who actually wrote this script for the Chairman, and admonish him (or less likely, her) accordingly.

Zooooooooooming

Does anyone remember Ayrton Senna?? Amazing as he was, I do not hear mention of his name often these days. While I do not watch CNBC very often either, I happened upon it last night for a few moments, and was transfixed by the deepening black sallowness of Maria Bartiromo's eyes, punctuation marks on time passed since her entry into the mile-high club. This was followed by an uber-slick, adrenaline-coursing formula-one race video - the kind where you can smell the burning rubber of the tires and feel the downshifts viscerally in one's mid-section. The ad was for FX-Pro one of the rapidly mushrooming FX trading sites peddling slick-colourful GUIs that make the day-trader feel like a trader coupled with obscene leverage. What was a peripheral phenom that began with simple tax-advantaged spread-betting and a pachinko alternative for Mrs. Watanabe is now huge business with nefarious Russians in warm offshore locations seemingly at the fore, making one wonder whether there is some grand money-laundering purpose behind the more overt feeding of the adrenaline-driven gambling beast via direct and leveraged FX market access, whether from your PC or iPhone.

But watching this Formula-1 machine weave its way around the track, with the powerful male voice-over trumpeting the unimaginable speed and power in your hands via FX-Pro (or CML or any one of a hundred other access providers peddling addiction via dreams) I had that awful feeling one has when witnessing the Private Equity purchase of EOP, the superbowl ad for Pets.com in 1999, or 300-words-per-minute urgent pleading for you to obtain a variable mortgage with a balloon repayment and teaser rate. Despite these premonitions, the blue F-1 car revved and swerved with increasing fury, that I nearly found myself with a phone mesmerizingly dialing their number to open account. Well, almost...

Yet Formula-1 is a dangerous sport, not dissimilar from surfing the edge of leveraged FX. Shit happens. Markets move often unexpectedly, and frequently in the wrong direction. Stops are triggered. Margin calls are issued, positions puked triggering yet more stops, and further negative gamma hedging from those short OTM vol. JPY moves 17 big figures overnight. Ouch!!
Even pro's get carried out. People who should have known better. Maybe that's why we don't speak of Ayrton Senna very often. He for he reminds us just how thin the tether actually is, between life and death - even for the greatest and most skilled in the world. One wonders how long one's "father" or "Brother" would last out on track in the pack, if they had the keys to such a machine...which is what FX-Pro and their brethren are doing each and every day.

More Sober-Minded "Hosanna's"

All kidding aside, the recent delusional religious rationalisations by Varley and Blankfein beg a more serious reply, the best I've seen which is in Marshall Auerback's measured retort entitled Attention Mr Blankfein, posted over at New Deal 2.0. Marshall deserves reading not because his analyses are unusually lucid and hyperbole-free (which they always are), but because he always translates them into definitive (and perhaps more importantly, realistic) public policy responses, which altogether put him in a rare class amongst practitioners/financial critics.

Hosanna!!

Salacious lies!! Goldman Sachs Press officers and executives had quite a day defusing all the fallout from CEO Lloyd Blankfein's so-called "own goal" (shooting himself in the foot for our American readers) by suggesting the $20 billion GS bonus pool is kosher because GS is doing ...ahem...."God's Work".

Some of their 'official' statements are collected below:

"GS will not ask its employees to make mandatory charitable contributions...their good and noble works for mankind in the name of God alone are sufficiently reverent that we believe our employees should be entitled to do as they see fit with their errrr ummm (verbatim hesitation) manna from heaven, without stipulations from management or worse yet, a secular, atheistic state".

"There is absolutely no truth to the rumour that Goldman Sachs will create a holding company for bonus-pool and deferred pay purposes, whose shares (like AIGs Starr affiliate) will ultimately be owned by a small Dublin charitable trust whose sole beneficiary is a 10-bed orphanage in Ireland". "We are shocked by the insinuation that GS would do anything contrary to the letter of the law to get a leg-up".

"Goldman Sachs will NOT be reorganizing itself into a tax-exempt religious "ministry" (or Temple rather) in order to take advantage of such status to further pursue God's Works" ( and get the Gross-of-tax Roll-Up). Bank-holding company status was quite sufficient thankyouverymuch. "Taxes" said their spokeperson, "in any event, are an important part The Lord's Work, which is why Goldman always engages multitudes of the best Tax Experts internally and pays for the best tax advice externally".

"Goldman Sachs is 100% categorically against abortion. We would never countenance aborting bonuses, at any part of the term but especially in late-term accrual, particularly when they've been earned in pursuit of such noble objectives as God's Work.

"Goldman Sachs is not a religiously-partisan organisation. If anything, we have a great diversity of religions pride ourselves on the diversity of our people. In fact we resemble the Unitarians - our units are the Millions, and the Billions"

"We have never claimed that our trading success was 'divinely inspired'. This is pure fiction. What we have said is different: Our traders are blessed with good luck (and information) and are annointed". The separation is not just semantic..."

"I don't know who said it (probably the goyim uptown at JP Morgan), but there is no truth that our blessed chairman and pious CFO were overheard talking derisively about the great, munificent, and most magnanimous people of America, suggesting that "....couldn't tell the difference between kneeling down and bending over..."

Hosanna's and Hallelujah's (for GS employees) all-round.

(Enough quotes! Amen.)

The First Call Before The First Call

At one end of the spectrum, you have so-called informationless traders who are the cheap bastards of the equity investment world. Not only do they desire to pay as little as possible to trade but many want/demand/expect to actually BE paid in the form of rebates. One might call them suppliers of liquidity, and they are desperate to be first in the queue. SO desperate are they, that they are competing to put their computers INSIDE the exchange's computers. OK, I exaggerate, but you get my drift. To facilitate this, some have conspired (errr sorry, I mean worked) with the exchanges to gain preference, however brief. Call it "first dibs". Others e.g. Timber Hill) have set up their own brokerage firms (e.g.Interactive) in order to directly capture the order flow (and thus the spread) before anyone else even sees it (and there is nothing wrong with that according to the letter of the rules though it must be said that bar of wrongness has not been set very high).

At the other end of the spectrum gather the information-based traders (and note my semantics - I do NOT term them information-based investors). They are the polar opposite of the cheap bastards when it comes to "commissions". They, it would seem, are relatively insensitive to commissions. In fact, they are willing to pay A LOT of commissions (so long as they are not in the nick). A fuck-of-a-lot of commission. A fuck-of-a-lot more of commission than the reasonably hefty commissions so-called research-clients pay for bundled brokerage and research services. Indeed brokers LOVE them. They love them so much, they call them often and often with good information (though admittedly they get called often with bad information too). And let me tell you (if you haven't had the pleasure) it is a brain-numbing and painful task reading through Wall Street research rife repetitive hackneyed cliches, all so dull as to make the literate amongst us positively suicidal. Galleon apparently is a good example of such a valued client.

But as Wall Street is a hotbed of efficient markets (umm errr right??!?) one might rightfully ask: What is the correct price that a 'good client' should be willing to pay for such 'good information'? This is not a simple question, but the answer lies (no pun intended) in examining several examples. At the extreme end, we have (or had) Raj who might cut you in by forming a side-venture with you, hiring you, promising to hire you, or letting you invest, the former more direct forms of profit-sharing. Others, like Marshall Wace (discussed in this I.A. Ehrenberg post) who systematically electronically capture and analyze broker tips, want to be the first to receive information updates, and will pay handsomely for it. Only not directly, and only if it makes them money. This is, in essence, a sort of reverse-rebate for the brokerage tipster. They (MW) of course apply strict rules to how they play - some of which might raise ethical eyebrows, were they not the eyebrows of the FSA. The beauty of their approach is that while ethically dubious, it games the system allowing the brokerage to recapture some of the value of their work - even if the value is the self-fulfilling, probably temporary, impact. Finally we have the "early bird catches the worm" approach. These are people who will pay whatever it takes to be the call before the first call. Heck 20-cents-a-share for execution is terribly cheap where the information is bankable, which is what for years SAC was rumored to frequently pay to be the first call before the first call. Such calls help the brokerage client get bigger. Who then does more business at high commissions in a veritable virtuous circle. It was with this in mind I read with some amusement in the online Wall Street Journal that as a result of information garnered in the Galleon investigation, the SEC is [finally?] turning it's attention to such less-than-salubrious arrangements, and that Mr Cohen and SAC are now the subject of inquiry which will see a more thorough examination of their trading records. It is no understatement to say that it is no easy task delving into a global trading organization with multitudes of mid and high-frequency strategies, carve-outs, etc., but nonetheless it something that a determined researcher could find in the patterns and footprints of position-sizing and relative success around market-moving events. Moreover, Wall Streeters, tough as they appear are really sissies when it comes to jail, and like Galleon, have again proven themselves notoriously mercenary when it comes to ratting out their colleagues (and bosses).

This is, of course, just the high profile tip-of-the-iceberg in respect of market abuse and manipulation. Ramping (and liquidation) for periodic performance fees and bonuses and corporate window dressing, insider trading, pump-and-dump, (or the inverse of bear-plunging) re all prevalent. To combat, I've an indecent proposal. which goes as follows: The exchanges and DTC & clearinghouses should be required to create and release the entire trade-by-trade data-set with ultimate customer delineation in some anonymized form. ALL shorts will be tagged as such. It can be lagged by a sufficient amount to prevent predatory short-squeezing, but it should be released in timely fashion. Options and Futures included. It should be available to any all who desire it. Researchers all over the world will be permitted to find the patterns and submit the likely errant violations to SEC, and if egregious and prosecuted, the finders would be entitled to an incentive fee of the disgorged profits, say 20% (50% in SAC's case). This would allow the market to recapture some of their lost profits. Fidelity would be as fair game as say for example, Steel Partners. I think this would result in some new financial innovation, but it would not necessarily the type that contrapreneurs would be pleased to see.

Plus ça Change, Plus...

With some trepidation, I attended a high school reunion recently at the urging of a couple of old school chums with whom I remain good friends. They are good fun and we had much to talk about despite their marked drift rightward in the political continuum, despite the night ending with one of them not speaking to me after a debate on immigration during which I highlighted the amusing paradox between his extremely nationalistic view and the details of his own central american spouse's naturalisation. I won't bore you with the other trite details certainly repeated at nearly every occasion across America. It was all polite, almost-acceptable food, perhaps insufficient drink, punctuated with a few unexpected surprises of interesting lives at their half-way points.

Sharing some such moments with an ivy-law educated black female classmate who against the odds scaled the heights of a Wall Street M&A practice of a top Wall St law firm, we were interrupted by the tall formerly good-looking alumni who'd lost most of his hair, being as disingenuous as he was twenty-five years before, almost pathological in his lack of awareness in his own behaviour. He was dishonest back then, always choosing the short-cut, irrespective of the morality or consequence. The pinnacle of such behaviour was during our AP History exam in a class taught by my favorite teacher - a Jesuit, and confidant of Bishop Abel Muzarewa. The boy in question sat behind me, and rather than study, copied my multiple-choice answer-sheet verbatim. Only his plan went awry when he transposed a letter from my sheet early-on, causing him it must be said, much embarrassment, and causing me to be called to account the next day by the Prof accusing me of complicity. Of course I explained that despite my rather tepid friendship with the guilty, I wholly disapproved and had nothing to do with it - which was the truth, and fortunately came across as such. Of course his ethical lapse didn't matter for he'd already been accepted to an Ivy undergrad whereafter he went on to, and graduated from the same Ivy Law School and ultimately, local mayor. Oh dear!! And here he was again, still affable, but still laughably disingenuous, interrupting some civilized conversation to talk about.....yes....himself!! Plus ça change, plus c'est la même chose. Once a narcissist...

And so when I look across the landscape today and I see health "insurers" (HMOs) organized (as much as possible) to restrict payments; property-cat insurance companies - even mutuals - hiring Mckinsey to find ways to avoid paying claims, corporate rent-seeking run amok, be it cash-for-clunkers, oil-co's penning environmental legislation and pharma co's routinely filing lawsuits to challenge generics after patent expiry, little of which raises eyebrows or arouses a renewed sense of public interest. One would have thought this paradox between the sub-moral public greed and the warm and fuzzy private life of my cheating former classmate, seen through the prism of his little-league coaching exploits, or one's high-profile faux-philanthropy vs. the more genuine and low-key tzedakah.

Despite my acerbic tone of disbelief, I should know better. For when I was sixteen, I was shown (in no uncertain terms), the way of the world. I was working as a "salesman" at a national chain of music & hi-fi shops - a plum-job for a long-haired high-school student when unemployment was high for adults. It was xmas. Taiwan and Korea, were not renown for quality, and the company sold a range of instruments from the expensive to the asian-sourced so-cheap many of which were wholly unplayable. I recall a post-xmas morning, a single-mother returning an instrument which was a xmas present - a bass guitar, just out of the box. The neck of this unplayed instrument was so warped, it was impossible to tune, even after attempting to straighten the internal bar. I returned to the store-room with another box of the same. Pulled it out. Worse than the first. The mother and child smiled waiting patiently and expectantly as I returned with a third, which was the same as the first two. I went to my manager, and asked him what to do? It was pretty upsetting to me as a budding musician, I empathized with the disappointed customer. He said "issue them a store credit" a lame response if ever there were one under the circumstances. I looked at him, quizzically and doe-eyed, and said: "Jimmy, why do we even sell such crap...we know it's lame and it causes nothing but problems and unhappy customers..Isn't this rather dishonest ummm errrr....??!?" Jimmy, a head taller, but more than three-quarters-of-a-decade older than me, didn't hesitate, broke into a huge shit-eating grin, slapped my back and chimed: "Welcome to the world of business...."

A Hope and a Prayer

Bernie Comes Out of The Closet was early in mulling over some of the unanswered questions brought to the fore by his out-ing. Now, according to revelations to the SEC reported by Bloomberg yesterday, The Fraud (if that indeed is the correct word), like many other large trading losses, began when his erstwhile legitimate trading strategy scuppered. And, like Jack Barry & Tom Daniels, like Nick Leeson, like Daiwa Bank's Toshihide Iguchi, like Jerome Kerviel, even Martin Armstrong, in the heat of the moment, they all took the cowardly route, employing deception punctuated with hope and invocations to one's preferred deity in order to forestall owning up in the belief that Master Market will sooner rather than later, come to their aid and make all that had gone wrong, right once again. Bernie, it would seem, has fessed to covering up the loss early-on, which was as I had thought, and lays to rest an important outstanding question - important if only from the viewpoint of my sadistic sense of curiousity.

Call me pedantic if you wish, but I do believe this meaningfully differs from most of the common Contrapreneurs listed in Hedgretracker's Hall of Shame, the majority of whom took the unashamedly direct route to [temporary] riches and a permanent entry into the Book of The Less-Than-Illustrious. This neither excuses nor elevates him above the others. But the distinction is worthy of something approximating a sense of pity rather than revulsion (and I direct this in general to the members of the category of folly, rather than Mr Madoff specifically who behaved appallingly in the interevening two decades of his charade). It is membership in a decidedly human club of folk, who when faced with adversity, unlike Shackleton, acted in a pathetic but empathizably escapist-like denial of reality. Perhaps I could be wrong in my sympathies. Perhaps Shackleton's success in reaching South Georgia from Elephant Island, managing to disembark at all on the wrong side and scaling the mid-island ridge with sweet f.a. for kit may actually have been what Leeson might have resembled had the Kobe quake not coincided with his monster covert naked-short puts on the Nikkei. Perhaps. But, Shackleton didn't lose a man, and so for the moment, I will rubberneck again at the less-than-robust fiber of those who acted poorly in the most crucial heated moments, and then wonder aloud, how many humans out of a thousand do, and would do, and have anti-heroically executed in their spheres, to greater or lesser extents. I fear, that we still place Shackleton on the pedestal precisely because fewer of us, and our brethren, are made of the same stuff.