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The King Report: Goldman’s Magic Software

Posted By Bill King On July 7, 2009 @ 11:15 am In Think Tank | Comments Disabled

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We are stunned – no, we’re shocked, shocked over the following admission from an Assistant US Attorney about the theft of Goldman’s proprietary trading codes.

Bloomberg [1]: At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“The bank has raised the possibility that there is a danger that somebody who knew
how to use this program could use it to manipulate markets in unfair ways,” Facciponti
said, according to a recording of the hearing made public today. [The prosecutor apparently does not understand the implications of his statement but most of The Street and much of the public do.]
Karl Denniger [2]: Did Assistant US Attorney Facciponti make an erroneous statement, or did he just lay a nuclear egg on the table, step back, and set it off – on accident – admitting in open court that the software in question “can be used to manipulate markets”?

Zero Hedge [3]: At least it is refreshing that none other than Goldman’s own de facto attorney admits that the firm has created a piece of code that permits “market manipulation.” When Goldman is the perpetrator, the manipulation is conveyed via “fair ways.” And when the manipulator is someone else, the ways become “unfair.”

NYTimes [4] (Thanks, Per): Chinese Currency Used for Some Foreign Payments Banks in China and Hong Kong began wiring Chinese renminbi directly to each other on Monday to settle payments for imports and exports, as China took another step toward establishing the renminbi as a global currency — and, eventually, an international alternative to the dollar.

China has tempered its recent calls for a global reserve currency other than the dollar going into a meeting of the world’s major industrialized countries and biggest emerging economies in Italy on Thursday. He Yafei, China’s vice foreign minister, said on Sunday that the dollar would remain the world’s dominant currency for “many years to come.”

But the Chinese government is accelerating the process of making its own currency, the renminbi, more readily convertible into other currencies, which gives it the potential over the long-term to

The above story is a perfect example of the necessity to heed behavior and not rhetoric.

The Telegraph [5]: US lurching towards ‘debt explosion’ with long-term interest rates on course to double The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank [China understands the mathematics of US debt.]

Here is why China is going postal over US schemes and chicanery: Yesterday the Fed bought, which is a euphemism for monetized, $7B of Treasuries maturing between January 2014 and March 2016 even though the US Treasury will hold a one-week record of four auctions this week to issue $73B of US debt. $8B of 10-year inflation-linked notes was sold yesterday. The remaining tranches: $35B of 3s today, $19B of 10s on Wednesday and $11B of 3s on Thursday.

Bloomberg [6]: The central bank has bought $197.723 billion in U.S. debt through the operations, which began March 25.

EPI [7]: A very significant story: This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007…

To keep up with population growth, the economy needs to add around 127,000 jobs every month, so the labor market needed to grow 2.3 million jobs over this period.

The WSJ [8]: Deadly Ethnic Riots Pose Fresh Crisis for Beijing Chinese security forces clamped down on large parts of this city of 2.4 million Monday, a day after long-simmering ethnic tensions erupted in rioting that authorities said left at least 150 dead and more than 1,000 injured.

The fatalities, if confirmed, would represent one of the deadliest outbreaks of violence in China in decades…

The FT [9]: Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead.

The schemes, which Goldman insiders refer to as “insurance” and BarCap calls “smart
securitisation”, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.

Barry Ritholtz [10] highlights this Andrew Cockburn story [11]: How Goldman Sachs and Citi Run the Show – The Wall Street White House Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs. This comes as one more, probably unnecessary reminder of the total control exercised by Wall Street over the Obama administration’s economic and financial policy…he will find plenty of old friends used to making decisions, almost all of them uniformly disastrous for the U.S. and global economy…

Hormats’ agricultural responsibilities will of necessity bring him into frequent contact with the Chairman of the Commodity Futures Trading Commission, Gary Gensler – a former Goldman partner.

As Assistant Secretary of Treasury in the Clinton Adminsitration Gensler played a key role in greasing the skids for the notorious Commodity Futures Modernization Act of 2000, which set the stage for the great credit default swaps scam that underpinned the recent bubble and subsequent collapse. News of the appointment did generate threats of obstruction in the Senate – any one of the senators could have blocked the appointment had they really wished to do so – but such threats proved predictably hollow. Had they been otherwise, Treasury Chief of Staff Mark Patterson could of course have lent the expertise he gained as Goldman’s lobbyist to overcome the obstacle…

Such connection to the key enablers of our bankrupt casino helps explain many of the other hires listed above…

Goldman Sachs has attracted the spotlight in a huge way. We wonder where this will lead.

The WSJ [12]: Public Pensions Cook the Books; Some plans want to hide the truth from taxpayers Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers…

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, “it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors.”

Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association’s objections seem less against market valuation itself than against the fact that higher reported underfunding “could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans.”

Fitch cut California’s debt rating to BBB, which is one step above junk. Does the market still believe that states do not default? How many Street denizens remember Walter Wriston’s [Citi’s former CEO] bold assertion in the seventies during the lending mania to Latam that ‘sovereign nations do not default’?

Investing continues to be a very dangerous endeavor because lying, dissembling and fraud are not only pervasive, the nefarious practices are openly encouraged by various and sundry parties.

Today – For the past month or two, traders have dominated stock market trading. But now even fewer traders and ‘real’ orders are in the arena. So stocks will gyrate according to whim. Traders are likely to play trader games until the window for manipulation closes for earnings reporting season [next week].

Defensive stocks [13] have been the market leader for the past two weeks. This is not a good omen.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/07/the-king-report-goldmans-magic-software/

URLs in this post:

[1] Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=ajIMch.ErnD4

[2] Karl Denniger: http://market-ticker.denninger.net/authors/2-Karl-Denninger

[3] Zero Hedge: http://zerohedge.blogspot.com/2009/07/sergio-posts-bond-as-toxic-code.html

[4] NYTimes: http://www.ritholtz.com/blogbe used widely for trade and as a reserve currency. http://www.nytimes.com/2009/07/07/business/global/07yuan.html

[5] The Telegraph: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

[6] Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=a30NWZ_5ppRA

[7] EPI: http://www.epi.org/publications/entry/jobs_picture_20090702/

[8] The WSJ: http://online.wsj.com/article/SB124685864855299373.html

[9] The FT: http://www.ft.com/cms/s/0/47403c68-698f-11de-bc9f-00144feabdc0.html

[10] Barry Ritholtz: http://www.ritholtz.com/blog/2009/07/the-wall-street-white-house/

[11] Andrew Cockburn story: http://www.counterpunch.org/andrew07022009.html

[12] The WSJ: http://online.wsj.com/article/SB124683573382697889.html

[13] Defensive stocks: http://online.wsj.com/article/SB124687776343500083.html

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