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On Goldman Sachs’ illegitimate high frequency program trading

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Update: Goldman Sachs finally responds, claiming that HFT accounts for less than 1% of its Q1 & Q2 revenue.

Update 2: Paul Krugman wrote an op-ed on this here.

The NYT reported yesterday that Goldman Sachs’ high frequency program trading may have given the bank an unfair competitive leg up over its rivals:

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

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Written by defennder

July 25, 2009 at 5:37 PM

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Goldman Sachs still ripping off taxpayers

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Update 1st Aug: A friend pointed out to me via a New York Times blog article that the warrants issued by Goldman came with a cancellation feature which automatically voids half of them should Goldman Sachs undertake a successful equity public offering of US$10bn before 31st Dec 2009.  So far, they have raised $6bn to date.  The warrants are dated to last 10 years and have a strike price of US$122.90 Goldman’s stock is currently trading at $163.30

The article goes on to conclude that in light of this revelation, it’s not unreasonable to suppose that Goldman Sachs may have paid Treasury the full worth of its warrants.  I have since relooked the original news sources, HuffPo and FT, and unfortunately neither of them pointed this out.

I haven’t been posting much in the past few days due to work commitments.  I finally had time to sit down and write some stuff during this weekend.  Anyway…

A few days ago, Financial Times reported that Goldman Sachs bought back warrants it issued to the US Treasury in a bid raise capital, shedding the last remains of its bailout legacy:

Goldman Sachs became the first major bank to buy back warrants held by the US Treasury on Wednesday, allowing the group to shake off the last vestige of its participation in the government bail-out programme after just nine months.

Goldman paid $1,1bn to the US Treasury to buy back the warrants. which were granted as part of the government’s $10bn investment of troubled asset relief programme funds in the bank last year.

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Written by defennder

July 25, 2009 at 4:37 PM

The closer your ties with Washington…

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… the larger profits you make it seems.  Today’s NYT has an article on JPM’s CEO who apparently enjoys a close relationship with those in power:

In Washington, One Bank Chief Still Holds Sway

WASHINGTON — Jamie Dimon, the head of JPMorgan Chase, will hold a meeting of his board here in the nation’s capital for the first time on Monday, with a special guest expected: the White House chief of staff, Rahm Emanuel.

Mr. Emanuel’s appearance would underscore the pull of Mr. Dimon, who amid the disgrace of his industry has emerged as President Obama’s favorite banker, and in turn, the envy of his Wall Street rivals. It also reflects a good return on what Mr. Dimon has labeled his company’s “seventh line of business” — government relations.

When Mr. Dimon was fired, he got a supportive call from Mr. Emanuel, who recalled his own firing early in the Clinton years and how he worked his way back into the inner circle.

Another Obama associate is on JPMorgan’s payroll. Mr. Dimon hired William M. Daley, a former commerce secretary and Chicago powerbroker, in 2004 as vice chairman and head of Midwest operations. Since 2007, Mr. Daley has overseen global government relations.

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Written by defennder

July 20, 2009 at 8:04 AM

Glenn Beck on Goldman Sachs

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Glenn Beck of Fox News explains the web of relationships Goldman Sachs has with the rest of Wall Street and the federal government.  I don’t like Fox News, but I find myself disliking Goldman Sachs more with each passing week.

P.S. I first saw this on Lucky Tan’s blog.

Written by defennder

July 19, 2009 at 5:35 PM

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Should CIT Group be bailed out?

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Update: CIT appears to have reached a deal with its debt holders for a US$3 bn loan.

I’ve been ignoring the story of CIT Group so far.  But it seems that they will be filing for bankruptcy soon if nothing is done:

July 18 (Bloomberg) – CIT Group Inc.advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said.

JPMorgan and Morgan Stanley are talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, according to the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.

CIT may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September.

Now I believe by now everyone will be sick of bailouts.  And there certainly is good reason why. We saw how AIG sent bailout money overseas earlier this year to honour their counter-parties’ contracts.  There’s also good reason to think that AIG’s role in guaranteeing debt by GM and Chrysler could have led to their forced bankruptcy.  And I’ve repeatedly pointed out, one of those who stood to gain was Goldman Sachs Group which recently declared a US$3.4bn profit.

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Written by defennder

July 19, 2009 at 4:24 PM

Revising monetary history of the 1970s

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A new article by The Economist on the confused state of macro-economics makes the following claim:

The Keynesian task of “demand management” outlived the Depression, becoming a routine duty of governments. They were aided by economic advisers, who built working models of the economy, quantifying the key relationships. For almost three decades after the second world war these advisers seemed to know what they were doing, guided by an apparent trade-off between inflation and unemployment. But their credibility did not survive the oil-price shocks of the 1970s. These condemned Western economies to “stagflation”, a baffling combination of unemployment and inflation, which the Keynesian consensus grasped poorly and failed to prevent.

The Federal Reserve, led by Paul Volcker, eventually defeated American inflation in the early 1980s, albeit at a grievous cost to employment. But victory did not restore the intellectual peace. Macroeconomists split into two camps, drawing opposite lessons from the episode.

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Written by defennder

July 19, 2009 at 1:24 PM

Investment banking and the economy

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A day after Goldman Sachs reported record profits, JP Morgan declared a US$2.7 bn profit:

The bank’s second-quarter profit rose 36% from a year earlier and 27% from the previous quarter, to $2.7 billion. Investment banking fees, up 29% from a year earlier and 62% from the first quarter to $2.2 billion, were a “record for any investment bank in any quarter,” Chief Financial Officer Michael Cavanagh said during a conference call with reporters. Investment banking profit smashed analysts’ expectations, just as fellow Wall Street titan Goldman Sachs Group Inc. did Tuesday.

Now the question is, if giant investment banks on Wall Street have been doing so well last quarter, why hasn’t the American economy picked up?

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Written by defennder

July 17, 2009 at 12:00 PM

What’s good for Goldman Sachs…

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isn’t necessarily good for America.  Goldman Sachs is reporting a US$3.4bn profit (way better than the US$2bn initially predicted) for the 2nd quarter of 2009.  This comes after it paid back TARP funds of US$10 bn the first quarter.  But of course, Goldman still owes the American taxpayers money.  You see, as noted earlier, Goldman received about US$13 bn from AIG when the latter sent out bailout funds it received to its counter-parties (of which Goldman is one), which is currently run by a former Goldman director and who also happens to own US$3M worth of Goldman stock.

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Written by defennder

July 15, 2009 at 9:58 PM

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How large is the Keynesian fiscal multiplier?

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Recently Greg Mankiw (whose Macroeconomics text is widely revered by econs undergrads) wrote a post on his blog which highlighted two papers (both published this year) concerning the size of the Keynesian spending multiplier. Those who have studied Econs 101 know that when a dollar is spent, the total cumulative effects of that spending on the economy and GDP is more than just a dollar.  Since I’m lazy, I’ll just let Wikipedia do the explaining.

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Written by defennder

July 15, 2009 at 3:44 PM

Goldman Sachs expected to post record profits

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The NYT reports that Goldman Sachs is expected to report it earned record profits for the last quarter:

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.

The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall.

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Written by defennder

July 13, 2009 at 3:32 PM

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