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Stiglitz Questions Goldman's Size, Potential For Front Running
One month ago Zero Hedge proposed the following questions to Goldman Sachs in response to their vehement denials of HFT abuse:
1. Regarding revenue percentages - We are happy to read Goldman's
broad generalizations: yet, if on 98% of SLP trades, which amount to
anywhere between 600 million and 1 billion weekly, Goldman collect the
generous $0.0015 rebate, it is a little troubling to see how this gift
from the NYSE to Goldman could be so marginal. Also, could Goldman
account for Implementation Shortfall costs associated of its SLP monopolization? We would be surprised if "slippage" profits did not fall
under the HFT revenue umbrella. Maybe in their next 10-Q Goldman can
provide some much needed detail to further elaborate this issue.
2.
Regarding Flash - Perhaps Mr. Tusar can clarify some of the numerous
questions we have had regarding use of Flash on SIGMA X. Furthermore,
it is our understanding that Goldman does in fact allow external
liquidity providers on SIGMA X, which are known as XLPs. Can Goldman
please clarify who these are? By what definition would XLPs not be part
of "client order flow." And, additionally, we would be excited to find
out specifics on how GS' Dark Pool Flash knowledge is kept isolated
from Goldman SLP trading flow.
3. Regarding Physical separation -
It is refreshing that Goldman believes in the concept of Chinese walls.
Since we are on the topic, would it be possible for Goldman to provide
a snapshot of its trading floor and to distinguish where the flow
traders and major fixed income and equity account salespeople sit in
relation to prop traders and their analysts? We believe Goldman's
credibility of a "force for good" would benefit significantly if
readers knew that Goldman's prop traders were not constantly within
earshot of hearing how many million shares of company X Fidelity may be
buying, or how many million notional in CDS of company Y Och-Ziff may
be a size buyer of.
Today, question 3 gets broad exposure in an interview in Daily Finance, where none other than former Council of Economic Advisors Chair (where he was succeeded by San Fran Fed's Janet Yellen), and 2001 Nobel Prize Winner in Economics Joseph Stiglitz discusses the implications how Goldman Sachs could potentially be abusing what is affectionately known on Wall Street as Information Asymmetry:
The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information. That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior.
Stiglitz' other contention that Goldman is a market behemoth whose break up (and not merely in the context of too much risk) deserves close scrutiny, is well known and is shared by many finance professionals. Zero Hedge has repeatedly attempted to draw the attention of Chrstine Varney to the issues of not only market dominance by various HFT and related topics as the new paradigm that needs careful anti-trust evaluation, but of Goldman Sachs, as the biggest purveyor of such dominance, desperately begging a review of Monopolist status. And while Goldman's control of the equity market is second to none, would a Goldman overture to do a roll up of virtually the entire fixed income industry pass anti-competitive muster? The collapse of FI powerhouses Bear and Lehman allowed it to do just that, and at essentially no cost to it whatsoever. Net result: in the world of capital markets, Goldman has domination over both Fixed Income and Equity product trading, and not only that, but it is the venue through which the bulk of all other financial participants trade (see REDI, Sigma X, Sonar, Etc.) as well as having an infinitely backstopped balance sheet to trade out of its own account, which probably does not even need the Fed's daily liquidity pump to have a 99.999% profitable trading days ratio.
One hopes that anti-trust regulators wake up to this issue before it is too late. However, if the SEC is any proxy for government agency efficiency, it probably already is.
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Tyler, you know i adore the site, and your work.
So i say this with respect, i will get a lap dance or 10 and invite all ZH readers to watch, if anti-trust regulators ever demand the break up of Goldman.
A safer bet could not be had.
Lizzy,
You said "get a lap dance" rather than "give a lap dance."
So what's so special about getting a lap dance? I don't need GS broken up to get a lap dance. :>))
I think Lizzie was offering to let ZH readers watch her get a lap dance. But I'm not sure why readers (almost all guys) would want to see a guy in a thong rub himself all over a lady trader.
I was talking girl on girl.
hot!
It would only be fitting if said dances were administered by the chairman of the House Financial Services Committee. Wicked haat.
or is this a prompt for a ZH F/M/K poll?
Tyler get your good buddy, ol pal Teddy Kaufman to launch an investigation and hearing--He is on the Senate Judiciary Committee.
http://www.reuters.com/article/ousivMolt/idUSTRE58G5U320090917 important. read it.
Hi CB--this has been widely discussed for months now. Top reset dates in 2010-2011.
Oh my...notice how they are mum on CRE??
i know, but what's important is the tense used in that article as in; " this month " or " 18 % higher Y-2-D " that why i posted the link. We may see a few surprises in Opt-A sector before the start of '10. Given the mayhem in 08 regarding the sub-prime, one should expect some turmoil in the Opt-A sector this year, given that the " fear " has not fully gone away, and that the potential downfall of the global economy, which could have happened if the FED and the Tres. did not bail out the participants, is still lurking in the subconscious mind of the " players " in the market. What will their reaction be; i don't know, but judging from a previous experience we could see a MAJOR ( as in top 20 ) bank go down WHEN ( as in; this year ) a shit storm called Opt-A default of category 5 starts tearing the fragile structure of worlds economy apart. Brace yourself; and enjoy the ride.
cheeky...thank you for expanding..."this month" is a change in paradigm in terms of what is reported by the media. good point on the comparison to the sub prime period.
waiting for the infamous bernanke quote of "we have sub prime contained" in 5....4...3....
deadhead; it would be good if someone can post a chart or a data set here, regarding the list of banks which have the biggest exposure to the Opt-A sector. It would surely be similar to the one of the banks which had the biggest exposure to the sub-prime sector. That would give us some guidelines of which banks to short; which to consider to big to fail, and which to buy when the crash comes and goes for a month or two into a downward spiral. Surely, given the social climate that is prevailing now i do not expect for the FED and the Treasury to bail out ALL the companies which are deemed to big to fail. Basically, there exist a choice between: a ) let some BIG banks go BK or b ) ensure a civil unrest of historical proportions not just in the US, but all over the globe. Basically that's all there is to this situation; and i don't want to think about how will the " landscape " look like when shit storm of category five hits the jumbo and prime sectors. Maybe Mayan' were right after all; 2012 looks more and more like a point in which SOMETHING MAJOR will happen; be it good or bad. Given the " landscape " which we have now, i vote for bad.
As far as I know, JPM has the most exposure. WFC and BAC not far behind.
then the picture is clear. WFC ---> BK, BAC ---> trading in the 1$-2$ range, JPM bailed out or just lose 10-15 % of their stock price. What you say Howard ? Oh; and if you could provide me ( us ) with a list of top 5 or top 10 i could give you a more precise " evaluation ".
WFC->BK, BAC->$1
------------------
in your dreams
in my dreams; we'll see, but i bet you were the one of those guys who were buying Bear and LEH and were sure " they could never fail " ... am i right, OR am i right ...
* ( i actually don't expect for you to admit it, but from a cocky and asshole-ish tone in your post it's a natural deduction that it was so )
Karl Denninger mentions WFC, BAC and JPM with links off to other predictions he made earlier in the year.
http://www.istockanalyst.com/article/viewarticle/articleid/3344477
I read a lengthy report months ago on the Alt/Opt-A's and unfortunately my mental hard drive did not save all the data or it's origin although it was a very credible bank analyst--perhaps Weiss? JPM, WFC, and BAC were definite, sorry I don't have more than that. I am sure C is right in there as well.
cheeky...howard is correct. the biggest players in the opt reset game were probably countrywide (now bac), wamu (jpm).
you also bring up an interesting point in regards letting a tbtf go...up until the Obama Federal Hall speech, the admin stated policy that the 19 tbtf were just that and the obamas gave a seal of approval to moral hazard. I swear when he spoke at fed hall he said the policy of moral hazard with the tbtf needed to change and that failure should be a consequence. this did not catch anybody's attention it seems to me. his liberal base and the church of the messiah at huffpost absolutely are miffed at him for his succumbing to the wall st machine.
i don't trade individual companies anymore (broke the rule once, bought bac in the spring at 3.90 and dumped on the two bagger, lol!) but if there was one bank i was to short, it would be wfc. i also like ms as a short, based on what was recently released about paulson offering up ms to the house of dimon for nothing during the crisis. as far as i am concerned, nothing has changed at ms save the infusion of capital from the japanese....
With regard to option ARM exposure, don't forget Wells Fargo, which acquired most of its option ARM exposure (over $100 billion) via Wachovia which in turn acquired it through its incredibly stupid acquisition of Golden West Financial. I suspect WFC has a bigger exposure to option ARMs relative to its total assets and tangible common equity than either JPM or BAC.
Virtually the entire Golden West option ARM portfolio was originated in 2004-06 (older loans were refinanced) and my recollection is that it is about 80% concentrated in California and Florida.
Hi Sharts--we had that covered with WFC...but thanks for the additional data on WFC.
thank you sharts....and Golden West was a real beauty, lol! If i'm correct, unlike some of the purchase accting write offs that wfc used on the wachovia deal, i think golden west was not a distressed deal at the time.
Why do you guys insist on looking at fundementals of stocks, and bank stocks of all things?!?! God only knows what crazy things they and their org, the Fed and US Treasury are doing cook the books...not that fundementals don't eventually come home to roost, but with he corruption in this market, in particular in relation to financials, how can you, at minimum hope to predict timing of stock falling? And even more, how can you predict how much govt and insider manipulation will go on? GS should be history if fundementals of private market mattered, just as Fannie and Freddie as supposed not-governmental backed orgs should be gone also...ignore corruption and unfair govt intervention at your own peril
we agree that the mayans were on to SOMETHING.
we vote that may be good and bad at the same time.
one is not mutually exclusive of the other depending upon one's perception.
CB, ever watch this?
http://video.google.com/videoplay?docid=-3221951342226757023#
maybe a little too kooky to swallow in one gulp, yet filled with some juicy food for thought if you click around.
it gets going around the 6:00 mark.
CB - I would check with Chris Whalen at the Institutional Risk Analytics. Their drill down of the American banking sector is top notch.
http://www.institutionalriskanalytics.com/team.html
Cheeky B, check out this zh link for some further points:
http://www.zerohedge.com/article/option-arms-most-misleading-mortgage-product-ever-devised-worst-subprime-you-bet-looking-wel
Spot on Nico!!! Short the SPX 2/10
Let them all fail...bailout 2 perhaps....God! I hope not, but at this point, really nothing this administration does would surprise me.
Check the October put activity in Wells Fargo--every strike down to 24 has huge open interest and 10000+ size trades daily. More today--45000 struck at $27. Nearly 6 to 1 in terms of put to call volume on the 27 strike. No other bank has this size options trading going on in puts except C. Oct $4 P/C is 4 to 1 but Oct $5 P/C is 1 to 4. In other words, either big spread trades thinking C will stay in the $4 range or something of that ilk. Something is definitely going on in WFC that is way out of the ordinary.
thank you howard. i have been following your analysis on the option end.
lots of buzz out there on wfc. every time stumpf talks it is de minimis and the wfc folks avoid answers from analysts, media. it's like they are trying to hide something (which they probably are). rumors floating that their cre (the other banks tend to get more discussion on the cre mess particularly regionals) is coming to more of a head.
gotta wonder if warren buffoon is behind some of those puts! good golly, if a filing comes out and he unloaded shares, ouch...that could be a triggering event.
Unfortunately, we don't get much from Berkshire's holdings on a timely basis. Some nitwit was on CNBS calling the put buying today on the S&P was bullish for stocks and 10-20% more on the upside. But the CBOE P/C ratio is at a very low level at about .45 with much more call buying going on overall. Use the same logic on Wells Fargo and it is going to the moon. Or the big players know something. We'll see.
C making a bee-line to $4 since 3:30. That was nice.
although your point is well taken and i'm not an expert in any forward looking analysis, this guy had some good points on this issue imo
http://wallstreetpit.com/9692-smackdown-week-option-arm-resets
what do you think?
correct Howard.
i'm wondering if the "smart" borrowers who have big resets coming up and who are in tough shape (unemployed, etc) or are underwater particularly, will beat the banks to the punch and just stop paying now?
Damn right they' ve stopped paying and since, according to the article, many of the OPT A loans are also Jumbo loans...I sure as hell would be pocketing that mortgage payment and heading out the door...(after I sold all of the copper piping in the house of course!)
In 2006 in Phoenix, empty homes were broken into and the wiring was stripped out of the house. It was happening at an alarming rate.
None of the McMansions have copper piping these days--just CPVC. The only copper in these houses is the wiring. Usually, only the desperate laborers that put the wiring in are bold enough to take it back out.
DH, with something like a 6.3 year inventory of homes in the jumbo market for sale, I would think it would be a safe assumption many have already stopped paying.
thanks howard and djchill.... that means the initial NODs should be forthcoming in, say, another 12 months or so, lol!
The typical Golden West (now part of WFC) option ARM doesn't reset for 5 years or until the loan is over 125% of market value. The vast majority of WFC option ARM customers make the minimum payment (which doesn't even fully cover interest). If the minimum payment is less than the cost to rent a comparable residence, many of these option ARM borrowers will pay until the payment resets up and then throw WFC the keys. WFC talks about how more than 50% of option ARM borrowers are current on their payments as if that means they are sound loans, and I'd be surprised if they're not carrying them at par. Not that WFC is going to disclose that kind of information.
thank you...i appreciate the info...wfc has been bragging about this lately......if they are carrying them at par, wow.....that's gonna be ugly (unless they are good at using the fasb 157 modeling!)
CHEEKY / Regarding your link for Option Arm Mortgages above, take a look at this link:
http://ftalphaville.ft.com/blog/2009/09/09/70881/134bn-of-us-option-arm-rmbs-to-recast-by-2011-fitch-says/
This is stunning (from this link/article): Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event (i.e. roll-over), though it should be noted that Fitch rated only approximately 5% of Option ARM transactions. Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize.
CHEEKY / Regarding your link for Option Arm Mortgages above, take a look at this link:
http://ftalphaville.ft.com/blog/2009/09/09/70881/134bn-of-us-option-arm-rmbs-to-recast-by-2011-fitch-says/
This is stunning (from this link/article): Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event (i.e. roll-over), though it should be noted that Fitch rated only approximately 5% of Option ARM transactions. Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize.
As the MSM likes to say, there is no crime in having the smartest people or the best corporate culture.
Breaking up the conflicted pieces would actually give them more freedom. The prop desk wouldn't have blackout periods around investment banking deals. They could use all their smart ideas any time they want. Why don't they like this idea?
deadhead - Dont know if I'd call myself smart, but certaily have stopped paying the mortgage since my reset is looming large next year and I'm waiting on a short sale offer. Note I'm not unemployed but why should I throw my hard earned money away when I know there is no getting out of the hole. Figure they cant foreclose on me anyways so why not enjoy the rent/mortgage payment free home for awhile. Its the least I can do for the bending over the banks/fed have handed us. Cant see why anyone in a similar position wouldnt do the same.
What? moral hazard, you say? Dont think so...
thank you for your personal experience 73586...I wish you luck and the best going forward.
i want to be mad at you for abusing a situation you got yourself into, but i really just can't with all of the nonsense going on these days. prior to all these bailout shenanigins i was waiting for people with resetting mortgages to really have to purge so i could purchase my first home with saved cash at a price which is actually affordable given median wages. i sat out while friends from LA to st. louis were talking about the 'sure win' of any kind of home ownership. but now i just wish you luck because there are greater abuses to save the energy for. in a wierd way im envious that you have a little bit of power to stick it to them and that you're willing to take on some sort of personal risk to do so.
Why Goldman Sachs Potential Whistle-Blowers Face Destruction
At various times on these comment boards, someone asks why doesn't a whistleblower from inside Goldman Sachs come forward ... people suggesting this person could get a big fat book contract or media frenzy around them ... the answer as to why such a person is too fearful of destruction, despite the chance for a brief moment of fame on ZeroHedge, is the following.
One is that big corporate media companies and book publishers, share common boards of directors or outright ownership with corporations generally, Time Warner Books, Pearson-Penguin etc. - The General Electric - CNBC model is actually the model of the entire publishing and media industry. A few hundred people keep popping up on all the key corporate boards, from the 15,000 families in which most US wealth is concentrated, a lot of those people tied to GS.
True that at the moment, there is a little corporate media negative on Goldman Sachs, but this kind of momentary blip - like the brief media hoo-ha over AIG executive bonuses - is sourced in two functions.
- One is to give off a false sense that there is 'critical media' about these people, a little smoke to fool the rabble.
- A second is that, there is indeed a little bit of jockeying for position among the ruling oligarchs, and some of the oligarchs not in the main GS loop are allowed a little nose-tweaking of Goldman Sachs without actually ruining them.
But beyond owning the media, there are the US judges, linked to Goldman Sachs via the top law firms who get money from GS and from where the judges come (and the judges' bribes can easily come from there too, just sayin' of course).
As for whistleblowers, this text lifted from an e-mail 'underground' newsletter, pretty much sums up the US situation:
§§§
Statistics - 98.5 % of all whistle-blowers, lose in US Federal courts
Everyone should know their odds of getting 'justice' in the US federal court system:
Statistics from the Citizens' Committee for Constitutional Protection:
« Since 1994, Federal whistleblowers have lost more than 98.5 percent of cases at the Federal Circuit Court of Appeals. »
And from the Project on Government Oversight, despairing on the frustrating results of the legislation for which many people fought, supposedly giving protection for those who blow the whistle on corruption:
The 'Whistleblower Protection Act' has ... « suffered from a series of crippling judicial rulings [that] have rendered the Act useless, producing a dismal record of failure for whistleblowers and making the law a black hole. »
§§§
'Nuff said.
Good grief. You really have no idea how the world works. Tin foil hat nonsense.
The real question here is "conflict of interest" whereby GS clearly has conflicting businesses....
The solution is simple...."Un-conflict them"....
An investment bank should concentrate on bringing private companies public....
The "brokerage model" has changed forever....
Again ....the conflicts are clear....the brokerage firms
have formed unfair electronic trading models as compared to that of the public....and again are running "conflicted" businesses....
The BATS electronic trading model ....is the correct model....An exchange is nothing more than software whichave
electronically changes the name of the owner by time stamp of the order....
All accounts....Grandma or BlackRock should be entering their orders....first come first served....on a direct access electronic exchange at the same cost....which today is maybe 20 cents per unit....
The same trading model should be for all securities....stocks, bonds, derivatives....all in the open ....first come first served....
If one has huge size....one has no right to operate off the public exchange....
Everyone first come ...first served...regardless of size....
Same transfer costs for all....and orders must be good for one second minimum....
The brokerage model must now focus on management ....not making money for name transfers because electronic direct access trading is far more efficient ....
Investment bankers have to focus on bringing private companies public....
End of story....
Furthermore....basic information on all securities should be wiki based....
In addition....management firms cannot be paid on mark to market....but on cash outs only....This is straight forward....
By default....this makes regulation very simple....because there are no more conflicting businesses....and the exchanges are no longer fragmented....
Revenues are all about management....because there is no longer fat margins available in just electronic time stamping...because of electronic front running or non public discovered markups....No more fat fees on mark to market....Fees based on cash outs only....
This should be maybe 20 cents per 100 units....for any type of security....
This is easy to see....and easy to solve....
It's easy to say that if you've never actually traded a stock, bond or OTC derivative in your life.
This whole article is a joke. "wah wah wah goldman evil wah wah wah"
I wish Stiglitz would hop in an intertube with Krugman and paddle to Cuba where they belong.
Pardon me folks. Am I the only one who wonders what the print of GS "shadow" on various firms is. Between their various services there most likely is an issue with GS exercising various levels of control over some of the firms that have crossed through an intersection governed by that firm.
Lizzy, if GS were ever "broken up" it would be to maximize their earnings and sector control potential through this model.
Sorry. Bitch skipped.
GS is going to make more mad money selling equity in banks to shore up the capital issue. Do they have any IB competition left? Merrill? MS? Wachovia? When is the GS - Good-Citi "merger" happening? Can GS put off that CRA exam forever?
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omg, stiglitz is in the loop on this now? goldman is fcked!!!!!!!!!!