Tuesday, July 07, 2009

What's going on in Goldman Sachs?

Here is an interest piece of news about a certain Sergey Aleynikov, a Russian working in the US caught for stealing secret computer codes from Goldman Sachs, his employer. [Link].

"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" - Bloomberg [Link]

I wonder what is in the proprietary trading system owned by Goldman Sachs that can cause a danger to the US markets.

Anyone observing the market, will begin to notice how inter-linked they have become. For example, a fall in US$ causes the price of oil to rise and generally cause the emerging market equities and commodities to rise. Not only that intraday fluctuations in today's market is very high much higher than in the past. The US$/Yen rate can actually move by 1% or more in a single day....and nowadays this occurs once every few days. The price of oil collapsed from $140 to $20+ then surge up to $74. It is hard to believe that such movements are due to demand and supply. If you have a good memory, it was a Goldman Sachs analyst who forecast oil reaching $200 when it crossed $100 [Link]. One barrel of oil is actually traded 24 times on the market before it is sold to the final buyer.

Next piece of news here [Link] is about US regulators considering regulation of the oil and gas market to prevent rampant speculation.

Why am I writing all this? In 1998, Dr. Mahathir made a statement about currency speculation being 'evil'. When he said that in 1998, he was ridiculed as the backward leader of a nation who did not understand the markets and was trying to pin his own incompetence running the economy on speculators. As I was watching the Asian crisis unfold, I thought there might be some truth in what Dr. M said although the (western) media was dismissive of his accusations.

I bring your attention to another article in Rolling Stone magazine called The Great Bubble Machine by Matt Taibbi [Link]. His claim which is quite incredible is that Goldman Sachs engineered every major bubble in the markets in the past few decades. You might ask yourself how is this possible? Isn't it too far fetched? Just to get an idea of how influential Goldman Sachs is watch this video:


If you recall in late 2008, when Lehman Bros collapsed, the next day AIG need $85B (the figure was $20B prior to Lehman's collapse but the figure ballooned to overnight $85B due to the Credit Default Swaps(CDS) AIG had sold). Goldman received $13B from AIG [Link] as the largest beneficiary of payouts made by AIG.

I'm not here to promote conspiracy theories and it is not possible for me to prove and show how Goldman Sachs or any investment bank is involved in the markets. But what is very clear is that the level of speculative activities in the markets is so high one wonders it distorts the economy. Driving oil prices to $140 per barrel caused many companies to over-invest in oil rigs and exploration. What about those proprietary trading systems that move billions around? The thing is the regulators don't know what these investment banks do and after what has happened in the past 12 months, isn't it is time to look into limiting their activities?

15 comments:

Anonymous said...

Haha, conspiracy theories!

Have you heard of any conspiracy theories why Temasek invested so much in those US investment banks? And then sold them "at the wrong time" making losses?

Some people even said that there are more than meets the eye regarding those investments and losses.

You know like they said things must never be seen from just numbers (profits or losses or whatever) alone. There are bigger things than that, things that are not so convenient or easy to explain to the public but are important and needed to be done.

Anonymous said...

It's possible that financial crises had been engineered by such mega banks all the while but what is the use of knowing that even if it is true ... unless there is way to make sure it does not happen, ever again.

For this reason I think China, Russia and a few other countries were supposed to bring up the issue of creating an alternative currency to the US dollar as a reserve and exchange currency in a recent global conference. Apparently the discussion was shelved for some reasons.

Now it is being revived. Read this current news - France joins China, India and Russia in calling for a new reserve standard on the eve of the G8 summit.

Once such an alternative currency is established, the mega banks like Goldman Sachs and JP Morgan which have their base in the US will never again hold the trump card because that trump card is dependent on the US dollar as the supreme currency.

This will create a far more stable global financial system definitely.

PAP will no longer have to kowtow to the American banks in squandering our reserves in bailing them out.

Which was ridiculous to say the least and at the cost harming the people greatly because of PAP wanting to make up for the loss.

I believe the big hikes HDB flat prices over the last few years demonstrate this quite well.

Eventually PAP will have to tweak its foreign policy to show a more non-aligned attitude given the rise of these other superpowers.

Anonymous said...

One problem with the US is that there are no lack of conspiracy theorists but too few strategists to fight what they see as dangerous and wrong.

For this reason before Obama, elections after elections the same type of puppet Presidents under the control of powerful capitalists were elected into office.

Those Presidents particularly the Bushes were only good "at creating wars and raising taxes" to borrow the words from top management guru Peter Drucker in describing what governments are usually good for.

Sometimes to change all that lies in just one simple strategy: The threat to ditch the US dollar and the manipulators and evil doers will immediately be thrown into disarray.

And has not some commentator in a previous Lucky's article also suggested precisely this strategy should the US go too far in its manipulation of the global economy solely to its advantage?

aiyah said...

Can we work till 65, please!
I wish I were like old Mr Lee
Who still serves our country
Few work to his advanced age
And still draws a handsome wage.

The people who once loved him
Ask why he is in the money game.
They wonder why he wants so much
When others are suffering such.

What's money in the bank?
It's just a figure if not spent
You cannot bring it with you
When your time is due.

Why lose your name?
Why lose your fame?
Why lose them both
In your pursuit of gold?

Each night when you go to bed
Do you think of the many unfed?
Have you ever wondered why
You cannot shut your eyes?

The moral of this short story
For everyone in this country,
Is to put others before yourself
Then you will be sleeping well.

Anonymous said...

Dear Mr Tan,

Thank you for sharing your knowledge to readers like me. Deeply appreciate.

I am not a finance person. I also remember Dr M's comment about the trade of currency was many time the actual value of world trade. He called for halt of currency speculation. Was he right in doing so? Should we stop currency trade which is purely for trading of currency that has nothing to to with actual trade??

Can you enlighten us more. Thank you.

Yours sincere reader

Anonymous said...

I am being a little idealistic but here goes.

There should be some sort of global Inspectorate that can oversee the waywardness of political leaders.

The UN was supposed to do that to some degree. But the sovereignty of nations cannot be compromised and hence the Security Council really do not have much authority in many instances such as telling political leaders how they run their countries.

In any case, the UN is there already and what is needed is more creativity on how to fix wayward leaders. Now I remember the bank accounts of North Korea leadership in Macau were once frozen through the directive of the US.

What I am proposing here is that should Singaporeans' hard-earned CPF savings be squandered by PAP, there should exist a way to make the leadership pay for it. This would act as a deterrence to political leaders not to abuse and misuse their powers while in office.

Bank accounts of political leaders are perhaps the easiest points of engagement with them. And I would think all dictators around the world have bank accounts; they cannot be keeping their money in tin cans, can they?

When Marcos fell the Swiss bank reveal that he had like US$1 billion with the bank and subsequently returned that money to the Philippines new government.

Of course I am not just talking of small countries; even leaders of superpowers like the US should be subject to this kind of vetting.

How this can be done is up to the Security Council; surely they can work out a plan to fix political leaders who abuse their powers.

No need for guns and bombs; in most cases what dictators hope to end up with at the end of their life is a huge bank account for their families.

Just a thought that comes to me when I think the dilemma we are in.

I hope Lucky and others will throw in their views.

pte ong said...

i know most Sporeans wont agree with me, but i have more respect for Dr M than LKY. For start Dr M is dead right that speculation is evil bcos speculation is a non-productive activity where no goods are produced. Prices are merely manipulated for ppl to make $$ from it, in other words it is not real, which means a bubble. Finance as the so-call "grease" that facilitates real science, real tech, real production and real economy has grown too big liao.. has fueled a bubble.. but hey the bubble help boost GDP numbers leh!


2nd, Dr M stood down from power in a manner unlike that of LKY. M's son certainly wasnt installed as the next-in-line.

Lim Leng Hiong said...

Lucky,

I've never formally read Econs so this may be a rather basic question:

Is there a method to estimate the influence of speculators by comparing on the rate of change in market movement with the rate of change in the fundamentals?

What I'm trying to say is that we may not be able to stop whatever the top bankers are doing, but it would be helpful be able to defend ourselves against false starts.

Anonymous said...

@Lucky

Goldman is a major donor to ur precious Obama. And paid hundred of millions to ur precious Paulson.

Maybe u want to remove this article?

PS: market movement is about flows and very little about fundamentals.

Anonymous said...

Anon 1:30 PM

I read about that too that Obama is greatly funded by Goldman. Question is, was he funded to get things fixed or just be a puppet?

From the look, it is more the former because the US has reached the point where something must be done to correct the systemic faults rather than to continue with the status quo.

Onlooker said...

Ummm lucky.
It is not a conspiracy theory.
Goldman Sach have an advantage using a combination of software and hardware.

The code is still out there but the Russian progammer was caught.

http://arstechnica.com/tech-policy/news/2009/07/goldmans-secret-sauce-could-be-loose-online-markets-beware.ars

No wonder so many companies lose out.

But a lot of people are hoping it is a conspiracy theory.Esp people working there.

Onlooker said...

Links from that ars technica article

Goldman Trading-Code Investment Put at Risk by Theft

A Goldman trading scandal?

Zero hedge blog post

Anonymous said...

Well the only theory I cannot understand is that we have to search the whole world for months for the right man with a proven track record to become the CEO of Temasek and boy does he have a fantastic track record. Yet seven years ago we so easily appointed a CEO with hardly any experience in investment, whose only track record was the testimony of the politicians. Bt then I was enlighted when someone pointed out that you do not need journalistic experience to be a editor nor any business experience to be a CEO in any of the government linked companies.All you need is talent, the talent to be born to the correct parents or talent to be married to the correct man. Cheers

LuckySingaporean said...

Onlooker,

Thanks for the links. I found this highly interesting:

The data indicated that during June 22-26, program trading amounted to 48.6 percent of NYSE average daily volume of 3,449.8 million shares1, or 1,675.7 million program shares traded per day (Revised from 1,678.3 million program shares traded per day).

48.6% of the trades on NYSE is done by computer progams. This is amazing so when the DOW fell 160pts yesterday was it human logic or just selling triggered by some inter-market formula. Jim Jubak wrote once that 200pts swings on the Dow are mostly caused by programs. For example, a billion$ program can trade the relationship of treasury yields vs equities can be triggered to buy billions in stock when the treasury yields fall.

Recently we see the stock market move in a correlated manner to the oil market. When oil price fall, the stock market goes down because it is interpreted as a weakening economy (by the software program?) and vice versa.

Anonymous said...

@Lucky

You dun know that Goldman is part of the "Plunge" *snigger* Protection Team meh? And how Goldman *offered* to *rescue* Bear Stearns.

You should also check out the % of the trades executed by Goldman.

Dun worry.
I am sure your precious Obama will *eventually* make a decision that does not benefit Goldman.