Wednesday, April 28, 2010

Goldman Takes Its Customers to the Zoo

Back in 1981, I had been a market-maker on the Chicago Board Options Exchange for less than a year when one day a broker walked into the pit where I was trading and announced that he had a cusotmer who wished  to purchase several hundred contracts in two different strikes of puts and calls and sell several hundred contracts in two other series.  I don't remember exactly what the trade was but I did recall that it made no sense to me.  Nevertheless, the other market makers in the pit and I quoted a price for the transaction and the broker executed the trade.   About an hour later, the broker returned and said that some one in his firm had made a mistake on which options to buy and which to sell and he explained what he actually wanted to do.  Unfortunately, the market had moved against him in the meantime and it cost him several thousand dollars to correct his mistake which was pure profit for the traders in the pit.

After the broker left, I turned to one of the older traders and said. "You know I wondered why he was doing that" (meaning the original trade).  The trader looked at me and said "Not me Vinny.  I'm just a fucking taxi driver.  The guy wants to go to the zoo, I take him to the zoo.  I don't take him to the airport."

According to Goldman Sachs, it was simply meeting its clients' desire for exposure to the housing market chairman.  As a market maker, it was simply giving its clients the opportunity to make the trades they wanted to make.  They were not obliged to tell their clients how foolish they were being or that Goldman was betting against them.

The problem with Goldman's defense is that it was not simply acting as a market maker.  It was also acting as a salesman and broker.  As a market maker on the CBOE, I was not allowed to give advice to customers.  I was not allowed to earn commission by persuading clients to buy and sell options.  My profit came solely from taking the other side of customers' trades.  I played no role whatsoever in helping the customer decide whether or not to trade options in the first place.  That was the broker's job.

Goldman didn't just take its clients to the zoo.  It dropped them off inside the lion's cage.  Then it bought life insurance policies on them.

Tuesday, April 27, 2010

A Few Gold Men, Sachs That Is

You want the truth? You can't handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who's gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman's death, while tragic, probably saved the financial system. And that Goldman's existence, while grotesque and incomprehensible to you, saves pension funds. You don't want the truth. Because deep down, in places you don't talk about at parties, you want us to fill that investment gap. You need us to fill that gap. "We use words like credit default swaps, collateralized debt obligation, and securitization. We use these words as the backbone of a life spent investing in something. You use 'em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We'd rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don't give a damn what you think you are entitled to!
 Author is unknown.  I saw it at Calculated Risk.

History Schmistory

My wife and I were in the Great Smoky Mountains in Tennessee this weekend and it seemed to me that at least half the basic cable package in the lodge where we stayed consisted of religious programs.  One that I watched for a few minutes was Truths that Transform from Coral Ridge Ministries which ran a segment on The Rise of Socialism in the 20th Century showing the clear connection between Lenin, Hitler, and Obama. 

Luckily, the weather was pretty good so I wasn't forced to spend a lot of time indoors.  Moreover, when the weather was inclement, I had a good book to read, George, Nicholas and Wilhelm: Three Royal Cousins and the Road to World War I by Miranda Carter.  It is the story of three mediocre monarchs, an English King, a Russian Tsar, and a German Kaiser, who led their countries at the beginning of the twentieth century and the havoc they managed to wreak in direct proportion to the power they wielded.

Not surprisingly, none of the wingnuts on Truths that Transform mentioned the political and religious systems that set the stage for Lenin and Hitler.  There was no mention of the autocratic Tsar who wielded absolute power while most of his subjects lived in abject poverty.  There was no mention of the repression, the pogroms, the disastrous wars that bankrupted Russia, the famines that resulted when wheat was exported to obtain foreign capital, or the Russian Orthodox Church that made support for the monarchy a religious obligation.  There was no mention of the arch-conservative aristocracy in Germany that fomented World War I and the post-war upheaval that opened the door for the Nazis.

I certainly do not mean to suggest that the Soviet Union and Nazi Germany were anything other than horrific failures, however, both systems were the products of failed systems in which conservative governments served only the needs of a wealthy and powerful minority while resisting any calls for reform.

Saturday, April 17, 2010

CNBC Protects Jim Cramer

In the following clip, which doesn't seem to be available on CNBC's website, a guy named Sylvain Raynes had the audacity to suggest that CNBC's previous guests had been acting as PR guys for Goldman. This provoked outrage from Jim Cramer and a firm admonishment from Erin Burnett. No doubt he will never be asked again.

Unfortunately the clip doesn't show all of Cramer's comments which were critical of the suckers who bought the CDO's. Cramer referenced his days as a hedge fund manager and said the the buyers should have understood that there was someone on the other side of the trade who might not be interested in the buyer's welfare.

This is of course bullshit. As a professional trader, I understand that when I trade options or futures the guy on the other side of the trade is hoping that I will lose money on it. However, this is not the case with all investments. When I buy a stock, the guy on the other side may be completely indifferent to whether I make money on the purchase since he is simply selling the stock because he needs the money for something else. If I purchase a mortgage backed security, the guy who is ultimately on the other side is the guy who borrowed the money to buy a house and he is hoping that I will get my money back.

This case is completely different though. This is like a case where I buy shares in a mutual fund and the guy who is managing the fund, i.e., the guy to whom I am paying a fee to pick the stocks that the fund will buy, is shorting those same stocks in his personal account. Anyone who defends that kind of conduct rightly deserves to be considered a shill for Wall Street

Friday, April 16, 2010

So Many Jerks on CNBC Today that I Can't Pick Just One

The free market ideologues on CNBC regularly oppose additional regulation of Wall Street on the grounds that "Fraud is already illegal."  One might think, therefore, that they would be pleased by the the case that the S.E.C.'s announced against Goldman Sachs.  This isn't a complicated case involving obscure regulations.  It is a case of lying.  Goldman sold collateralized debt obligations.  The underlying mortgages for the CDO had been selected by a hedge fund manager who bet against the securities.  Goldman told its customer that the mortgages had been selected by an independent third party.  Also Goldman told buyers of the CDO that the hedge fund manager owned the CDO when in fact he had bet against it.  Felix Salmon of Reuters provides a nice summary of the facts of the case.

Shockingly, the douche bags on CNBC weren't pleased at all to see fraud being prosecuted.  The clip below is typical of the Wall Street apologists who appeared all day.  CNBC's Simon Hobbs saw it as a big change in the rules.  He was outraged by this new "duty of care" that would prohibit Wall Street from lying to its customers.  Bank analyst Anton Shutz called it a "witch hunt" even though he acknowledged that Goldman Sachs were responsible for its employee's wrongdoing and deserved to be prosecuted.  Melissa Francis couldn't see anything questionable about a short seller picking out which mortgages went in the CDO.

Tuesday, April 6, 2010

The Empty Teapot

As the old saying goes, “The cat, once burned, stays off hot stoves. The trouble is, he stays off all stoves.”

In the Tea Party movement, we see the “all stoves” response to government. Having spent a generation, from Reagan onwards, with a government that told them over and over that “government is the problem, not the solution,” while proving this point by changes in law and regulation that squeezed them and removed many protections, they now have fully formed faith-distrust of anything called government.

The problem is that only government, good government, has the power and mandate to correct the maltreatment of bad government. Not business, not finance, not private militias, not NGOs, not churches – only government. Their faith-distrust cuts them off from the primary lifeboat -- however leaky it may be -- that can get them clear of the wreck.

The Angry Bear

Thursday, April 1, 2010

Euthyphro’s Dilemma

The point which I should first wish to understand is whether the pious or holy is beloved by the gods because it is holy, or holy because it is beloved of the gods.  Socrates.

Is God good because God is good or is good good because it is what God is?  Me.

In a recent post at Thoughts from a Sandwich, Dagoods challenged theists to explain why God answers the prayers that he answers:
To claim there is a God who can cure cancer, but doesn’t, raises the huge question, “Why?” The fact the Christian cannot answer this very basic fact about God demonstrates why I reiterate any claim about God is unenforceable, because God is unobservable and unverifiable.
If you don’t know enough about your God-concept to explain why such a God wouldn’t cure cancer in a five-year-old, don’t tell me how it writes books, or provides you a parking space, or gave your child the winning shot in the J.V. basketball game.

Greg at . . . to fall in love with Jesus told Dagoods that his conception of prayer was wrong:

God doesn't exist so that we can get what we want... in fact, we exist so that God will get what he wants, in particular, glory and praise.

It might sound quite lame- a God who creates us to be worshipped? What kind of God is that? But the truth is, truth isn't determined by its lame-factor (how lame it is or isn't). I think it's lame that if i fall off a 400 foot cliff, my bones will quite likely fracture, or perhaps even explode and shatter all over the place. I may even die. As lame as it is that I have to suffer from falling off cliff, it doesn't take away from the truth that gravity exists, and rocks at the bottom of a cliff are usually hard. (By the way, I've come to experience that giving all to glorify God isn't lame at all. It's actually quite satisfying when I'm living according to my intended design).

I pray this would make sense to you someday: From a biblical perspective, Praying to God isn't about getting what we want. Prayer is about wanting what we get.

God is Sovereign. God's will is the goal of every believer, to align our desires with his, rather than trying to allign his desires with ours.

We need to start living according to God's words, and stop trying to get Him to live according to ours.
Even before I drifted fully into agnosticism, I wasn't comfortable with the idea that God created me so that we could tell him that he was doing a good job.  A God who was so concerned about my opinion hardly seemed like one who was worth worshiping.  The only thing I could figure was that God might want me to worship him because it did me some good to acknowledge his transcendence. 

Greg's attitude, however, seems positively nihilistic. God created me to praise him for his goodness. Unfortunately, I am incapable of determining whether or not anything he does is good because his actions cannot be judged by any notions I might have of what is good and what is evil. I am simply to accept on faith that whatever God does is good because it is what he he has done.

I have recently been reflecting the implications of the Parable of the Talents:

[I]t will be like a man going on a journey, who called his servants and entrusted his property to them. To one he gave five talents[a] of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. The man who had received the five talents went at once and put his money to work and gained five more. So also, the one with the two talents gained two more. But the man who had received the one talent went off, dug a hole in the ground and hid his master's money.

After a long time the master of those servants returned and settled accounts with them. The man who had received the five talents brought the other five. 'Master,' he said, 'you entrusted me with five talents. See, I have gained five more.'

His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!'

The man with the two talents also came. 'Master,' he said, 'you entrusted me with two talents; see, I have gained two more.'

His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!'

Then the man who had received the one talent came. 'Master,' he said, 'I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.'

His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.

Take the talent from him and give it to the one who has the ten talents. For everyone who has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him. And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.'
Matthew 25:14-30

If there is a God, he gave me a brain with which to try to figure out what is good and what is evil.  On top of that, he gave me a will with which I can choose that which I determine to be good.  The only God worth praising is one who would prefer my exercise of the talents he gave me even if they lead me away from him to my denying my reason and mindlessly chanting "hosannas."