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More Bad Press For Goldman Sachs

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July 16, 2009

They can’t seem to get away from it, no matter how hard they try.  Goldman Sachs is finding itself confronted with bad publicity on a daily basis.

It all started with Matt Taibbi’s article in Rolling Stone.  As I pointed out on June 25, I liked the article as well as Matt’s other work.  His blog can be found here.  His article on Goldman Sachs employed a good deal of hyperbolic rhetoric which I enjoyed  —  especially the metaphor of Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.  Nevertheless, many commentators took issue with the article, especially focusing on the subtitle’s claim that “Goldman Sachs has engineered every major market manipulation since the Great Depression”.  I took that remark as hyperbole, since it would obviously require over 120 megabytes of space to document “every major market manipulation since the Great Depression” — so I wasn’t disappointed about being unable to read all that.  Some of Taibbi’s critics include Megan McArdle from The Atlantic and Joe Weisenthal at Clusterstock.

On the other hand, Taibbi did get a show of support from Eliot “Socks” Spitzer during a July 14 interview on Bloomberg TV.  Mr. Spitzer made some important points about Goldman’s conduct that we are now hearing from a number of other sources.  Spitzer began by emphasizing that because of the bank bailouts “Goldman’s capital was driven to virtually nothing — because we as taxpayers gave them access to capital — they made a bloody fortune” (another vampire squid reference).  Spitzer voiced the concern that Goldman is simply going back to proprietary trading and taking advantage of spreads, following its old business model.  He argued that, a result of the bailouts:

. . . their job should be, from a macroeconomic perspective, to raise capital and put it into sectors that create jobs.  If they’re not getting that done, then why are we supporting them the way we have been?

This sentiment seems to be coming from all directions, in light of the fact that on July 14, Goldman reported second-quarter profits of 3.44 billion dollars — while on the following day, another TARP recipient, CIT Group disclosed that it would likely file for bankruptcy on July 17.  On July 16, The Wall Street Journal ran an editorial entitled:  “A Tale of Two Bailouts” comparing Goldman’s fate with that of CIT.  The article pointed out that since Goldman’s risk is subsidized by the taxpayers, the company might be more appropriately re-branded as “Goldie Mac”:

We like profits as much as the next capitalist.  But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business.  Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail.  But that is all but impossible now and for the foreseeable future.  Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week’s tale of two banks, it’s that it won’t be enough to give the Federal Reserve a mandate to “monitor” systemic risk.  Last fall’s bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share.  Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer’s dime.

Robert Reich voiced similar concern over the fact that “Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street.”  He went on to explain:

Value-at-risk — a statistical measure of how much the firm’s trading operations could lose in a day — rose to an average of  $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.  Which means you and I are still indirectly funding Goldman’s high-risk operations.

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So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again — leaving the rest of us once again to pick up the pieces.

At The Huffington Post, Mike Lux reminded Goldman that despite its repayment of $10 billion in TARP funds, we haven’t overlooked the fact that Goldman has not repaid the $13 billion it received for being a counterparty to AIG’s bad paper or the “unrevealed billions” it received from the Federal Reserve.  This raises a serious question as to whether Goldman should be allowed to pay record bonuses to its employees, as planned.  Didn’t we go through this once beforePaul Abrams is mindful of this, having issued a wake-up call to “Turbo” Tim Geithner and Congress.

As long as we keep reading the news, each passing day provides us with yet another reminder to feel outrage over the hubris of the people at Goldman Sachs.

The Second Stimulus

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July 9, 2009

It’s a subject that many people are talking about, but not many politicians want to discuss.  It appears as though a second economic stimulus package will be necessary to save our sinking economy and get people back to work.  Because of the huge deficits already incurred in responding to the financial meltdown, along with the $787 billion price tag for the first stimulus package and because of the President’s promise to get healthcare reform enacted, there aren’t many in Congress who are willing to touch this subject right now, although some are.  A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

As Victoria McGrane reported for Politico, other Democrats are a bit uncomfortable with this subject:

Democrats are all over the map on the stimulus and the possibility of a sequel, and it’s not hard to see why:  When it comes to a second stimulus, they may be damned if they do and damned if they don’t.

Kevin Hall and David Lightman reported for the McLatchy Newspapers that at least one high-ranking Democrat was keeping an open mind about the subject:

“I think we need to be open to whether we need additional action,” House Majority Leader Steny Hoyer, D-Md., said Tuesday.  “We need to continue to focus on bringing the economy back to a place where we’re not losing jobs.”

An informative article by Theo Francis and Elise Craig, in the July 7 issue of Business Week, explained the real-world difficulties in putting the original stimulus to work:

Dispensing billions of dollars, it turns out, simply takes time, particularly given government contracting rules and the fact that much of federal spending is funneled through the states. Moreover, some spending was intentionally spread out over several years, and other projects are fundamentally more long-term in nature.  “There are real constraints — physical, legal, and then just the process of how fast you can commit funds,” says George Guess, co-director of the Center for Public Finance Research at American University’s School of Public Affairs.  “It’s the way it works in a decentralized democracy, and that’s what we’re stuck with.”

Nevertheless, from the very beginning, when the stimulus was first proposed and through last spring, many economists and other commentators voiced their criticism that the $787 billion stimulus package was simply inadequate to deal with the disaster it was meant to address.  Back on December 28, Nobel laureate Paul Krugman explained on Face The Nation, that a stimulus package in the $675-775 billion range would fall short:

So you do the math and you say, you know, even these enormous numbers we’re hearing about are probably enough to mitigate but by no means to reverse the slump we’re heading into.

On July 5, Professor Krugman emphasized the need for a second stimulus:

The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon.  The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted.  That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Another Nobel laureate, Joseph Stiglitz, pointed out for Bloomberg TV back on January 8, that the President-elect’s proposed stimulus would be inadequate to heal the ailing economy:

“It will boost it,” Stiglitz said.  “The real question is — is it large enough and is it designed to address all the problems.  The answer is almost surely it is not enough, particularly as he’s had to compromise with the Republicans.”

On February 26, Economics Professor James Galbarith pointed out in an interview that the stimulus plan was inadequate.

On January 19, financier George Soros contended that even an $850 billion stimulus would not be enough:

“The economies of the world are falling off a cliff.  This is a situation that is comparable to the 1930s. And once you recognize it, you have to recognize the size of the problem is much bigger,” he said.

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise — simply for the sake of compromise itself — is bound to bite him in the ass on this issue, as it surely will on health care reform — should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.  As a result, President Obama will need to re-invent this aspect of his public image before he can even consider presenting a second economic stimulus proposal.

Painting The Tape

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July 2, 2009

Would you be willing to wager your life savings on pro-wrestling matches?  That is basically what you are doing when you invest in the stock market these days.  The game is being rigged.  If you are just a “retail investor” or “little guy”, you run the risk of having your investment in this “bear market rally” significantly diminish in the blink of an eye.  Regular readers of this blog (all four of them) know that this is one of my favorite subjects.  In my posting on May 21, I recalled feeling a little paranoid last December when I wrote this:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock. This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

After my last posting about this subject on May 21, I have continued to read quite a number of opinions by authoritative sources, echoing my belief that the stock market is being manipulated.  Tyler Durden at Zero Hedge has been quite diligent about exposing incidents of “tape painting”.  Some examples appear here and here.  In case you don’t know what is meant by “painting the tape”, here is a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

As one might expect, this activity is more easily accomplished on days when trading volume is low.  On June 11, Craig Brown had this to say about the subject on the Seeking Alpha website:

I have read some posts about some suspicions on perhaps some entities painting the tape. Volume has been light so it is something that could happen. We will see if these conspiracy theories play out.

Regular readers of Zero Hedge (it’s on my blogroll, at the right) had the opportunity to see some televised interviews during the past few days, when professionals have complained about “tape painting” in the equities markets.  On Monday, June 29, we saw on (of all places) CNBC, a discussion with Larry Levin, a futures trader on the Chicago Mercantile Exchange.  I would consider CNBC the last place to criticize “pumping” of stock prices, since their commentary often seems designed to do just that.  Nevertheless, watch and listen to what Larry Levin had to say at 2:22 into this video clip.  He explains that “this market continues to be propped up by government intervention and manipulation” and he unequivocally accuses the Obama administration of acting to “prop this market up on a daily basis”.  Again, on Wednesday, July 1, visitors to the Zero Hedge website had the opportunity to see this June 30 clip from Bloomberg TV, wherein Joe Saluzzi of Themis Trading noted that “you’ve got government forecasts that are intentionally misleading us, constantly”.    He went on to emphasize that the trading volume we see every day is “fictitious — it’s not real”.  He explained the potential hazards to retail investors caused by trading programs that “artificially inflate the prices” of stocks, although a “news event” could cause that program trading to abruptly reverse, erasing a valuable portion of the retail investors’ assets.

On June 24, Bret Rosenthal posted an article on the HedgeCo.net website, entitled:  “Coping With Government-Sponsored Market Manipulation”.  Here’s some of what he had to say:

We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time.  Example:  the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital.  Again, if you wish to argue this point I suggest you go down to the water’s edge and scream at the tide.  Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days.  This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go?

The best advice for the retail investor, attempting to navigate through the current “bear market rally” was provided by Graham Summers, Senior Market Strategist at OmniSans Investment Research, in this July 1 posting at the Seeking Alpha website:

This rally has sucker punched the shorts countless times now, particularly when it comes to late-day market manipulation.  In a nutshell, every time stocks begin showing signs of breaking down, someone steps in, usually during the final 30 minutes of trading, to push the market back into positive territory.  So while economic fundamentals indicate we’ve come much too far too fast, it’s hard to make money trading based on this information.

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To rephrase the above thoughts, stocks are currently trading where they should be a full year from now assuming that the economy turns around this fall.  This hardly makes a strong case for greater gains or more upward momentum.  But it’s hard to go short with the historic rig that is currently taking place in the market.

So my advice to anyone right now is to stay put.  This week is a wash anyhow due to it being short and due to performance gaming:  portfolio managers and institutional investors pushing stocks higher so they can close out the quarter with gains on their positions.  Indeed, yesterday’s market volume on the NYSE was the lowest we’ve seen since January 5, 2009.

So don’t open any new positions for now.  This week will be exceedingly choppy.  And with volume drying up to a trickle, there is potential for some violent swings as the big boys play around with their end of the quarter shenanigans.  You don’t want to be on the wrong side of one of those swings.

Meanwhile, I’ve been watching my investment in the SRS exchange-traded fund (which inversely tracks the IYR real estate index, at twice the magnitude) unwind during the past few days, erasing the nice profit I made just after getting into it.  Will I bail?  Nawww!  I’m waiting for that “news event” to turn things around.