A Wall Street Saga: A 'Goldman' Opportunity (Part 2)
Thursday, August 13, 2009 | Bob De Dea
"With the right hand out begging for bailout money, the left is hiding it offshore."
-- Rep. Lloyd Doggett, (D–Texas)
"The chains of habit are too weak to be felt until they are too strong to be broken."
-- Samuel Johnson
-- Rep. Lloyd Doggett, (D–Texas)
"The chains of habit are too weak to be felt until they are too strong to be broken."
-- Samuel Johnson
Last week, we looked at some interesting facts about Goldman Sachs. Let's pick up where we left off.
The Only Things Certain are Death and ... WHAT?!!?
If you said "taxes," you must not be at Goldman Sachs! Check out this timeline of events:
September 2008: Treasury Secretary Hank Paulson chooses to let Lehman Brothers fail. By doing so, he eliminates Goldman Sachs' last real competitor.
The Next Day: Treasury Secretary Hank Paulson bails out AIG. AIG hands over $13 billion of the received funds to Goldman in repayment of debt owed.
Shortly Thereafter: Treasury Secretary Hank Paulson implements the Troubled Asset Relief Program, a $700 billion federal bailout for the financial industry, placing Neel Kashkari, a 35-year-old Goldman banker, in charge of administering the funds.
In the Wink of an Eye: POOF! Goldman transforms from an investment bank into a bank-holding company and gets $10 billion in TARP monies.
Same Day: Since the transformation, Goldman is now supervised by the New York Federal Reserve, headed by Stephen Friedman, former co-chair of GS. (He got a conflict-of-interest waiver, which made him big bucks because he not only didn't have to divest himself of GS stock, but he also bought 52,000 more shares.) He leaves the Fed in May 2009.
Current Day: William Dudley is now the N.Y. Fed president, a former -- surprise! -- Goldman Sachs fellow. And GS is back to its old tricks, moving up its earnings report calendar to effectively wipe out December of last year ($1.3 billion loss) and reporting a $1.8 billion Q1 profit, partly due to the AIG bailout money. That, remember, is money that you and I paid.
Goldman Sachs paid out $10 billion in comps and "bennies" in 2008 and made over $2 billion in profit.
It paid 1% in taxes in 2008. An incomprehensibly insignificant $14 million.
According to Matt Taibbi, "The low taxes are due in large part to changes in the bank's 'geographic earnings mix.' In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. ... A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations in the U.S. paid no taxes at all."
Cap'n (Trade) Crunch
There's a Democrat in the White House. Regardless of your political leanings, it's hard to escape the fact that around $981,000 was given to Barack Obama's campaign by Goldman Sachs employees. Or the fact that many GS alumni are still in high places in government posts.
In case you missed last week's section on commodities, you can read it here. But all you really need to know is that it's déjà vu all over again.
This time it's carbon credits.
The current cap-and-trade bill in Congress is designed to allow those companies who produce greenhouse gases over a given limit for their industry to buy “credits” from those companies who were able to come in under the limits in their carbon emissions. The estimates for these auctions over the course of the first seven years ranges from $650 billion to $2 trillion.
During the past few years, Goldman Sachs has sent its lobbyists to Capitol Hill to full-court press Congress for cap-and-trade. One of these lobbyists was Mark Patterson, current Treasury chief of staff.
Why Would GS be so Environmentally Concerned?
Tabbi reports that GS “owns a 10% stake in the Chicago Climate Exchange, where the carbon credits will be traded,” as well as a portion of carbon-credit reseller Blue Source LLC. (Read about the “strategic alliance” at Ghgworks.com/2b-alliances.html.)
I consider myself an environmentalist but I, for one, am against the cap-and-trade legislation making its way through the congressional halls of D.C. I believe that the fairest and most-effective way to give companies the incentive to reduce emissions is by taxing them directly.
I’m not alone in this thought. Hedge-fund director Michael Masters said:
"If it's going to be a tax, I would prefer that Washington set the tax and collect it. But we're saying that
Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want.
It's just asinine.”
A Man's Reach Should Exceed His Grasp, or What's a Market For?
The market is designed for good, worthwhile and well-managed companies to rise to the top and for companies with bad ideas, insufficient capital or poor execution to sink to the bottom. Money goes to the productive and shies away from the ineffective.
Conventional wisdom says that the market is just too big to be manipulated. I’m beginning to question the conventional wisdom.
Super-fast computers make trades in milliseconds. They can buy and sell hundreds of securities while you’re still reaching for the “Enter” key.
Honestly, I’m not sure what value they add to the market, other than the efficiencies and excessive profits they grant their owners.
Goldman Sachs admits that it profits from HFT, High-Frequency Trading, but it refuses to admit the possibility that this might give them an unfair advantage over those without such advanced computers, including you and me.
Here’s one example of how it could.
I know that, to ensure transparency, orders issued by an exchange are supposed to arrive simultaneously, so that everyone sees them at the same time. Enter the loophole: Some marketplaces (e.g., the Nasdaq) that pay a fee can receive the orders ahead of everybody else.
To put it simply, investment banks like Goldman Sachs are able, with these super-fast computers, “to front-run the rest of the market by determining investors’ sentiments by virtue of being able to examine incoming orders and estimate the upper limit of how much the market traders (a)re willing to pay for shares”.
Can anyone tell me what this ability to quickly make has to do with developing a analytical investment strategy or with improving liquidity in the market?
The Final Straw
On July 3, Sergey Alynikov, who used to program these supercomputers for Goldman Sachs, was arrested in Newark, New Jersey. He was charged with allegedly stealing the software code for GS’ proprietary trading program.
According to an article by David Glovin published on Bloomberg.com, “The prosecutor, Assistant U.S. Attorney Joseph Facciponti, was quoted as telling the court: ‘The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.’ “
If someone else could use the program to manipulate the markets in unfair ways, why is it assumed that Goldman Sachs would do no such thing?
I think you already know what I think.
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Bob De Dea
Chief Investment Officer
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