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The Great American Bubble Machine
July 6, 2009 7:32 AM   Subscribe

"The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Matt Taibbi vs Goldman Sachs.

“What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain -- an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

previously.
posted by philip-random (76 comments total) 18 users marked this as a favorite

 
There are some There are some odd goings on (that I confess I don't fully understand) over GS' program tradings right now. Industrial espionage! Dissapearing data! Erlang!
posted by Skorgu at 7:46 AM on July 6, 2009 [3 favorites]


previously - but that does not imply that this is a double
posted by caddis at 7:49 AM on July 6, 2009


Ah, the underused "vampire squid" tag makes an appearance at last!
posted by Locative at 7:51 AM on July 6, 2009 [2 favorites]


Drat, philp-random, you beat me too this by mere moments!

This is really a great article that explains the financial meltdown in the some of the most straightforward language I've seen. I forwarded this on to all of my Twitter and Facebook friends as this is a very good piece.

Also in the news today: New Secrecy Rule Lets Goldman Sachs Control Stock Prices Unmolested by Public Scrutiny
posted by daHIFI at 7:56 AM on July 6, 2009 [2 favorites]


This piece from RS making the rounds and getting mucho attention, as well it should...in fact, pass it on to all your left of center friends who want to see CHANGE that we might reqally believe in instead of a slogan for election.
posted by Postroad at 7:57 AM on July 6, 2009


Vampire Squid? Like a Mind Flayer?


...oh god.
posted by Pope Guilty at 7:57 AM on July 6, 2009 [8 favorites]


After reading this I feel that everything evil in the world is hiding in plain sight and there is nothing anyone can do about it. I would go buy a torch and pitchfork but damn it, they own the store AND there is a new carbon tax on those as well!!! I'm going to go eat lunch and then silently cry in my office now.... sigh.
posted by Mastercheddaar at 7:57 AM on July 6, 2009 [2 favorites]


Ah, the underused "vampire squid" tag makes an appearance at last!

Not quite - vampiresquidfromhell has been around for a while.
posted by permafrost at 7:58 AM on July 6, 2009


Zalgo?
posted by jquinby at 8:01 AM on July 6, 2009 [10 favorites]


Phew, good thing it was one evil company at fault, not the whole system.
posted by TheophileEscargot at 8:02 AM on July 6, 2009 [16 favorites]


Link to the printer-friendly version or people will try to ruin your day.
posted by Afroblanco at 8:07 AM on July 6, 2009


Picture a mind.

Okay I got it.

Now flay that shit!
posted by lazaruslong at 8:11 AM on July 6, 2009 [3 favorites]


btw- last september I recommended doubling down on GS. They were trading about 108 that day and are at 142 today. too bad I don't take my own advice.
posted by caddis at 8:13 AM on July 6, 2009


It's interesting, but I'm not really sure that you can pin the actual bubble-causation on Goldman. They certainly take advantage of every cycle, and they seem adept at jumping on board early and getting off while the getting's good, but there's a difference between riding the wave and causing the wave. They're good, but they're not that good.

There's a lot of capital tied up in bubble markets; when one bubble bursts, that means a lot of people are suddenly looking for someplace else to stick their cash. Almost inevitably — absent any effort from the likes of GS — that creates another bubble, just due to herd mentality. When the tech bubble popped a lot of people put their money in real estate, believing it was "the safest investment" and all that. When the housing market started to seize you saw a lot of money shift into commodities, especially oil futures. Even if GS didn't exist I don't think those bubbles just wouldn't have happened, just like there's almost certainly going to be another bubble in the not-too-distant future.

It's not necessary to invoke a conspiracy on the part of GS to explain the bubble/burst phenomenon. People do it all by themselves as they hunt for bargains and then chase returns, and individual investors virtually always get crushed by institutional ones just by dint of size and market savvy.

If enough people believe that GS runs the market, then to a certain extent that may actually become true: if people watch them, thinking they have an inside track, and then immediately emulate their actions, then they could essentially lead the market around by the nose. Ironically, by pushing his GS-as-Illuminati angle, Taibbi may be actually strengthening GS's position rather than weakening it.
posted by Kadin2048 at 8:16 AM on July 6, 2009 [7 favorites]


"The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

I'll take colossal monsters with more than eight tentacles for $500 please.

Vampire Squid? Like a Mind Flayer?


...oh god.
posted by Pope Guilty at 7:57 AM on July 6 [1 favorite -] Favorite added! [!]


No That's this company. (skip to 4:50)
posted by Pseudology at 8:19 AM on July 6, 2009


Phew, good thing it was one evil company at fault, not the whole system.

Yeah, Taibbi could have said something more like: just one of many unfortunate loopholes in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

Still, I'm happy to see this show up here. Thanks for the post.
posted by metagnathous at 8:21 AM on July 6, 2009


Other Goldman Sachs news: a former programmer has been arrested for allegedly stealing proprietary trading algorithms.

Also via FT Alphaville: Goldman's response. And Taibbi's counter-response.
posted by Electric Dragon at 8:22 AM on July 6, 2009 [1 favorite]


Goldman Sachs is artificially inflating my urge-to-kill bubble.
posted by logicpunk at 8:25 AM on July 6, 2009 [1 favorite]


OK, I read the whole article (didn't watch the video). Did I miss the part where Taibbi brings new aspects of the story as a result of his investigative journalism? All I see here is a retread of investment-bankers-as-pirates. Which is certainly a story that needs more investigation. But all I get here is the outrage, the examples of abuse. I was hoping for more understanding.

The story I keep hoping someone writes is not how the investment banks are extremes of behaviour, but rather how they are fundamental to our financial system. And how scary that is. A lot of stuff just stopped working last fall when the investment banks refused to lend money. "Too big to fail" is a deep part of our political and economic system, and that's a terribly bad thing when your economy is beholden to a greed-driven corporation. I don't care about some investment banker's $87,000 area rug. That's a sideshow. What I care about is the entrenchment. Taibbi gets into that a bit, talking about oil futures and friendly bailouts from the Fed. But there's no meat to that in this article. Or did I miss it?

I hate to say this, but Goldman Sachs isn't just a vampire squid (as good as that image is). They and their fellow squids are also an essential part of our economy providing essential services. We can't just sic Godzilla and Gamera on them and destroy them, we need someone providing their function. How?
posted by Nelson at 8:26 AM on July 6, 2009 [10 favorites]


I can't fucking stand Matt Taibbi and his solipsism, but that quote made me inexplicably horny.

again, I overshare...
posted by Lipstick Thespian at 8:27 AM on July 6, 2009


there's a difference between riding the wave and causing the wave.

And part of the difference is the size of the surfer.
posted by Slothrup at 8:28 AM on July 6, 2009 [1 favorite]


What, no bloodfunnel tag?
posted by odinsdream at 8:29 AM on July 6, 2009


Phew, good thing it was one evil company at fault, not the whole system.

The system isn't broken! Sure the "system" is doing nearly nothing right at tremendous expense to all of us, but it's not broken! The answer must be tax cuts and new shiny free market solutions to protect us from all the current broken free market solutions.
posted by anti social order at 8:32 AM on July 6, 2009 [2 favorites]



I can't fucking stand Matt Taibbi and his solipsism,


Aw man, LT, now we can't be friends anymore.
posted by The Whelk at 8:35 AM on July 6, 2009


Can anyone who's seen the full article comment on how excepted these excerpts are? The gaps in the prose are really jarring, and Taibbi usually comes in with a lot more detail -- given how much stir this is causing, I have to believe there's a lot more than what they put up here.

The story for me isn't all the ways that Goldman has been torching the world around it to make a buck, it's the government's (transparent) complicity in their scams. And, more immediately, the notion that the cap-and-trade scheme might be substantially -- if not predominantly -- a revenue vehicle for Goldman.
posted by bjrubble at 8:46 AM on July 6, 2009 [3 favorites]


And part of the difference is the size of the surfer.

For program trading, the wave was 48.6% of the NYSE. Goldman was responsible for 30% of that activity.
posted by ryoshu at 8:58 AM on July 6, 2009


Oh, man. Now I have to start a band, because "Relentlessly Jamming Its Blood Funnel" is too good an album title to waste.
posted by Mr. Bad Example at 9:00 AM on July 6, 2009


I'm trying to figure out the hyperbolic indignation to information ratio in this article but I keep getting "NaN."
posted by justkevin at 9:03 AM on July 6, 2009 [3 favorites]


I'm going to go eat lunch and then silently cry in my office now.... sigh.

That's fine, as long as you return to work afterwards, citizen.

They and their fellow squids are also an essential part of our economy providing essential services. We can't just sic Godzilla and Gamera on them and destroy them, we need someone providing their function. How?

The "service" they provide is continually generating new and innovative ways for established industrial powers to defraud developing economies. They're very, very good at it and the modern American lifestyle is almost entirely enabled by their doing so. Our current per-capita resource consumption is simply unsustainable by any other means.

You really want to see pitchforks and torches in the streets? Try attenuating that consumption even modestly, see where it gets you.
posted by Ryvar at 9:06 AM on July 6, 2009 [5 favorites]


Nelson, the video has some pretty meaty tidbits I hadn't heard illuminated very clearly before. Such as, when Paulson went to the SEC to eliminate the 12:1 lending to asset ratio for GS allowing them to lend without any connection to the real market.

As bjrubble pointed out, this is not the full article and the main story here is the goverment's complicity to bend to GS's will.
posted by dagosto at 9:19 AM on July 6, 2009


Reposting a comment at reddit that's relevant to the secrecy subject:
The NYSE's retirement of DPTR is of no importance whatsoever.

First, for anyone who thinks program trading means electronic trading from computers, it doesn't. Program trading is trading a “program” of multiple stocks simultaneously (the NYSE defines a program as orders for 15 or more stocks with value > $1m but the definition is loose and sometimes it is described as trading multiple stocks under a “coordinated strategy”). The DPTR reporting was created back in the 80s after a market crash that was suspected (I have my doubts) to have been caused by program trading, specifically arbitrage of index futures vs the underlying stocks. The regulators, ever reactive not proactive, immediately concluded that everyone needed to start reporting their daily program trading activity along with details such as whether the program was for a client or for index arb purposes.

Over time, DPTR evolved. The rules started incorporating more and more flow and interpretation of what constituted a program became much more complex and very subjective. The markets have completely changed since 1980 – then the only traders doing "programs" were specialist desks with expensive IT systems and most of the trading manual. Now nearly all the flow you see is driven by automated trading systems and most of this could be interpreted as a program under the rules. Huge numbers of IT and operations man-hours are wasted at every member firm trying to get the data right, but at the same time the data has become essentially meaningless.

In addition, getting to the top of the rankings became a major status symbol for the big firms. This is why Goldman are at the top — they are proud to be up there with huge volume. The way they have done it is by spending a lot of time and effort dredging through all their various trading businesses and classifying as much as possible as a program trade. Client trading more than 15 stocks in under 10 minutes via your trading API? Call it a program. CDS trading desk automatically sending out equity orders to hedge themselves? Call them a program. They love the fact that their volumes are 50% higher than the nearest competitor. It's a big PR boost and wins them more business from institutional investors. Probably a number of other firms trade the same volume, but haven't spent the time to do the data mining required to report it as DPTR volume. The linked article implies that the DPTR stats are a kind of “name and shame” of Goldman's evil deeds, and that the move to suppress the data is somehow what Goldman wants, but the opposite couldn't be more true.

Regarding transparency - the NYSE are not abolishing these kind of stats, they're just changing how they are gathered. They have stated they plan to start publishing a new kind of ranking based more around overall volumes, broken down by the trade indicator sent on the order at the time of placement (“program” is one such trade indicator). This will cut down on the gaming, while continuing to publish rankings and stats.
I'm nowhere near knowledgable enough to evaluate it but it sounds more plausible at first blush than the somewhat breathless copy posted upthread.
posted by Skorgu at 9:25 AM on July 6, 2009 [1 favorite]


This is kind of unfair to the actual vampire squid, which doesn't act like this, as vividly illustrative as the imagery of the made-up one in this article is.
posted by kalessin at 9:26 AM on July 6, 2009 [2 favorites]


i can't buy the thesis here that ONE company is responsible for this whole mess - i don't doubt for a minute that they're up to their necks in it, but ...

no, this is an attempt by some people to find a scapegoat - (and a guilty one works very well)

what you should be asking yourself is who would benefit from having goldman sachs being dragged down and punished

there's much more going on here than we know about
posted by pyramid termite at 9:32 AM on July 6, 2009


the weirdest in this world of the strange
posted by philip-random at 9:35 AM on July 6, 2009 [1 favorite]


bjrubble, I started reading the online article, switched to the print version after a the first couple paragraphs... and literally couldn't find the place where I had left off (it was somewhere around page three. A cursory page count comes up somewhere around nine and a half pages total.

You and anyone else who thinks there is some good stuff here have got to spend the six bucks, as long as you can buy a mag with a cover story about the Jonas Brothers with a straight face.
posted by Mr. Anthropomorphism at 9:42 AM on July 6, 2009


Read the original story if you can. THIS is why I distrust investment bankers.

pyramid termite: of course there's more involved than Goldman. But they're probably the biggest players.

Matt Taibbi has written on this theme before... he understands just how fucked up things are in the financial system better than most. He's not a shill, except maybe on your behalf.

Normally, in capitalism, most activity is wealth-generative -- it still concentrates, and a few people get obscenely wealthy, but everyone steadily does better, for the most part.

The modern financial system, on the other hand, is a casino, and is extremely wealth destructive. A very large chunk isn't investment in the sense of trying to find and fund great businesses. Rather, it's speculation, trying to find an asset that some other sucker will pay more for than you did. It's not about creating wealth by carefully allocating capital to great ideas, it's just about chasing the flavor of the month and taking money away from less savvy investors.

They don't generate that much real capital themselves, mostly just smoke-and-mirror money, but they take a ton of very real wealth out of the economy. Then the bills come due as we discover that the smoke and mirror money was no good.

It's normal to have speculation on the fringes, but when it becomes center-stage, your economy's in trouble. When the government takes on massive debt, which will have to be paid by the real producers of the economy, with the purpose of bailing out speculators, you're in truly deep shit.
posted by Malor at 10:14 AM on July 6, 2009 [13 favorites]


Also, I can understand why some may object Taibbi's style, but for my money, there's nothing better than a guy sharp enough to wade through the history, read the legislative documents, get the interviews, unravel the mess, and bring it all together not with academic detachment, but with let's-sit-down-over-a-beer-and-I'll-tell-you-how-these-shitheads-fucked-us directness.
posted by Mr. Anthropomorphism at 10:23 AM on July 6, 2009 [6 favorites]


and bring it all together not with academic detachment, but with let's-sit-down-over-a-beer-and-I'll-tell-you-how-these-shitheads-fucked-us directness.

In a weird way, he reads like Hunter Thompson without the psychedelics.
posted by philip-random at 10:26 AM on July 6, 2009


n a weird way, he reads like Hunter Thompson without the psychedelics.

That's funny, I've always thought he read like HST without the charm or wisdom.
posted by adamdschneider at 10:45 AM on July 6, 2009 [3 favorites]


This is an insult to vampire squid!
posted by kldickson at 11:02 AM on July 6, 2009


Rather, it's speculation, trying to find an asset that some other sucker will pay more for than you did. It's not about creating wealth by carefully allocating capital to great ideas, it's just about chasing the flavor of the month and taking money away from less savvy investors.

I would urge you to educate yourself on modern financial theory rather than dismissing the efforts of a whole industry. In short, the benefits of increased trading volumes are lower transactions costs, increased liquidity, and more efficient markets. Just because you don't see these benefits doesn't mean they don't exist.

Like many other processes, financial markets have good sides and bad, and unfortunately make headlines on only the most abusive incidents.
posted by gushn at 11:10 AM on July 6, 2009 [1 favorite]


Malor: "It's normal to have speculation on the fringes, but when it becomes center-stage, your economy's in trouble. When the government takes on massive debt, which will have to be paid by the real producers of the economy, with the purpose of bailing out speculators, you're in truly deep shit."

On that note, last month's CBO Report is pretty sobering reading, although it's more about entitlement programs than the bailout (although the bailouts certainly don't help the debt load):
CBO’s long-term budget projections raise fundamental
questions about economic sustainability. If outlays grew
as projected and revenues did not rise at a corresponding
rate, annual deficits would climb and federal debt would
grow significantly. Large budget deficits would reduce
national saving, leading to more borrowing from abroad
and less domestic investment, which in turn would
depress income growth in the United States. Over time,
the accumulation of debt would seriously harm the econ-
omy. Alternatively, if spending grew as projected and
taxes were raised in tandem, tax rates would have to reach
levels never seen in the United States. High tax rates
would slow the growth of the economy, making the
spending burden harder to bear. Policymakers could miti-
gate the economic damage from rapidly rising debt by
putting the nation on a sustainable fiscal course, which
would require some combination of lower spending and
higher revenues than the amounts now projected.…
And I'd just like to underline that this is coming from the Congressional Budget Office, not the Cato Institute.
posted by Kadin2048 at 11:20 AM on July 6, 2009


This just makes me even more curious about when America is finally going to shift to a space-mining-based-economy.
posted by Navelgazer at 11:26 AM on July 6, 2009


Goldman is just getting blamed for being smart. The reason that they were selling all those mortgage derivatives and shorting it at the same time is a little bit more complicated. Many Goldman executives knew that mortgages were going to blow up, any retard that looked at the Case-Schiller Index knew that, and I would argue that many outside Goldman saw it coming. You really can't blame many of the investment banks for scamming others, though, because the banks themselves stood to lose a ton if the housing bubble went bust. Many banks (I'm looking at you, Citi), held many of those positions on their own books instead of passing them off. Goldman was the only one that successfully mitigated their losses. They hedged their positions by betting against their own trading activities.

But wait, why didn't Goldman just stop trading in these products and get entirely out of the mortgage market? (It certainly would've looked a lot less evil and reduced their counterparty risks) This question answers why Goldman was the smartest bank on the street: Even though the executives of Goldman knew that the housing market was going to explode, they couldn't have gotten out of the market easily because it would've caused an internal political shitstorm. The mortgage divisions were making a ton of money and to suddenly close of a division that was minting money would've caused huge internal divisions and killed morale. I suspect many individuals got to this point and gave up due to internal political climate, but it was only Goldman that secretly bet against their own mortgage traders at the top to offset their risk. What Goldman did was nothing short of brilliantly resolving an internal political issue.

As to their carbon-trading activities, I see nothing evil in trying to profit from carbon trading. A huge aspect of the bill passing congress is about carbon offsets, and investing in companies (e.g. wind farms) that will reduce our energy output is not some giant evil conspiracy. Of course someone's going to make money from carbon-offsets, that's the point. It's supposed to encourage investments into that field.

Also, to the links to Zerohedge above, it's known to be a bit of a tinfoil-hat woo-woo amongst traders, but occasionally right. So take any editorializing on that side with a moon-sized grain of salt and only pay attention to the facts (not the leading commentary, as they're a bit crazy).
posted by amuseDetachment at 11:53 AM on July 6, 2009 [1 favorite]


Actually, I do kind of agree that we should experiment with mining the moon.
posted by kldickson at 12:23 PM on July 6, 2009


The Daily Show: Clusterf#@k to the Poorhouse-Goldman Sach's Connections
posted by homunculus at 12:37 PM on July 6, 2009


n a weird way, he reads like Hunter Thompson without the psychedelics.

That's funny, I've always thought he read like HST without the charm or wisdom.


Same difference.
posted by philip-random at 12:47 PM on July 6, 2009


The correct term is Illithid and I have long suspected this about bankers in general.
posted by Tashtego at 12:54 PM on July 6, 2009 [1 favorite]


"I hate to say this, but Goldman Sachs isn't just a vampire squid (as good as that image is). They and their fellow squids are also an essential part of our economy providing essential services. We can't just sic Godzilla and Gamera on them and destroy them, we need someone providing their function. How?"

Investment brokers and "banking" need to be separated. That's how you start. The investment class already has all the services they need. They don't need banking/retail loans tied up with investment houses. Leverage needs to be managed and brought down to earth. 30-1 is not an acceptable risk for all of us to bear.

There is no need to let any company get to be too big to fail. The other way you deal with this is break up any companies which pose a systemic risk due to their size and enforce regulation to that end.
posted by krinklyfig at 1:38 PM on July 6, 2009 [6 favorites]


"What Goldman did was nothing short of brilliantly resolving an internal political issue."

That's nice for Goldman. What about the resulting economy and the rest of us who have to live with it?
posted by krinklyfig at 1:40 PM on July 6, 2009 [3 favorites]


Navelgazer: This just makes me even more curious about when America is finally going to shift to a space-mining-based-economy.

High finance is the IRL version of Eve Online.

amuseDetachment: Goldman is just getting blamed for being smart.

If by "smart" you mean "getting away with a massive rip off of the tax payer," Goldman Sachs is fucking brilliant. It was great how the ex-Goldies in the Fed and at Treasury managed to back door billions of dollars through AIG to send to Goldman. They didn't even have to take a haircut. Give me $12.9 billion in tax payer cash I'll show a record profit in the middle of an economic crash too.

Of course the smartest people on the planet have certainly learned from the mistakes that almost destroyed the global banking system, right? Right?!

Hahahahaha! Suckers!
posted by ryoshu at 1:52 PM on July 6, 2009


I was shown a pyramid scheme the other night. It's presumptively a multi-level or network marketing system, with some interesting variations from the usual (ie, the legal) plans. The product, which IMO is a figleaf over the plan itself, is a powdered energy drink, notably not analyzed by the FDA or any other regulatory body, but it certainly feels effective.

The plan is binary, and new distributors are put into anywhere downline from the sponsor, such that the binary structure is kept. That is, each participant has exactly two direct downline. The ongoing spend is ~$30 per distributor per month for a box of the powder, yet the plan promises, and appears to deliver, quite high bonuses - thousands of dollars per month. How? There's a buy-in. To be eligible for the bonuses, a distributor must buy around 48 boxes up-front; which purchases are of course the source of the bonuses for the distributors upline.

It's sheer genius, and it'll make a fortune for anyone who gets into it in the next few months, but it'll burn out fast, get investigated and shut down in countries that police financial scams, and leave a whole bunch of suckers holding unsellable product while the top ranks get away with it. I know this, I've seen this happen with a few similar products over the years.

I'm not getting into it, because it's wrong. While the prospect of high returns is perfectly true for me, for my would-be sponsor, for anyone who gets in in the next few months or so ... it's a house of cards, it will collapse, it will hurt others. I consider it ethically unsound, however high the returns, to be involved in that thing. I don't care how much money it will make.

Being "smart" just makes your unethical actions more unethical, because you're knowingly doing wrong. If Goldman Sachs knew--and of course they did--that any of the markets they got involved in early, pumped up, and got out of with massive profits were going to tank, then they should not have gotten involved with them, their gains are ill-gotten, they should be taken away, and the perpetrators punished for being involved in something they knew would fail and harm others further down the track.

I think that's the thing that people like gushn just don't get. The mere fact that predatory behavior in the market is profitable does not grant you a right to engage in it, any more than the fact that, say, rape is pleasurable grants you a right to rape. Your obligation to be ethical supersedes your desire to be rich. If you get rich through engaging in unethical conduct, ie conduct that harms others, then that indicates a flaw in the system, and that flaw must be corrected, ie your riches taken away, and you punished as an example to others, to show that your unethical methods of self-enrichment will not be allowed to work. We've tolerated such flaws for far too long, we've let the unethical prosper, and as a result the stupid think that it's okay, they think that profitability rather than ethicality is the supreme test, and flock to the unethical schemes.
posted by aeschenkarnos at 2:51 PM on July 6, 2009 [12 favorites]


When Paulson and Bush asked the congress for 700 billion to cover the banks that were too big to fail, they asked candidate Obama on CNN what his thoughts were. He said (this is not an exact quote but is very very very close) "you cannot have a situation where these guys are making big bets and if it's heads they win and if it's tails they do not lose".

Very well. That remains the situation up until the day where we don't have banks too big to fail. I still haven't finished reading the finance regulation reform proposal from a couple weeks ago. (It's 70 pp long in government English.) But I haven't seen the part in there where the feds bust up these big banks so us taxpayers don't get hosed again the next time they screw up. As far as I can tell Obama's economic policies and experts are the exact same thing we got from the previous group that was in charge.

That seems essence of Taibbi's complaint and although I am in agreement I didn't get much value from reading his article.
posted by bukvich at 3:21 PM on July 6, 2009 [2 favorites]


We can't just sic Godzilla and Gamera on them and destroy them, we need someone providing their function. How?

REGULATION. Or, what krinklyfig said.
posted by synaesthetichaze at 3:28 PM on July 6, 2009


Being "smart" just makes your unethical actions more unethical, because you're knowingly doing wrong.

As far as I see it, this is one of the differences between corporations and people. Corporations (IIRC) are legally required to do what is profitable, as long as it doesn't contradict their charter. It's good management - How would you feel if the fishing company you invested your retirement in went bankrupt because management had a change of consience, became vegans and gave their boats to Greenpeace?

The problem is partly the fact that we created monsters(corporate entities) and partly that we're refusing to keep them locked up properly(regulation).
posted by Orb2069 at 3:42 PM on July 6, 2009


I'm never convinced when folks raise the spectre of regulation, particularly increased regulation, as the end all salvation to our current economic problems. After all, to paraphrase Jess Jackson -- "if you keep doing what you're doing, you'll keep getting what you get".

We clearly need a paradigm shift, a markedly different approach to financial services regulation.

First, lets start with the basics.

The US regulatory system is rules based. For every situation there is a distinct rule. New product, new structure, new situation? Sometimes existing rules apply, but not always. Many times a new rule is needed. That's ok, add it to our already enormous rule book and be done with it.

And if the new situation doesn't fit an existing rule? The precise wording of the law? Its ok, its legal - go ahead, do deal, book the trade. In other words, letter of the law applies.

But the new product, new structure, new situation is prohibited by existing rule? Well, having worked in the business I'll tell you the dialog that goes on behind closed doors goes something like this - "Where can we book this trade to avoid the regulatory constraint?" or "How can we change this situation to render the existing rules non applicable?".

And so it goes.

Another approach to financial services regulation is what's known as "principles based". And its easy to understand as well as appealing to common sense - the spirit of the law applies.

Rule books are smaller in principles based systems. The regulators don't need a precise, very detailed rule for every situation, as their interpretation applies. Not some dense, multi volume tomed that's been built up, layer after layer for some sixty years, rather their reading and their application of what the law intended to accomplish.

In other words, the spirit of the law.

You see the fundamental problem is regulator agencies will always be outgunned by the banks in a rules based regime, as the best and brightest (well most of them) will be lured by the substantially higher pay packets industry can offer.

Increasing regulatory salaries and bonuses to Investment Bank standards is only a temporary measure, not a long term fix. To fix this permanently you've got to change the rules. Change regulatory oversight from rules based to principles based.

In such systems, the principles not the rules apply. No dense, multi volumed tomes to peruse, looking for loopholes. No jobs for such people, as the spirit of the law applies. Simple, really.

This is going to be very, very difficult to push onto US banks. They've had sixty or so years of rules based regulatory oversight, and the US is a very, very litigious culture.

Compounding the problem bank management is trained to think according to strict quantitative measures; one can't readily calculate the ramifications of many principles based decisions as we're operating in gray areas - the rule books don't apply now. So that will be a tough sell as well, and something all managers from senior management down will, I suspect, fight tooth and nail. Principles based systems will drive increased transparency across the enterprise. Right now many banks have multiple layers of ineffectual management, who can effectively "hide" from the ramifications of their rules based decisions.

There are already principles based regulatory regimes - the UK, for example, which was also seriously impacted by the existing difficulties.

Going forward as the US moves closer towards a principles based regulatory regime, the UK's "failure" will be touted by proponents of the status quo, those with a vested interest in dense rule books and litigation. But the real situation is far more complex, the system leverage was much, much too high for any safe harbours to remain. Pretty much all developed - and most developing - nations have been and are continued to be impacted by The Great Unwinding.

There are many different agents with interests in the existing system. And no doubt about it - this will be a tough slog, but if we seriously want to change things we've got to start at the bottom, rebuild the system from the ground up rather than just bolt on some quick fixes on the top.

Black, from The London School of Economics recently (2008) published an interesting paper entitled Forms and Paradoxes of Principles Based Regulation. The abstract is particularly interesting:

Principles-based regulation is high on the regulatory agenda in a number of regulatory domains, most particularly financial regulation. Its supporters argue that it provides a flexible regulatory regime which can facilitate innovation; its detractors argue that it simply lax regulation. This article explores the political rhetoric surrounding principles-based regulation. It identifies four forms of principles-based regulation: formal, substantive, full and polycentric principles-based regulation. It also identifies and explores seven paradoxes which principles-based regulation may encounter in its various forms. These relate to interpretation, communication, compliance, enforcement, internal management, ethics, and above all trust. PBR, in its full form, can provide an effective, durable, resilient and goal based regulatory regime; but at the same time its paradoxical nature means that it is vulnerable in many respects. Unfortunately for the detractors of principles-based regulation, many of these paradoxes are not necessarily avoided by using detailed rules instead of principles. Rather their resolution lies in trust. Yet, it is argued, trust is the ultimate paradox. Principles-based regulation can help to create trust, but the core elements of that trust have to already exist if principles-based regulation is ever to operate effectively, if indeed at all.
The last sentence bears repeating: "Principles-based regulation can help to create trust, but the core elements of that trust have to already exist if principles-based regulation is ever to operate effectively, if indeed at all."

Trust. It has to already exist. As in all parties need to trust one another.

I'm a banker and can speak candidly. Its gonna take some time for my profession to regain that trust.
posted by Mutant at 4:32 PM on July 6, 2009 [11 favorites]


Just wanted to mention that Reuters thinks the change in program trading at the NYSE is (directly?) influenced by the alleged stolen trading algorithm from G-S.

The case against Aleynikov may explain why the New York Stock Exchange moved quickly in the past week to alter its methodology for reporting program stock trading. Goldman often was at the top of the chart–far ahead of its competitors.

On the week ending June 19, Goldman, for instance, was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didn’t appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE announced it would change some of the data for calculating the trading report.

posted by iurodivii at 4:44 PM on July 6, 2009


I'm never convinced when folks raise the spectre of regulation, particularly increased regulation, as the end all salvation to our current economic problems. After all, to paraphrase Jess Jackson -- "if you keep doing what you're doing, you'll keep getting what you get".

Well, what we've been doing is stripping away regulations left and right, so maybe we should do... something else.
posted by Pope Guilty at 5:31 PM on July 6, 2009 [1 favorite]


And the big problem with "principles systems" is that without actual rules to point to, you're basically left making subjective arguments. Rules can be objectively enforced, while with "principles" it's impossible to not have miles and miles of room for bankers to squirm out of their obligations to not be fuckers.

...of course, I'm uncertain that you're unaware of that.
posted by Pope Guilty at 5:33 PM on July 6, 2009


The full text of the article was scanned and OCRed and is up on the SomethingAwful forums...
posted by gen at 8:14 PM on July 6, 2009


Principles-based regulation seems like a good idea, but I don't know how you avoid regulatory capture. The point of rules-based regulation is that it's tougher to game: you make the rules, and then when someone breaks them, it's hopefully obvious to all concerned. But with a principles-based system, you're dependent on some sort of arbiter — talk about a high-value target. All the banks have to do is compromise them, and they own the system even more thoroughly than they do via the rules-gaming inherent in the current system.

The concept seems to have a lot going for it, but the financial industry has every motivation to play absolute hardball. I can't think of a more hostile environment, one with more money and resources to throw at the regulatory apparatus in an effort to compromise it.

On the whole I am with krinklyfig and others who have said that breaking up the mega-institutions seems to be a necessary step before any other real progress can be made. Not only are they "too big to fail" in their current form, they're also too big to regulate. I have absolute confidence that any regulatory regime created to fence them in, unless run by Skynet and enforced by Terminators (and perhaps not even then), will eventually become compromised and end up working for the mega-institutions.

Until and unless we break up the Wall Street heavies, I don't think any sort of effective regulation — whether rules- or principles-based — can really take place. And that means everything that's going on in the political realm is just so much theater, or at best an expensive exercise in Titanic deck-chair-reorganization.
posted by Kadin2048 at 10:10 PM on July 6, 2009 [1 favorite]


How about a rule that says that anyone who has worked for a major investment bank, (let's say over $1B in assets) cannot work for the government for 5 years. That way we don't have this revolving door where ex-GS executives end up running the Fed, Treasury and other key parts of the US Government's finance-related agencies.
posted by gen at 10:53 PM on July 6, 2009


The Vampire squid does make for an embarrassingly ignorant metaphor... why not a nice parasitoid like this one?
posted by Blasdelb at 11:59 PM on July 6, 2009


Pope Guilty -- "Well, what we've been doing is stripping away regulations left and right, so maybe we should do... something else."


Well, not really. I'm not a compliance person (my expertise is on the product and quantitative side), but that deregulation everyone seems to make so much noise about? The system has been accreting rules for almost sixty years.

I've seen papers (can't cite at present since I'm away from Uni) that says deregulation to date has removed perhaps 5% of those rules. Net / net - the towering edifice of dense, almost impenetrable rules requiring specialised knowledge to 1) create then 2) interpret hasn't been markedly reduced. A few high profile rules have been removed. The greater majority remain.


"And the big problem with "principles systems" is that without actual rules to point to, you're basically left making subjective arguments. "

I'm sorry, I probably explained this poorly in my original comment. Principles based system have broad, well defined - not subjective, but objective - goals, then allow the regulatory agency the lattitude to determine if the action of the banks violate said goals.

By contrast, rules based systems sport dense tomes defining specific rules for specific situations. Change the situation slightly, and the rule doesn't apply.


Kadin2048 -- "But with a principles-based system, you're dependent on some sort of arbiter — talk about a high-value target. All the banks have to do is compromise them, and they own the system even more thoroughly than they do via the rules-gaming inherent in the current system."


I'm not sure which principle based regulatory system you're referring to, but the FSA in England certainly doesn't operate like this. There isn't a single arbiter rather an organisation. The organisation has multiple layers and active regulation takes place in the lower, operational layers.

Policy is set by the upper layers of the FSA. There is direct oversight of the FSA by a Parliamentary panel (the Treasury committee), and the Bank of England. Additional regulation takes place laterally, with market participants and other regulated bodies encouraged to bring irregularities they might be aware of to the attention of the regulators (in the vernacular, rat out cheaters).

That's not to say such a system can't be gamed, but the regulators have much more freedom to unilaterally define specific behaviours as not in the public interest.

Under a rules based system there has to be a rule. Change the structure of the product sufficiently and the rule doesn't apply.

Black, Hopper & Band (2007) present an excellent illustration of how relatively simple, principles based approaches are employed.

They present a hypothetical situation that any retail investor will be familiar with: best pricing for equity trades.
Principles based: "A firm must pay due regard to the interests of its customers and treat them fairly"

Rules based: "A firm must execute all orders for customers within one business day in the following circumstances: [definition of customer, definition of order, restriction as to whether discretionary dealing or execution only, definition of one business day, circumstances where large orders may be worked over a longer period, etc]"

They go on to illustrate that the principles based system is not only much easier to apply / interpret, but also the scope for what they called "creative compliance" (Black, et al define this "as the process by which firms can seek to structure their arrangements or activities in a way that complies with the detailed requirements of rules but which, while compliant, undermines or avoids their purpose." -- pg 14) is low.

The rules based systems (there are two illustrated in their paper) by contrast, allow a wide scope for "creative compliance"

And that's the problem with a rules based system.

The best analogy is the debate over flat tax on personal income. One of the attractive arguments in favour of such a tax is its simplicity, and the fact that existing rules regarding personal taxes have gotten far too complex, to the point where annual returns have to be created with the aid of a professional.

The same situation applies to the regulation of financial services. The regulatory environment has gotten far too complex, the rewards for circumventing the rules is much too high, the regulators simply can't compete with the banks. The investment banks have entire departments of highly compensated individuals who do nothing but figure out how to game the system.

The system has to be changed, rejiggered in a way that favours the regulators and I don't see tossing more rules on a teetering tower of six decades of legalese as the way forward.



gen -- "How about a rule that says that anyone who has worked for a major investment bank, (let's say over $1B in assets) cannot work for the government for 5 years. That way we don't have this revolving door where ex-GS executives end up running the Fed, Treasury and other key parts of the US Government's finance-related agencies."

Well this is attractive on the surface, but the key problem I could see with this is how would government then gain insight into current financial products?

Business Schools typically lag industry by maybe three to five years (this is a subjective estimate, based on my own industry and University experience), so graduates wouldn't be a viable source of expertise here. And five years is a lifetime in banking, considering the speed of financial innovation and how quickly the market drives said innovation.

It probably would work if these regulatory agencies set internal ceilings, where folks from industry could enter government service but not assume key decision making roles. That way expertise from industry could be acquired and leveraged, while not subverting the system from within.
posted by Mutant at 1:52 AM on July 7, 2009 [1 favorite]


The mere fact that predatory behavior in the market is profitable does not grant you a right to engage in it, any more than the fact that, say, rape is pleasurable grants you a right to rape... If you get rich through engaging in unethical conduct, ie conduct that harms others, then that indicates a flaw in the system

Are you seriously analogizing trading activities to heinous sex crimes? The silliness of that aside, of course every economic agent desires to buy low & sell high. If you consider that unethical and "predatory", then we might as well tear down the entirety of commerce.

And let's not confuse poor risk-taking with market manipulation, as we have regulations against the latter. Without risk-takers, business and innovation would be extremely stagnant.
posted by gushn at 6:51 AM on July 7, 2009


And let's not confuse poor risk-taking with market manipulation, as we have regulations against the latter. Without risk-takers, business and innovation would be extremely stagnant.

It's interesting you mention market manipulation:
“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,” Facciponti said, according to a recording of the hearing made public today.
So Goldman Sachs has admitted to a Federal prosecutor that their software can be used to manipulate markets? Interesting.
posted by ryoshu at 9:59 AM on July 7, 2009


So Goldman Sachs has admitted to a Federal prosecutor that their software can be used to manipulate markets? Interesting.

No, not at all. They meant that someone with knowledge of Goldman's trading behavior would be able to calculate how GS is planning to trade, and use that information to front-run Goldman's orders.

When you are talking about software which trades hundreds of millions of shares a day, even a slight edge in predictive accuracy can be translated into enormous profit at very minimal risk.
posted by gushn at 1:41 PM on July 7, 2009


No, not at all. They meant that someone with knowledge of Goldman's trading behavior would be able to calculate how GS is planning to trade, and use that information to front-run Goldman's orders.

Front running Goldman isn't market manipulation, it's front running Goldman. It's unfair to Goldman and could cause them to lose on trades, but the larger equities market shouldn't be affected by it. Perhaps it's just a poor choice of words from the US Attorney?
posted by ryoshu at 5:55 PM on July 7, 2009


How can you not love Taibbi?
“Hank Paulson is a national hero. I said it last October and I’m sticking by it. And now, there’s actual evidence to back me up. The TARP bailout worked. The Wall Street crisis is over.”

-Evan Newmark, It’s Time to Enshrine Hank Paulson as National Hero

So here’s the letter I wrote to the Wall Street Journal after reading Evan Newmark’s paean to Hank Paulson last week:

Dear WSJ,

Just out of curiosity — did Evan Newmark ever work for Goldman, Sachs? And if the answer to the question is yes, don’t you think that might have been a good fact to disclose before he fellated Hank Paulson in his “Mean Street” column?

Sincerely,
Matt Taibbi
And, of course, it turns out Newmark was a GS employee.
posted by five fresh fish at 2:02 PM on July 8, 2009 [1 favorite]


Opps. Correct Link.
posted by five fresh fish at 2:03 PM on July 8, 2009


Taibbi on Democracy Now.
posted by homunculus at 1:39 PM on July 15, 2009


The complete article is now online.
posted by Penks at 4:41 PM on July 16, 2009


Robert Reich: Goldman and JPMorgan -- The Two Winners When The Rest of America is Losing
posted by homunculus at 7:35 PM on July 16, 2009


Krugman: The Joy of Sachs
posted by homunculus at 8:45 PM on July 17, 2009


"It's sheer genius, and it'll make a fortune for anyone who gets into it in the next few months, but it'll burn out fast, get investigated and shut down in countries that police financial scams, and leave a whole bunch of suckers holding unsellable product while the top ranks get away with it." --Aeschenkarnos

I know people who go looking for multilevel marketing scams *knowing* that they are going to collapse but hoping they can cash in before everything implodes. As I write this, it strikes me that I've just described the housing bubble.
posted by mecran01 at 8:01 AM on July 18, 2009


Rewarding Bad Actors
posted by homunculus at 11:20 AM on August 5, 2009


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