Convergence on Goldman-Sachs

Slide1While the rest of the country strips Sarah Palin of her humanity for no good reason except that mobbing is so much fun, something very weird is going on with Goldman-Sachs.  There are a number of credible sources reporting now on the arrest of Sergey Alenyikov on July 4, 2009 at Newark Airport.  Mr. Alenyikov is accused of stealing G-S source code and uploading it to a computer somewhere in Europe.  Goldman sent the Feds to round up the rogue programmer because, as the US Attorney on the case says, the source can be used to manipulate the market.  Daytraders who monitor the market very closely say that they noticed some non-linear activity in the several weeks leading up to the arrest and that afterwards, the markets seemed to have returned to normal, whatever that means since last year’s crash.

But it gets more interesting.  As Bloomberg notes, how do we know that Goldman-Sachs hasn’t been using this code all along to manipulate the markets?  The theory goes something like this: Goldman-Sachs gets to put a unix server with the code on a network cable somewhere and uses a packet sniffer to watch the transactions that come across from traders at other companies.  With that knowledge, G-S is able to anticipate trades and shave a bit off for itself for every transaction.  If this is true, it means that G-S has a massively unfair advangtage in trading compared to, well, just about everyone else. Here’s a post at the Big Orange Cheeto for those of you who eat netstats for breakfast and think Perl poetry is romantic.  It goes into quite a bit of technical detail.

Check out this video from Bloomberg that lays it all out:

What’s really disturbing about this case is that the government seems to be extraordinarily receptive to calls for help from G-S.  Either the Goldman crew close to the White House is concerned with losing their bonuses or the potential for market failure is huge. Either way, it lessens confidence in the system.  It looks like “all traders are equal except some traders are more equal than others”.  What happens to the system when the people who have no choice but to operate in it no longer have any trust?  This leads me to my podcast du jour recommendation.  This one is from Speaking of Faith with Krista Tippet.  Her topic this past week was The Science of Trust with guest Chris Farrell, a neuroeconomist.  The secret to keeping everyone honest is the neurotrsnsmitter hormone oxytocin.  Oxytocin promotes empathy.  Approxomately 2% of the population has insufficient levels of oxytocin to experience empathy with other human beings(and you’re probably thinking they all work at Goldman-Sachs, right?)

Farrell says that the lax regulatory system is partially responsible for the financial disaster, although he takes a pretty long time before he gets around to saying it.  Farrell thinks that for *most* people, *most* of the time, the feelings of empathy lead to a sense of reponsibility and honesty.  That’s why you might have felt you could trust your banker with your money.  But in recent years, there have been advances in technology that lead to a depersonalization of the banker-client relationship.  It’s hard to see the person behind an account number on a monitor.

The podcast is part of a series by Tippett on Repossessing Virtue, all highly recommended.  You don’t have to be religious to have an ethical model.  But ethics, virtue and trust are all severely lacking in this dog eat dog world where nothing much makes sense.  Societies start to unravel when the sense of morality and consideration for others is replaced by, well, nothing at all.

If Tippett is concerned with repossessing virtue, I guess you could say that the fundamentalist group, The Family, is concerned with redefining it.  A second podcast recommendation is one that Terry Gross did last week on The Family, a religious community in DC that has been the spiritual guiding force for many enemies of The New Deal over the decades.  John Ensign was a recent alumni as was Governor Sanford of South Carolina.  The Family believes the end justifies the means and that chosen Family members are possessed of the virtue that requires no further regulation by the government.  They will lead us because it is their destiny and if they cheat on their wives on Family property, it must mean that God works in mysterious ways.  Caveat: Terry Gross is the best interviewer in the world but she has kool-ade psychosis and it is unfortunately seeping into her interviews.  “The propaganda is strong in this one.”  Proceed with caution.  Her bias shows.  Even so, if this group is only 1/10th as bad as the interview suggests, it’s pretty bad.

Update: It looks like Citadel is getting in on the act now.  The former head quant at Citadel started a new company called Teza Technologies and hired Aleynikov. Mikail Malyshev signed a 9 month noncompete clause when he left Citadel back in February.  That means he wasn’t supposed to open his door until November.  Maybe it’s all a preparation phase thing.  Teza is cooperating with the FBI. This stuff is starting to sound familiar.  Several of my former colleagues (all Russians BTW, tho’ I’m sure it’s all a coincidence) have gone to work for quant firms, though I can’t imagine they’ll be writing code.  Who knows?


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23 Responses

  1. But ethics, virtue and trust are all severely lacking in this dog eat dog world where nothing much makes sense.

    True, but not complete. In fact, ethics and virtue have been held up to ridicule while the reverse is lauded as being smart. The “greed is good” attitude really took over our society in the 1980s until that family values illusion, Ronald Reagan.

    I even see liberals assert this piece of garbage: Companies are obligated to do all they can to make money for their shareholders. Uh, not really. They’re obligated to do their work within the bounds of legality, ethics and morality. I’m not allowed to pick up some quick cash by hitting people over the heads with crowbars and stealing their wallets. Doing it at a distance by spreadsheet and corporate structure is no more acceptable, especially in a country where corporations have legal personhood.

    • Well said – thank you!

    • I’m sorry, did I say they were justified in behaving badly? Um, no, I did not. I am simply pointing to the causes of this misbehavior. Zack, the neuroeconomist, says that the reason the baddies did it also has to do with whether there were punishments for bad behavior and the lack of regulation lead to misbehavior with no accountability. We are still seeing this. In fact, now you get *rewarded* if you get inti trouble.
      Now, if it’s not illegal and you don’t get caught and you make oodles of money and people are high fiving you all the time, it is very diificult to see where you’ve done anything wrong. Reality is distorted, ethics and morality is distorted. I’m not cheering about it. My concern has all to do with reintroducing rewards and punishments so the correct balance of trust and fiduciary responsibility is re-established.

      • I think pages 20 and 21 of this link from zerohedge pretty much support your argument:

        http://www.zerohedge.com/article/whitney-tilson-why-there-more-pain-come

        Page 20 essentially says, if you offer people a lot of money to do something, no matter how unethical or illegal, a large number of them will do it.

        Page 21 shows how deregulation led to a surge in compensation, leverage and proftis.

        • Thanks for the link. It’s a depressing read. Detailed yet understandable. Refreshingly realistic.

      • RD, maybe re-read the comment. It came across at first to me that way, but on re-read I don’t think sister was intending to imply you agree with or excuse unethical behavior.

        I think she was just expanding the thought to say that not only is it “lacking”, as you said, but that it is actively ridiculed, and its opposite lauded. She was taking it further, and jumping off from your statement, not disagreeing. I don’t think the “even liberals asserting garbage” referred to you.

        • Never said she was referring to me in the “liberals spouting garbage” stuff.
          But if both you and I read the comment to mean that we were so
          ehow giving a pass to G-S simply because we found a diagnosis, then I think ye meant to say what she did.
          IOW, it came off that we were insufficiently righteously indignant. Nothing could be farther from the truth.

      • Great post RD!

  2. Is there a connection between Bush picking Goldman Sachs head Paulsen for Treas. Sec. in 2006 – and the then looming mortgage bubble and economic crisis?

    • IMO, Paulson was the transition guy for Geithner – brought in deliberately to do TARP, then quietly go away, leaving Geithner with everything set up and in place for the looting to continue. This way, any outrage got directed at the transition guy (who was going away anyway) and not the longer-term player, who they needed to stick around.

      Just my take on it.

      • Thanks!

      • I had no idea that Bush could foresee the future (including TARP). Seems like he would have been a better President if he had used his power for good instead of evil. lol.

        • Oh, I think that even in 2006, insiders knew that the banks were eventually going way underwater with the CDS toxic assets, and were going to need a helping hand to maintain their oligarchy when the sh*t hit the fan.

        • Well – CPAs and other knowledgeable investors (in their online pajamas) began warning about the mortgage bubble wayyy back in 2006 and 2007.
          But apparently it was all “too difficult” for the media to air – given their election primary sensationalism – other than a few stories about people losing their homes to foreclosures.
          Who knew??

  3. I have to wonder if oxytocin is neutoalized by the combo of KoolAid and cheetos. It would explain a great deal of the past 18 months if it were.

  4. Whoops- make that neutralized, please.

  5. I just can’t believe this story is not scaring the whole country.

    I read Jonathan Weil yesterday and I was shocked. The US Attorney said: 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.

    Didn’t GS themselves just spilled the beans right there?

    That’s why I asked people to read that story carefully and digest what they just read.

    • I feel the same way. But it seems the country is numb, or having fun debating Palin’s hip waders or Obama’s booty-watching, while the oligarchy consolidates power and robs us blind.

      I long for a good old fashioned investigative journalist to delve into GS and the NYSE and financial markets in a major truth-digging way. But I’m not sure those exist anymore.

      People I know who have played stocks and invested and traded for YEARS tell me that the market that exists today is not the free market for legitimate investment that they knew. It is a playground for the powerful and well-connected few, making money off things that bear no relation to true investment, or productive capital that helps create anything. And the people telling me this are hard-core pro-business capitalists, not anti-WallStreet types. Even many of THOSE people are appalled.

    • We subscribe to both the Austin and San Antonio newspapers. Why, I’m not sure any longer, because each morning I peruse them and think, “Okay where’s all the real news, the stories behind the stories I find only on the Internet. I also look at the NYTimes online most days and have the same reaction. I’m not a believer in conspiracies, but what the hell is going on with the near complete lack of honest reporting, especially re the economy and G-S’s role in its ruination, not to mention the Great O and his heinous record on civil rights? It’s so easy to succumb to despair these days.

  6. OT RD I think I found “gen obot” this is the rave set from 8os gen –ask BBOOMER to pass along ako? at my place.

    RD this would have loved to latch onto a logo like that?
    like apill?

    also I am watching TV comedy show

    tell BB there is no reality testing in this show she will know– mental status exam

  7. RD the prob is with the eyes, too – tell BB

    this might be autism kids

    • wattch this comedy show and you will see prob?
      they blew out the synapses in the brain with that drug at those parties
      the meth thing does that too

      is that why no speech & telepromter we see?
      has to have that
      this show is on comedy central right now

      somebody watch and you will see
      the

  8. If you are not with us you are against us.
    Obama&Co. are not about to bite the hand that fed them so I don’t expect anything to come of this.
    Just like the “mistake” that let those bonuses go through the first time.

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