Need Yves Smith’s analysis of new Pfizer hostile takeover of Astra-Zeneca

Derek Lowe at In the Pipeline has a post on Pfizer’s hostile move on Astra-Zeneca:

What the hell is Ian Read thinking? Pfizer is apparently going hostile with their attempt to buy out AstraZeneca, all but ensuring that the deal, if it goes through, will take place at the highest price and in the messiest fashion that it possibly could. And for what?

If you’ve been following Pharmageddon from the beginning, you will know that Astra-Zeneca’s fall off the “patent cliff” was one of the steepest in the industry.  The patent cliff is the term used in the industry that refers to the expiration of patents for the major blockbuster drugs.

Patent Cliff by company since 2010.

 

Weirdly, most blockbuster patents have expired within the past decade because they were discovered in the 90’s, the golden age of drug research.  If you’re wondering why your blood pressure meds are suddenly so affordable, that’s why.  They’re generic now.  Pharma can’t make as much money off them anymore.  Great!, you say.  And it probably is great, to some extent.  The problem is there is not a lot in the pipeline to replace them, that is, if you’re interested in more effective drugs with fewer side effects.  There are several reasons for this that I’ve discussed in previous posts but the primary cause is NOT for lack of trying.  Researchers have seemingly endless dogged determination to preserver in  the face of failure after failure.  The problem is that research has to deal with *two* impossible systems: the complex biology and the self-serving, clueless managerial/finance class.  And the underfunded and politicized FDA.  Make that THREE impossible systems.  And the class action law industry.  FOUR! It all adds up to unnecessarily and ridiculously expensive drugs.  But I digress.

So, according to Derek, Astra had some really rough years, laid off a ton of people in Delaware and all around the world, but hired a new guy in 2012 to turn the ship around and has plans to consolidate a tiny fraction of their research unit in Cambridge, MA where no one really wants to work because it’s a.) expensive, b.) a pain in the ass commute and c.) an insecure career environment for researchers.  MBAs really are a bunch of status snob lemmings, I swear.  Or magpies chasing the latest shiny thing.

My bad, that’s Cambridge, UK where AZ wants to set up its stripped down R&D division.  It’s probably just as attractive to the relocated researchers (You happy few!  You band of brothers!) as the American Cambridge.

Derek makes a good point in that Pfizer has a lot of money to spend on the small, nimble biotech startups that MBA types have told the analysts are supposed to be able to generate a s^&*load of drugs to inlicense.  They’re like unicorns, these little startups, or like perfectly elastic collisions of particles in a box.  Theoretically, they exist but in the real world?  ehhhhh, not so much.  Drugs rarely emerge from these tiny incubators fully formed because, helloooooo, Silicon Valley, drug discovery is NOT like writing code for a new Facebook.  But you’ll find out in the next couple of years.  Just sit in on one of the project teams while the biologists drone on and on and on about how much to tweak the components of their confirmatory and cell based assays to make them reproducible and it will quickly dawn on you that drug discovery makes coding look like Chutes and Ladders.  Even so, we’ve got to wonder why Pfizer is choosing to forgo spending some of their billions on the biotech startups in order to sit on a pile of cash.  Where is the drive for innovation we’re always hearing so much about?

Anyway, where was I?  After pondering the problem for awhile, Derek hypothesizes that Pfizer is buying Astra-Zeneca, a foreign owned company, to hide its taxable profits from the US government.  Or the British government.  It’s like some British, Swedish, American threesome, which initially sounds like a good time for everyone except the citizens who actually count on corporations to respect them. It’s a rather strong accusation but Derek says he never wants to work for Pfizer anyway.  That’s Ok for him but my pension was acquired by Pfizer when it gobbled up Wyeth and then proceeded to lay off every one of the people I used to work with.  I’m kind of concerned with this wobbly third leg of my rapidly disappearing retirement stool so if Pfizer is up to something, I’d like to know what the heck it is.

The remaining survivors in research at Astra-Zeneca can see what’s coming.  They must be busily rewriting their CVs and networking instead of finishing that reaction or fishing the crystals out of solution to send to the synchrotron.  What a lovely way to spend your hours in the lab.  And the industry wonders why there is nothing in the pipeline after 20 years of this crap.

What this research project team really needs is a financially nerdly Yves Smith type who can look at the details of the proposed takeover and report back in a meeting to tell us what’s up.  More to the point, what does the UK’s new tax rates for foreign profits say about whether the conservative government is trying to make Britain into a sleeker global tax haven?  I’m just a chemist.  Money is not my area of expertise.  This project team needs a finance specialist.

 

 

Stop the Obama propaganda campaign against the 99%

Yves Smith has an important post up about the coming propaganda campaign against all of us who aren’t the 1%.  We’re going to be forced to eat austerity against our best interests.  Are we going to take this s^&*?  It’s time to call the White House and your elected officials and tell them to stop forcing this budget deal on us because we want no part of it.  Here’s Yves:

The fact is that unless enough Senators decide to oppose Obama, the middle class is going to take a hit out of a budget deal. But it’s now clear that ordinary citizens will also be subjected to a full bore messaging campaign to persuade them that they should regard this counterproductive sacrifice as good for them.

Key extracts from the Guardian:

“Barack Obama has enlisted the help of his formidable grassroots army of volunteers in the battle with Republican members of Congress over the fiscal cliff, the January 1 deadline for a deal on tax and spending….

It calls on them to spread the word about Obama’s position to friends, families and neighbours. It said he wanted a balanced budget that will extend tax cuts for 98% of the population, eliminate tax cuts for the wealthiest and cut spending by $3tn.”

The article indicates that the reason for turning up the messaging is that no progress has been made on the Great Betrayal since Obama went to Asia. That further suggests that he still firmly intends to get a deal done before year end, when it’s clear that going past Jan. 1 would strengthen his negotiating position….if his interest really were in increasing taxes on the rich and sparing Medicare and Social Security. His sense of urgency is further confirmation of whose interests he holds most dear, and they aren’t yours and mine.

So, in summary, “the more effective evil” is about to turn up the volume on deficit reduction using his fanbase to make sure that we get royally screwed by his backers.  Hey, I didn’t vote for him -twice!, (and I loathe Republicans) but this shit has got to stop.  We worked hard for that money and we shouldn’t have to part with a cent of it.

Why isn’t Obama using his fanbase to force bankers to take a haircut and to tell the 1% to stop acting like selfish, greedy pigs?  Why aren’t more people asking that question?

We aren’t Greece, who doesn’t know how to collect taxes, and we aren’t Ireland, who seems to be into masochism without a safety word.  The vast majority of Americans did absolutely nothing to merit this kind of treatment.  We deserve better from our president and his party.

They should be ashamed of themselves.

In the meantime, we still haven’t gotten an effective pushback from the New Deal side of the Democratic party.  There is a giant void.  I am urging all of you bloggers out there to get over your mutual revulsion of each other (ok, of people like me, in particular) and join together to deliver a counter message before it is too late.

Hacks and thwaks

Yesterday, for some bizarre, unknown reason known only to Yves Smith, I was accused of spouting PR for the pharmaceutical industry.  It appears that it goes against left of center dogma to say that the NIH does not just hand over perfect drug entities to the drug industry, already tested and bioavailable and efficacious, and that all the industry “R&D” divisions (well, what’s left of them) do is add a few finishing touches and charge everyone an arm and a leg for them.  Yes, that is what pharmas do.  They don’t really do research.  We just accept these gifts of government largess and when they arrive on our front door steps all glistening with ingenuity and brilliance, we stand around and marvel at them like they are alien creations.

Ok, the chemists can stop laughing now.  No, really, you’re going to hurt yourselves.

The truth is that NIH grants allow for some good science and many new discoveries.  But very rarely do they get to the stage where a new drug is delivered to a pharmaceutical company as a fully formed entity that requires no modification.  My experience (>20 years in the industry) is that NIH grants fund a lot of basic science on targets.  Then, if those targets (not drugs, protein targets) look interesting, they’re picked up by a pharmaceutical R&D, or more likely, several pharmaceutical R&Ds because the information is public, and all those different companies work on the target at the same time.  That’s how you get “me too” drugs. Just because someone beat you to market doesn’t mean you can trash all your hard work. Besides, your drug might actually be better.  It is strange that it is only in the pharmaceutical industry that “new and improved” is looked on as a bad thing.

Now, I am not going to argue that the pharmaceutical industry doesn’t charge an outrageous amount of money for new drugs these days.  And I won’t argue that they haven’t done much of anything to put new drugs on the market.  Or that they haven’t gone back into their old compound libraries  or that they reformulate things.  Sometimes, those reformulations are meaningful and sometimes they are not.

But I do know that research is expensive.  Ridiculously expensive.  That’s why big pharma has been cutting back on research as a counterintuitive business model.  That’s why there’s nothing coming out of the labs.  They are spending less money these days and they are relying on academic groups more often now.  The reasons are many but chief among them is that after having spent many billions of dollars on research, very few new drugs were approved by the FDA.  And that could be a result of higher safety standards that didn’t exist when the project was started or the constant mergers and acquisitions and bad management and the explosion in biology in the past couple of decades and the new and trendy things that snake oil salesmen corporate ladder climbers sold to their bosses as the next big thing that weren’t ready for prime time.  In fact, if Yves had been reading the posts I have written in the past several years on the pharmaceutical industry, or Derek Lowe at In the Pipeline has been writing (check the archives, Yves) or even someone like Anthony Nicholls at Openeye has been writing, she would have gotten a more complete picture of what is really going on.

What is really going on is that the big pharmas are going “weightless”.  They think they can exploit little start up companies and academic groups and turn those compounds into drugs.  And they want a cheap workforce.  I mean REALLY cheap.  Like $37K/year is their ideal top of the salary band for post docs who will never find a job in industry.  So they have been pushing this nonsense to the White House and Congress that what we need is more students who will sacrifice themselves to STEM professions and forget about having a stable job or family life because it is the patriotic thing to do.

Meanwhile, there really are academic groups that are trying to create new drugs.  They consist of former industry professionals who have taken incredibly steep cuts in their salaries and work in facilities where their resources are vastly reduced compared to their formerly corporate lab environments.  The pharma industry has them right where they want them, using their decades of expertise to cobble together drugs out of shoestrings and bubblegum.  And those dedicated scientists spend a lot of time applying for grants from the NIH but the money is very hard to come by and can’t pay for all the things and people they need to do their jobs.  These people are amazing and I can’t say enough good things about them.

But they are the exceptions, not the rules.  The rule is that the vast majority of NIH funded research provides germs of ideas.  They are hints of possibilities, a bunch of gel slides and some correlations.  I have been on many projects that started with a few interesting papers from NIH funded research.  We spend a lot of time on these shiny little nuggets setting up assays and crystallizing proteins and screening millions of compounds and synthesizing new compounds only to find out that the NIH funded studies did NOT have all of the answers.  The initial studies had only part of the answers and didn’t know about all of the other pathways and upregulation or the initial study was just off and the assays don’t work like they should and the project has to solve a different problem before it circles back to the original problem.  In the process, the industry research uncovered many aspects of the biology that the NIH scientists didn’t have the time, money or urgency to discover by themselves.  Many millions of dollars have been spent chasing NIH beginnings that ran into brick walls and had to be abandoned.  In any pharmaceutical company, there were dozens and dozens of these kinds of projects going on all at the same time.  Many projects are started but bloody few succeed and the vast majority of drugs that are produced from the germ of an idea that came out of an NIH study originated in the compound library of the pharmaceutical company itself.

Those are just the facts, Yves.  You can talk to anybody who has ever worked in pharma in the past 20 years and they will confirm this.  Yes, some remarkable things have come out of academia but very few of them  came directly from some academic lab untouched.  All of the other drugs were industry generated.

The reason why drugs are so expensive and are going to get more expensive is because more companies are abandoning their small molecule drug discovery efforts, because they couldn’t get approvals and recoup their investments before the patent clock expired, and are now moving into biologicals, the next big thing.  Oh sure, there will be some small molecule efforts in areas like oncology but this is due to a very cynical calculation on the part of the bean counters.  Oncology drugs are fast tracked and the safety profile is relaxed. People with death sentences on their heads are more than willing to become human guinea pigs and put up with a lot more toxicity than average non-sick people. They’re less picky about formulations.  Sure it would be great if the drug is oral and easily bioavailable but if you have to take it by IV, that’s OK too. If the drug extends life by even a few months, some families would consider that a success and they’d be willing to pay whatever the market wants.  And best of all, patients don’t complain and file class action lawsuits.  If the treatment succeeds, everyone is happy no matter how much the liver is shot.  If it fails, well, the patient was going to die anyway.  The relatives chalk it up to fate. The shareholders are happy.

Biologicals are a whole different animal with their own share of problems from humanizing mouse antibodies and aggregation problems to all kinds of new and different things that no one even knew about the cell.  It’s going to be interesting and very expensive.

The rest of the non-wealthy people will have to live with generics, which are bound to get more expensive.  Yves is smart enough to figure out why because she understands scarcity, supply and demand.  But these will be older, less efficacious drugs.  Well, the public put it’s foot down about “me too” and demanded a higher level of perfection than any small molecule drug is likely to ever deliver and this is what happens.  No more new small molecule drugs.

There are many facets to this problem.  Everyone sees the issue they are closest to.  If you only consult one “expert”, you only see one part of the problem.  There is no reason to distrust those of us former industry professionals who have a different version of events.  Believe me, we are not going to tell you a lot of flattering things about the pharmaceutical industry that stupidly laid off all of its expertise.  But unless you find out what is really going on and who is doing what with which resources and how successful those resources are, you can’t develop a complete picture of the landscape of this problem.  And more importantly, you can’t *solve* the problem. That smacks of a very unscientific approach to solving problems and, in the end, it doesn’t serve the patients or American citizens well at all.  In fact, not gathering as much information as you can from different sources is precisely what Big Pharma wants you to do.  It’s asymmetrical information at its best.  You only have one part of the picture and they just sit back and laugh at your righteous indignation while you rail against them.  How is this different from the finance industry?

By the way, I am no finance person and I didn’t much care for economics.  But I took the time to read books and ethnographies and visited wonky sites and read Yves and waded through all this money crap that interests me not even in the slightest.  And although I don’t know everything, I know much more than I did four years ago.  I know what motivates the bastards now and what incentives need to be changed to make the system function again.  That’s a positive step, right?

So, maybe closing your ears to differing points of view is not a good thing, Yves.  You’re not helping us beat this thing.  And that is something no pharma PR rep would ever say.

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And now for some IKEA hacks!

This first one is from one of my new favorite YouTubers, goodbrowngravy, who despite being a white southern male with an accent, appears to be not the ignorant redneck that some lefties think all white southern men are.  (Do we condescend and stereotype much?  I think we do.)

Here’s goodbrowngravy’s IKEA hack of a Rast dresser into a campaign style side table.  Nice work!

And here is a hack of an Expedit unit turned into a stereo system from Apartmenttherapy.

Speaking of IKEA, if you are in the area tomorrow of the Elizabeth, NJ IKEA, you can drop off some badly needed items for the NYC/NJ survivors of Hurricane Sandy. IKEA is teaming up with the RedCross and other organizations to provide furniture and funds and also to collect items from customers who are shopping on Sunday. Check here for a list of items that would be much appreciated.  The collection will start at 11:00am.  And I really need a Rast…

What Yves said

Yves Smith at Naked Capitalism has a long post about former Goldman Sachs Vice President Greg Smith’s new book on the company.  Smith’s book, Why I Left Goldman Sachs, describes the atmosphere at Goldman and how vulnerable clients are in an environment when making a deal and the gigantic fees that come with it is more important than selling a complicated and flawed financial instrument to unsophisticated clients.  Yves gives her own insider view of Goldman and why the company has gone ballistic over Smith’s book while at the same time insisting that Smith was too junior to know what was going on.  The money quote comes at the end of her piece:

Goldman has such a strongly developed internal culture that even a change at the top would take a while to percolate through, and Smith appears to have seen the impact.

I can relate.  Those of us in the lower rungs of the pharmaceutical industry witnessed a similar phenomenon.  At one point, we were governed by scientists and MDs who rose through the ranks to head the companies.  But that started to change radically in the 90’s during the era of many mergers and acquisitions and it really accelerated in the 2000s.  The financiers began to have more influence at about that time and we read accounts of CEOs under fire from analysts to cut research and outsource heavily. In retrospect, it looks like they were setting up pharma companies for their next M&A deals but eventually, all of the restructuring and Wall Street culture of constant change tricked downwards. The performance and compensation system changed, adopting Jack Welch’s program that was designed for GE salespeople, until it resembled Enron with even the lowly lab rats ranking each other, hoarding resources and actively engaging in cutthroat activities in order to avoid the ax.  And that, my friends, is about the worst thing you can do to a research organization.  Collaboration is essential to research.  By the time Wall Street values had trickled down to our level, we could see that they were more suited to the sales executives but in the labs were alien, out of place and destructive.  When it got to the point that lab equipment repairs had to be justified and we were forced to charge other departments for services we used to provide as part of our project collaboration, it was over.

So, I have no doubt that whatever Smith witnessed at Goldman was significant, profound and deeply disturbing.  It may be a similar situation where the business has begun to run amok and eat itself from the inside out, where policies no longer make sense and where the bulk of his time was spent pushing the competition in the next office off of his pedestal.  At that point, it’s no longer a functional business.  It’s a game of winner take all musical chairs.

Yves speculates on the reasons why Smith doesn’t spill all of the beans on Goldman or is even as detailed in his account as someone like Michael Lewis.  Some of those reasons include his relatively low level and institutional omertà.  But another possible reason is that there are few former insiders, even low level insiders like Michael Lewis who can write well on what are pretty complex financial instruments and make them intelligible to the average consumer.   I loved Lewis’s book The Big Short but it wasn’t until I was halfway through the book before I understood enough of it that I saw the humor in some of Lewis’s passages.  Now I know what Wall Street was up to but I doubt that even many Wall Street analysts truly understand the math and models behind their dynamic proprietary programs.  If Greg Smith understands them, there’s probably a lot he can’t divulge without  getting the Goldman legal department to bear down on him.

In any case, Smith’s book sounds interesting but I probably won’t be adding this one to my audible queue.  It’s not because I don’t think it is a worthy read or can’t learn more.  It’s just that through Karen Ho’s book Liquidated, and Lewis’s The Big Short and Boomerang, I think I get the picture well enough to know what went wrong.  But if you don’t have the time or patience for more than just a high level summary. it sounds like Greg Smith’s book might be just the horror story to keep you up on a cold and stormy October evening.

The worm is turning on Obama

I’m getting that vibe.  It’s like the country is starting to realize that, Oh. My. God., we might be stuck with this loser for four more years.  How did this happen?  I have a hypothesis that the last time Americans picked a president was in 1996 but I’ll save that for another time.

What I’m surprised to see is how many opinion makers are now turning on him.  There was The Daily Show last week when Jon Stewart pointed out that a felon in the West Virginia primary got 40% of the Democratic primary votes.  There was Kristen Schaal disgusted with her choices this year and pleading, “Please run for Office, Hillary Clinton”.

And now we have Richard Cohen.  Wait, did he make the wanker of the decade list? Turns out he did coming in as 6th runner up.  Congratulations, Richard! Well, nevermind that, his latest column was unexpected.  Richard is basically saying, “Obama smells, he’s got no friends and nobody likes him.”

Last week I asked a member of the Senate if he knows of anyone who really knows Obama. He said he does not.

Washington is thick with stories about Obama’s insularity and distance. We hear how he does not listen to criticism — he sometimes just walks out of the room — and how he sticks to a tight circle of friends. His usual weekly golf game is mostly limited to the same people — and when he played a round with House Speaker John Boehner(R-Ohio), it was treated as an exceptional event. When, for whatever reason, Politico analyzed Obama’s golf outings (June 6, 2011), it found that Obama’s “golf circle has actually gotten much tighter over the past 2¹/ ₂ years” — none of them politicians or, heaven forbid, journalists.

 […]But Obama cannot or will not indulge in the sort of face-to-face politicking that Johnson so favored. He has not stroked important contributors — one bundler told me he never hears from Obama. As the New York Times put it recently in an article about his fundraising on Wall Street, Obama himself has “a reputation for being cold at small gatherings.” “I just don’t think he likes us,” one fundraiser is quoted as saying.

The best that can be said for Obama is that he treats everyone with about the same degree of distance. One important Democrat used the term “cuckoo-clock events” to refer to White House receptions where Obama robotically appears, says a minimal amount of words and then disappears. He does not mingle — or, if he does, it is as little as possible. Bill Clinton, in contrast, was the host from hell. The party never ended.

I highlighted all of the negative words and phrases.  Considering the length of the post, this many negative phrases should sound alarm bells for his campaign.  Reading this, you get the feeling that Obama is callous, cold, insensitive to the feelings of others, and really doesn’t like people.  He’s a bit of a misanthrope.    There’s even a comparison to Bill Clinton who seemed to be warm, gregarious and a people person. Cohen seems almost wistful about the endless party that was Bill.  Don’t it always seem to go that you don’t know what you’ve got til it’s gone…

There’s more to that column about LBJ.  I’m listening to Robert Caro’s book on Johnson, The Passage of Power, and I can definitely see the characteristics of JFK in Obama.  He’s surrounding himself with the smartest guys in the room who have absolutely no idea how to deal with Congress.  Like JFK, Obama spent most of his time in the Senate interviewing for his next job.  JFK never passed a significant piece of legislation and was not known to be a “workhorse”.  You could cut Kennedy a break because of his constant illnesses but what’s Obama’s excuse?  Four years ago, we here at The Confluence predicted that he would have trouble working legislation through Congress because he’d never really had to do it and how could it have been otherwise?

But what we have here in Cohen’s column is cocktail party talk.  This is the voice of the Village who now do not want Obama at their lunch table.  It’s sophomoric and petty but when the press starts to turn on you, it can get ugly fast. The New York Times is calling him “cold at small gatherings”.  That can’t be good.

The second worm that has turned as been Yves Smith.  I know she has been critical of Obama in the past but her post today makes it sound like her hair is on fire.  It’s hard to pick excerpts from Barack Obama, the Great Deceiver, the whole thing is good, so run over there and read it yourself.  Here’s a taste:

Engelhardt depicts a malevolent leader without using that word. It is hard to see a policy of drone strikes that have and will continue to kill innocents, a continuation of extraordinary renditions, and assassinations of American citizens merely suspected of terrorism, in any other light.

But his actions are detrimental not only for their overweening, super-hero-like force, but more often, for serving vested interests by being deliberately weak, badly watered down versions of real reforms (and correspondingly, notice how often Obama maintains he was boxed in by intransigent Republicans, when in fact they serve as convenient scapegoats for what he wanted to do anyhow?)

And by taking as much debate and energy as the genuine remedies, they prevent the topic from being revisited for years, if not decades. The frequently criticized Dodd Frank is one example, but the poster child is Obamacare. The program manages the difficult feat of worsening the fundamental problem of our health care system, which is bad incentives and resulting out-of-control costs. It enriched Big Pharma and the insurers rather than bringing them to heel. The result will be overpriced insurance that covers little. We’re seeing that start now as the FDA is looking into make a number of widely used drugs, such as high blood pressure and cholesterol medications, over the counter, which would mean they would not be covered by health care policies.

Readers of this blog are likely to argue that they have a jaded view of Obama, but still regard him as preferable to Romney. But they seem to fail to appreciate another layer of Obama’s deception, that his charm and unflappable demeanor mask his ruthlessness. It’s no accident that he chose Rahm Emanuel as his initial chief of staff, an enforcer and by all accounts one of the members of what was an unusually tight inner team. The Democrats are now indistinguishable from the Republicans in their mastery of Rovian playing on identity politics. Obama has also proven adept at neutralizing well positioned actual or potential threats, such as David Petraeus, Elizabeth Warren, and Eric Schneiderman.

People who answer polls may not want to say what they really think of Obama.  They don’t want to be called racists.  But it’s not about race.  It’s about getting the feeling that, somehow, you’ve been had.  Yes, I think malevolence is not too far off the mark.  It started in the primaries of 2008.  It was the hooliganism of his on the ground supporters at caucuses, the fact that he took his name off the ballot in Michigan in order to monkeywrench the primary process, that he never stood up for the voters of Florida and Michigan and how he and his party treated his competition at the convention, with contempt and driven to humiliate.  Those of us who were not starstruck watched it in horror because we couldn’t seem to stop it and make people come back to themselves.

Back then, Yves was a cautiously optimistic Obama supporter.  Not anymore.  And once you see what you’ve been trying to avoid, you can’t unsee it.

Expect more of the same over the next couple of weeks.  The reality of the next four years is setting in and so is the slowly escalating anxiety and fear of what’s to come.

Convergence on Goldman-Sachs

While 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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