September 2008 #3 - Goldman's Chickens

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DATE : 30 Sep 2008 19:30:00 +1000
Entered in Database : 2008-09-30 09:30:00
length : 4000000
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Its funny, isn’t it, that as the capitalist system tries to reinvent itself, the so called ‘market leaders’, who caused the problem in the first place, have now been put in charge of designing the ‘fix’. Although not unlike putting the foxes in charge of the chicken coop, the main difference is, this time, the farmers are shooting, cleaning and serving up the chooks for the foxes. One of the main characters in this story is a rather large and influential firm called Goldman Sachs. They aren’t the only one but serve as a model for what the others aspire to. Here’s a few starters. Dozens of former Goldman Sachs’ senior staff have gone on to influential positions in government. Current head of the US treasury, Hank Paulson, is a former CEO as was previous treasury secretary, Bob Rubin. Former Goldman executive, Steve Friedman, was head of the National Economic Council. Josh Bolton, White House Chief of Staff, is a former Goldman executive and World Bank chief, Robert Zoellick, likewise. Former Goldman CEO, John Whitehead, heads up the US Treasury Department and former US Export Bank head, Ken Brody, knew them all from his time at the company. In Superclass: The Global Power Elite and the World they are Making, David Rothkopf writes of Goldman Sachs, “Goldman’s influence extends beyond the ability of its analysts and traders to drive stock or bond prices up and down … The firm shapes new views of the world. …it creates new financial instruments that shape the globalmarketplace, it can make or break the CEOs and government ministers who regularly pass through its doors … and it serves as the hub of an international network of deal makers.” One has to wonder just how much of our interests Goldman Sachs’ former executives have in mind when doing their billion dollar deals? While the focus of the last couple of weeks has been on ‘the markets’ very little attention has been paid to the so called ‘dark pools’ that companies like Goldman and others have established. These ‘dark pools’ are named as such because of their “nebulous and murkynature”. Writing over 18 months ago, Market Watch columnist, David Weidner, notes that these off book share trading mechanisms account for ten percent of all share trades. He writes that rules put in place over a decade ago and which were meant to control these types of trading schemes, are nowoutdated and unable to effectively police or regulate them. At the same time that Weidner was writing his article, Goldman Sachs were announcing to the world that their own ‘dark pool’, SIGMA X, was able to “allow customers to take liquidity from non-displayed sources” because, “accessing liquidity in an anonymous and systematic way is essential to reducing impact costs.” In other words, the so called ‘leaders’ of the investment and banking world believe that the system they have created for the rest of us (the ‘real market’ and its exchanges) is not up to the task of getting more and more cash to them efficiently. So while the main act in the centre ring of the Washington circus is at present the threats to our retirement funds, superannuation and property values, I would argue that treasury secretary Paulson and the media’s main aim is to keep our attention away from the real action taking place in these ‘dark pools’. When you think about it, the first rule of thermodynamics states that matter cannot be destroyed, it can only be transformed. When you think of money, even the non-existent type that forms the basis of most trading these days, and apply this rule, you realise that something other than ‘huge losses’ is taking place. In other words, the money is not being ‘lost’, that is destroyed, it is being transformed into something else or transported elsewhere. The question is, “into what oroff to where?” The online newsletter AutomatedTrader included a very bold claim in its September 22nd update. The newsletter quotes C. Thomas Richardson. He carries the lofty title of “Global Head of Transaction Services” of NYFIX. He told the AutomatedTrader that their ‘dark pool’ system, “Millennium” had set an “all time, single day record’ in off the book trades. He effused, “What we’ve seen over the past couple of days marks a compelling shift, dispelling the previous notion that traders shy away from executing in dark pools during times of high volatility.” He goes on to say that “regardless of market conditions” traders using his company’s system can save money on their share transactions. Remember, this is just one company running a scheme that subverts the ‘real’ market the rest of us have to put up with. The money in the ‘real’ market hasn’t been lost, misplaced, destroyed or devalued. It has been sucked into these ‘dark pools’ simply because they are so efficient in transferring real wealth to ever smaller concentrations of owners. In other words, the circus that is going on in Washington is a smoke screen to keep our attention off these unregulated and unaccountable trading schemes. Under the current, ineffective rules, companies, like Goldman Sachs, argue that so long as the seller and buyer don’t ‘know’ each other, then there is no problem. Of course, companies like Goldman Sachs are usually the ones who advise sellers and buyers and often ‘lend’ them the funds to trade with. This means the executives of these companies get to play both farmer and fox. In short, they can’t lose, particularly when their former CEOs and other executives are fiddling with the ‘policy levers’ and telling us its allfor the best. Don’t believe them. The only ones that lose out every time are the chooks. And we were never any good at laying golden eggs anyway. Even if we were they would be sucked down the vortex of the ‘dark pools’ and deposited in someone else’s nest ensuring the next generation of chickens don’t need to come home to roost.

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