Copy + Paste:

Most of us make the same mistake with our money over and over again: We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea.

The easiest way to see this behavior in action is to watch money flow in and out of mutual funds. Let’s go back to early 2000. The dot-com market had reached a fevered pitch. People were using their home equity to buy tech stocks right after the NASDAQ had a single year return of better than 80 percent!

Then, in January 2000, investors put close to $44 billion dollars into stock mutual funds, according to the Investment Company Institute, shattering the previous one-month record of $28.5 billion. We all know the story from there. Money continued to pour into stock funds, breaking records for February and March and pushing the NASDAQ to 5,000, only to lose half its value by October 2002.

This gets worse. That same October (at the low for the cycle), as investors were selling stocks as fast as they could, where was all the money going? Into bond funds, at a time when bond prices were near record highs.

Think about this pattern for a minute. At the top of the market we can’t buy fast enough. About three years later at the bottom, we can’t sell fast enough. And we repeat that over and over until we’re broke. No wonder most people are unsatisfied with their investing experience.

Now we might be doing it again. Over the last year, investors have put an estimated $506 billion into mutual funds, but $409 billion of that went into bond funds. Let me repeat that: Of the total of over $506 billion, $409 billion went into bond funds.

No one is sure how this will turn out. But with interest rates again near record lows (meaning bond prices are near record highs), you could end up losing money in that bond fund you bought for the purpose of making sure you don’t lose money.

To be clear, the solution here is not to sell your bond funds. It is not to buy stock funds. The point is to recognize that, in aggregate, investors tend to be very bad at timing the market.

It makes far more sense to ignore what the crowd is doing and base your investment decisions on what you need to reach your goals, then stick with the plan despite the fear or greed you may feel. To do otherwise would be following a pattern that has proven to be extraordinarily painful.

Link: Carl Richards

- Rapha Winter Jersey, $230. Can also wear it as a light jacket.
- The Quants by Scott Patterson, $17.82 at Amazon.
- Framed Print of Untitled (Red and Black), 1955 by Mark Rothko, $200 at MoMA.
- Sidi Dragon 2 SRS Carbon Mountain Bike Shoes in Red, $372.50 at Chainreactioncycles. Retails for $465.
- Paddle Shifting Steering Wheel for my car, $2,095 at Suncoast. Retails for $2615.
- Decoded by Jay-Z, $18.88 at Amazon.
- Vision Racer VR3 Racing Simulator, $1295. The best way to play Gran Turismo.
- Rapha 3/4 Bib shorts, $225. I’m a sucker for that white stripe.

Cheers!

Links:
Watership Down
Monkey Business
Christie’s

Excerpt form Adam Bryant’s interview with Barbara Krumseik of the Calvert Group Ltd:

…I think the key is that people who work for me honestly believe that there is going to be a win-win here. I’ll bring it back to my obstacle-course analogy. I believe that the whole career ladder concept is a very disruptive concept because what does it suggest? You can’t get past the person ahead of you unless you push them off the ladder. It promotes aggressive behavior.

When you think of an obstacle course, there are a lot of people on the obstacle course at the same time, and my success doesn’t impede your success. And I may be able to take a minute and help you over that next obstacle and still get where I want to get to.

I also think you have to be a little humble. You have to be maybe a little bit overly confident to break into new things, but a little bit overly humble about what you don’t know, and admiring of the talents different people bring to the table.

Link:
Corner Office: It’s Not a Career Ladder, It’s an Obstacle Course, New York Times, 5/21/10.

Banks and governments in these five shaky economies owe each other many billions of euros — converted here to dollars — and have even larger debts to Britain, France and Germany. Arrow widths are proportional to debt amounts.

Links:
Europe’s Web of Debt, New York Times, 5/1/10.
What Happens if a Euro Area Government were to Default? by Wolfgang Munchau, Financial Times, 1/20/2009

NEW YORK (AP) – The stock market had one of its most turbulent days in history as the Dow Jones industrials fell to a loss of almost 1,000 points in less than half an hour on fears that Greece’s debt problems could halt the global economic recovery.

The market’s plunge came less than 90 minutes before the end of trading. The Dow’s drop was its largest loss ever during the course of a trading day, but it recovered to a loss of 347 at the close. All the major indexes lost more than 3 percent.

There were reports that the sudden drop was caused by a trader who mistyped an order to sell a large block of stock. The drop in that stock’s price was enough to trigger “sell” orders across the market.

For fun….

Accenture’s stock at one point traded down to a penny on this computer glitch. Volume was only about 27.5K. So say that one person bought the entire lot at for $275 and held on to them. In a minute, that person turned his or her $275 investment into $1.1 million!

Unfortunately for that person, NASDAQ announced that they would be cancelling orders that were 60% above and below market on consolidated trade price from 2:40 to 3:00. But ah, to dream!

….well, at least good enough for a trade..

Around 11:30am (Eastern time), the stock started to move up. I watched it for a good while to confirm upward price action. Eventually, I started a position at around 12:20pm (Eastern time) – blue arrow.

On this 15-minute chart, which shows the price activity for the past week, you can see a bullish hammer right before the point I bought the stock; that was another good sign that the stock was moving in the right direction.

This particular trade is going to be a swing play, where I’m looking to hold onto this stock for at least a few days or so. Ultimately, I’m looking for an island reversal (where price will jump back to the level prior to the sell-off)  or to slowly fill the gap (where the price covers the empty space). In any case, my plan is to start selling at the point of the red arrow. I may look to increase my position size if the stock hovers above the horizontal, solid white line for a bit.

Cheers!

With that said, I’m looking to restart another position in $RIG…. not right away, but soon..

Anyways, here’s a pretty cool graphic showing the current problem, and how BP plans to stop the oil leak.

Link: What’s Going on Beneath the Sea

It’s been quite a year since I’ve spoken here last — lots of ups, lots of downs — except for my approval ratings, which have just gone down. (Laughter.) But that’s politics. It doesn’t bother me. Beside I happen to know that my approval ratings are still very high in the country of my birth. (Laughter and applause.)

By the way, all of the jokes here tonight are brought to you by our friends at Goldman Sachs. (Laughter.) So you don’t have to worry — they make money whether you laugh or not. (Laughter.)

Link: Borowitz Report

Copy + Paste from Indiepulp:

He accepted the job because it would be like doing the 1929 issue of the magazine, and he filled the image with tons of satirical imagery, like the U.S. [Treasury] being raided by Wall Street, China dumping money into the ocean, homes being flooded, homes being foreclosed, and CEOs dancing a jig while society devolves into chaos.

It’s too bad that the folks at Fortune don’t have a sense of humor.

Links:
Indiepulp
Link to a giganormous jpeg of the cover for downloading pleasure

Interesting to me (probably way more so than to anyone else) is how beautifully Fibonacci Retracement Lines touched certain candlesticks (the christmas-colored verticle lines). You can see, by using the intraday high and low as a base, this stock was trading between 38.2% and 23.6% mid-day. Yep, I know…. more interesting to me.

So, if you haven’t read the news, basically, Golden Slacks created, marketed, and sold knowingly-crappy investments to other parties. What is worse is that at the same time, they bet against those same investmets. They made moolah when the investments became worthless. That’s it in a nutshell. If you want details, you can read this NY Times article.

Bet Against the American Dream from Alexander Hotz on Vimeo.

Links:
A Show Tune About a Hedge Fund: ‘Bet Against The American Dream’
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going, by Jesse Eisinger and Jake Bernstein, ProPublica, 5/9/10

Liar’s Poker by Michael Lewis
The Big Short: Inside the Doomsday Machine by Michael Lewis
Outliers: The Story of Success by Malcom Gladwell
A High Wind in Jamaica by Richard Hughes

..and that’s my ring that I wear everyday, right middle finger.

Get the books off of Amazon for cheap. No tax (at least in California) and Free shipping (spend over $25).

Dear Economist: If I reduce ‘supply’, will my ‘price’ go up?

I was in a long-distance relationship with my ex-girlfriend for six months, I in Bangladesh and she in England. At first, everything was perfect, but then her demand curve for me seemed to be slowly shifting to the left. Paranoid, I started giving her a lot more attention, thereby increasing my supply. My price and marginal utility fell. We broke up once, but I convinced her to come back.

We went back to normal and we talked for hours everyday. I decided I would move for her and managed to get offers to study economics in the UK. She started acting very oddly, and a few days ago, she said she doesn’t love me any more and completely broke up with me.

We’re still friends and she’s started making excuses that don’t seem too rational. I think she’s confused and that she’ll come back if I play my cards right. Should I sharply reduce supply and hope that my price goes up? I love her more than anything. My demand curve for her is perfectly inelastic.

Anon, Bangladesh

Dear Anon,

I would put away the supply and demand curves and treat this as a problem of imperfect information. Before you cross continents, you must figure out what your ex-girlfriend thinks.

You blame your needy desperation for her change of behaviour – and it probably hasn’t helped. Even if you rescue this relationship you’ve basically conceded that you’ll be washing the dishes from now on.

But remember that she reduced demand before you increased supply. Why? Two hypotheses: she was bothered by the long-distance nature of the relationship, or she found someone she preferred to you. Test each against the fact that when you announced you’d be arriving on her doorstep, she dumped you. It’s pretty clear where the truth lies: it’s over. Yes, “sharply reduce supply” to this girl, but not because you hope to win her back.

Link: Tim Harford, “Dear Economist: If I reduce ‘supply’, will my ‘price’ go up?” Financial Times, 4/3/10.

Repo 105 from Marketplace on Vimeo.

What a month!

With all of the current chatter on (unlikely) financial regulation, (likely) Greek bailout, and potential economic recovery in 2010, FAS is a great ticker to exploit. It’s basically a basket of bank stocks on steroids.

Anyways, in the first week of February, FAS failed to break above the 20 day, Exp. Moving Avg (red line). My interest peaked when it hit the lower Bollinger band (lower green line). The previous day saw an ugly, ugly down move (long red bar). The sell off was overdone, and brought it into Oversold territory (Stochastics indicator – bottom set of black/red lines). With a relatively low risk, I started buying.

Into the second week of February, FAS continued to languish and then consolidated in the Oversold area. I bought more and more trying to lower my cost average (price paid per share) to the point I was comfortable with my position.

My big picture plan was to trade and extract the price difference between the Bollinger Bands (solid squigly green lines) – buy at the lower green band and sell at the upper green band.

Along the way, we witnessed some good battles between the bears and the bulls…

Beginning on February 16th, the bulls came out with much force, and gapped up the stock, which decidedly turned the MACD indicator up (black line criss crossed the red line). 

Throughout February, the bears and the bulls had good fights between the 50 day EMA (squigly blue line) and the 20 day EMA (squigly red line). For a while, every time the bulls tried pushing FAS over the blue line, the bears came back to push it towards the red line. We were in grid lock until the last trading day of February and the first day of March, when the bulls were successful in pushing above the blue line and led their march towards the upper green line.

Around this time, FAS was in the Overbought Stochastics area (which is a relatively safe time to sell), but with some seriously good momentum. Since FAS had not hit the upper green line like planned, I was not yet ready to sell, so I started paying more attention to the Relative Strength Index (RSI). In the recent past, FAS topped out (orange circle) when the RSI reached the upper line (powder blue circle)….

Not exactly perfect, but check out what happened yesterday. FAS not only got really close to the upper RSI line (powder blue circle), it also hit the upper Bollinger Band (squigly green line), and per the original plan, I dumped all of my FAS shares. It is possible that FAS could go higher in the next few days, but I think the bears will be coming back soon to take it down to at least the 50 day EMA (squigly blue line). If the bulls can hold it there, I will be back in the game.

Anyways, after commissions, I yielded + 27.8%, which is damn good for me! It was a good swing trade.

Even Stocktwits gave me a shout out…

Cheers!

Goldman Sachs and other big banks aren’t just pocketing the trillions we gave them to rescue the economy – they’re re-creating the conditions for another crash

MATT TAIBBI

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America’s pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman’s role in precipitating the global financial crisis.

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a “bailout tax” on banks. Maybe this wasn’t the right time for Goldman to be throwing its annual Roman bonus orgy.

Not to worry, Blankfein reassured employees. “In a year that proved to have no shortage of story lines,” he said, “I believe very strongly that performance is the ultimate narrative.”

Translation: We made a shitload of money last year because we’re so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.

Goldman wasn’t alone. The nation’s six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. “What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?” asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America’s populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what’s the difference if some fat cat in New York pockets $20 million instead of $10 million?

The only reason such apathy exists, however, is because there’s still a widespread misunderstanding of how exactly Wall Street “earns” its money, with emphasis on the quotation marks around “earns.” The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street’s eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its “performance” was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they’re back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they’re rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.

That’s why this bonus business isn’t merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There’s even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn’t call the cops is known as the “Cool Off.”

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don’t so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids’ playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:

CON #1 THE SWOOP AND SQUAT

By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG’s “counterparties” — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.

What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as “Swoop and Squat,” in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target’s insurance company — in this case, the government.

This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors’ cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to “selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”

Goldman often “insured” some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn’t required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.

Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.

Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn’t going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the “Swoop and Squat” that ultimately crashed the firm. “It put the company into a liquidity crisis,” says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.

It was a brilliant move. When a company like AIG is about to die, it isn’t supposed to hand over big hunks of assets to a single creditor like Goldman; it’s supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. “Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance,” says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they’d been gouging. Roll the Ray Liotta narration: “Finally, when there’s nothing left, when you can’t borrow another buck . . . you bust the joint out. You light a match.”

And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that’s $19 billion in pure cash that Goldman would not have “earned” without massive state intervention. How’s that $13.4 billion in 2009 profits looking now? And that doesn’t even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.

CON #2 THE DOLLAR STORE

In the usual “DollarStore” or “Big Store” scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.

The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.

Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.

Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of “free money” by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. “They had no other way to raise capital at that moment, meaning they were on the brink of insolvency,” says Nomi Prins, a former managing director at Goldman Sachs. “The Fed was the only shot.”

In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.

“You’re borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way,” says the manager of one prominent hedge fund. “It’s free money.” Which goes a long way to explaining Goldman’s enormous profits last year. But all that free money was amplified by another scam:

CON #3 THE PIG IN THE POKE

At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the “Rocks in the Box” scam or, in its more elaborate variations, the “Jamaican Switch.” Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it’s baby powder.

The scam’s name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he’d miss the switch, then get home and find a tied-up cat in there instead. Hence the expression “Don’t let the cat out of the bag.”

The “Pig in the Poke” scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. “All of a sudden, banks were allowed to post absolute shit to the Fed’s balance sheet,” says the manager of the prominent hedge fund.

The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed’s own write-up described the changes: “With the Fed’s action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF.”

Translation: We now accept cats.

The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called “mark-to-market” accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn’t invite your shareholders to a slate of pork dinners come year-end accounting time.

But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would “more likely than not” hold on to them until they recovered their pig value. In short, the banks didn’t even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.

That’s why the “profit” numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call “profits” might really be profits, only minus undeclared millions or billions in losses.

“They’re hiding all this stuff from their shareholders,” says Ritholtz, who was disgusted that the banks lobbied for the rule changes. “Now, suddenly banks that were happy to mark to market on the way up don’t have to mark to market on the way down.”

CON #4 THE RUMANIAN BOX

One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous “Ten Commandments for Con Men,” was a thing called the “Rumanian Box.” This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he’s been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.

How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.

The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn’t just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government’s good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. “TLGP,” says Prins, the former Goldman manager, “was a big one.”

Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government’s standpoint, was to spark a national recovery: We refill the banks’ balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. “The banks were fast approaching insolvency,” says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. “It was vitally important that we recapitalize these institutions.”

But here’s the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That’s where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn’t fork over more cash — a lot more. “Even if the Fed could make interest rates negative, that wouldn’t necessarily help,” warned Goldman’s chief domestic economist, Jan Hatzius. “We’re in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more.”

Translation: You can lower interest rates all you want, but we’re still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the “private sector” and “save” the taxpayer aid they had received — in the form of bonuses and compensation.

The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion “real” dollars.

The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington’s demand for cash was so great post-Clusterfuck ’08 that even the Chinese couldn’t buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.

And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.

CON #5 THE BIG MITT

All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country’s leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. “It’s like that scene where John Candy leans over to the guy who’s new at poker and says, ‘Let me see your cards,’ then starts giving him advice,” Masters says. “He looks at the hand, and the guy has bad cards, and he’s like, ‘Bluff me, come on! If it were me, I’d bet everything!’ That’s what it’s like. It’s like they’re looking at your cards as they give you advice.”

In more ways than one can count, the economy in the bailout era turned into a “Big Mitt,” the con man’s name for a rigged poker game. Everybody was indeed looking at everyone else’s cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.

At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.

One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.

But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.

This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was “absolutely ridiculous” that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. “Some of them created this mess,” he said, “and they are making a killing undoing it.”

CON #6 THE WIRE

Here’s the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of “significantly tighter regulations and much closer supervision by bank examiners,” as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.

One of the most common practices is a thing called front-running, which is really no different from the old “Wire” con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

Say you’re working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he’d end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn’t keep banks from screwing their own customers in this very way.

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. “Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research,” the disclosure reads. “Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.”

Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in “fair dealing with customers” and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.

To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as “flash trading” — really is. “Flash trading is nothing more than computerized front-running,” says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.

Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank’s computerized trading code. In a court proceeding after Aleynikov’s arrest, Assistant U.S. Attorney Joseph Facciponti reported that “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.”

Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. “That is much, much higher than any other bank,” says Prins, the former Goldman managing director. “If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed.”

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman’s own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm’s practice of betting against the same sorts of investments it sells to clients. His response: “These are the professional investors who want this exposure.”

In other words, our clients are big boys, so screw ‘em if they’re dumb enough to take the sucker bets I’m offering.

CON #7 THE RELOAD

Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an “addict” in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.

It’s important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.

But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.

A lot of this was the government’s own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.

Now we’re in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more “creative” opportunities. (It’s “Greenspan times 10,” jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that’s not what our modern Wall Street is built to do. “They don’t seem to want to lend to small and medium-sized business,” says Rep. Brad Sherman, who serves on the House Financial Services Committee. “What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don’t have marketable securities. They have bank loans.”

In other words, unless you’re dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country’s debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you’re not really on Wall Street’s radar.

So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed’s low interest rates, where did Wall Street go? Right back into the shit that got us here.

One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund’s analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

“I said, ‘Fuck it, let’s make some money,’” he recalls. “I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!”

This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It’s old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.

The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. “Summarizing our views,” the bank wrote, “we expect robust flows . . . to dominate fundamentals.” In other words: This stuff is crap, but everyone’s buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.

To sum up, this is what Lloyd Blankfein meant by “performance”: Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn’t deserve billions in bonuses for doing all that?

Con artists have a word for the inability of their victims to accept that they’ve been scammed. They call it the “True Believer Syndrome.” That’s sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn’t so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn’t matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn’t going to work, no matter what we do. Sure, mugging old ladies is against the law, but it’s also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

That’s why the biggest gift the bankers got in the bailout was not fiscal but psychological. “The most valuable part of the bailout,” says Rep. Sherman, “was the implicit guarantee that they’re Too Big to Fail.” Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. “It’s evidence,” says Rep. Kanjorski, “that they still don’t get it.”

More to the point, the fact that we haven’t done much of anything to change the rules and behavior of Wall Street shows that we still don’t get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.

Copy + Paste from Bloomberg:

To: Lloyd Blankfein
Re: Winning the Public Relations War

Six months ago, with what I mistakenly took to be your tacit approval, I attempted to address ordinary Americans, almost as equals. (read it here)

They envied and resented our firm; I sought merely to correct their misunderstandings about Goldman Sachs and send them on their way, so that they might more briskly resume their quest for gainful employment.

In hindsight, I misjudged their ability to see the reality of their situation, and of ours. At the time I accepted your strong suggestion that I never again try to speak directly to mortals — or, as you referred to them, “The Morts.”

Now our predicament is suddenly more dire. Ordinary Americans wish to control not just our pay but our core values: We at Goldman have long stood for the right of every prop group to trade against its firm’s customers. If we abdicate that right, who are we, deep down?

In just the past few days many of us on the Goldman trading floor have wrestled with that question. We believe that rather than re-think our core values we should re-think our relations with the American public.

Hence this memo. Your recent non-verbal signals — your habit of passing directly behind my trading desk en route to the elevators, your selection of the urinal adjacent to my own — convince me that you continue to value my thoughts.

As it happens, I have recently conducted a thorough study of the culture of ordinary Americans. Please take the following ideas in the spirit in which they are intended: a team spirit. There is no “I” in Goldman Sachs, or in me. Nor will there ever be.

Idea No. 1: Give the Morts a small, perhaps even illusory, stake in our upside.

We have all seen the effects on the hearts and minds of our government officials and business leaders when they sense that our prosperity might one day be theirs. In the past year Warren Buffett has gone from being a leading critic of Wall Street to the greatest defender of Wall Street bailouts. Him we needed to pay hard cash — most accept less.

That’s perhaps the most curious trait of these ordinary Americans: you don’t need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn’t know that — and thus he has done so much for us.

Ordinary Americans

Obviously we can never employ large numbers of ordinary Americans. But if you stop for a moment and think like a Mort you will realize that we don’t need to. We need only harness two more of his many irrational traits: overconfidence, plus a willingness to ignore the odds — as evidenced by everything from his interest in the Lotto, to his belief in what he calls “love.”

Each year, for example, Goldman Sachs might announce a grand national competition, much like “American Idol.” Finalists will appear before a national television audience to be judged by a panel of three rather ordinary looking Goldman executives. On stage they will perform various Wall Street tricks: negotiating with Tim Geithner, lobbying the Senate Banking Committee, designing securities that blow up, selling bonds to Germans, etc.

The winner receives a job at Goldman Sachs. Which brings me to…

Big Idea No. 2: Give Morts the illusion that they have been admitted into our realm, and can now truly see who we are and what we do.

The winner of our national competition, for instance, might easily be attached to a small Web-enabled, head-top photographic device. Thus equipped he would become the eyes and ears of Morts everywhere. As he stumbles around our offices, attempting to understand that which is beyond his comprehension, he will no doubt create what ordinary Americans refer to as “comedy.” Morts love to laugh, to the point where they interpret our most straightforward remarks as occasions for humor. As we do not respond to comedy it will not disrupt the flow of our business, and we can encourage it.

Let me say here that I, like every other Goldman trader, have admired the lengths to which you have gone to resemble an ordinary, non-threatening American. Your conscious decision to forgo muscle definition, along with your persistent hairlessness, has been nothing less than enlightened public relations.

Only So Much

But there is only so much one human being can do, even when that being is more than human. Our employees along this new interface with Mort culture should reinforce your subliminal message. They should be “normal looking” and trained to mimic the Mort’s strange, emotional responses to external stimuli.

But the main purpose of any new personal contact with individual Morts is to address what is perhaps our biggest problem: the new belief of ordinary Americans that they now, finally, understand what we do. That our work should be as simple as “facilitating productive enterprise,” or “allocating capital.” They have lost their former awe; we must restore it.

Notice that they do not begrudge professional basketball players their vast salaries: they can see that those players are so unlike themselves as to constitute a different species. As our differences lie below the surface, they are harder for the Morts to perceive. Closer proximity to us, and our complexity, will solve this problem. They will soon weary of trying to comprehend what we do, and go looking for another outlet for their personal frustrations. Which brings me to my final thought…

Big Thought No. 3: Remind the Morts of their more natural resentments.

At the moment they mistrust us, perhaps even despise us, but their feelings toward us are new and thus shallow. They have had 30 years of training in hating their own government (the ultimate example of Mort irrationality). We must remind Morts that we share a common enemy: them.

Link: Goldman Trader Shares Three Big Ideas With Lloyd: Michael Lewis, Bloomberg, 1/29/2010.

Even without reading the news, Friday’s price action was predicted 2 days earlier.

Fluroescent Green Line has me interested again.

Link: Floored

Historically, the first few trading days of January have been among the strongest for stock performance, because this is when individuals and pension plans add big chunks of new money to retirement accounts. Whether people follow their normal pattern and pump money into stocks in January can be a sign of the market’s prospects for the coming weeks, and even for the entire year.

If stocks rise in January, they often finish the year strongly. If stocks are weak during this normally propitious time, stocks tend to do poorly…

…In years when the Dow has risen in the first month of the year, the median rise for the rest of the year is 10.4%. In years when the Dow has fallen, the median rise for the next 11 months is just 0.28%.

Because of the inflows of new cash, January has seen stock advances 62% of the time since 1900, well above the average of 57% for all months.

In fact, November, December and January typically are the market’s strongest three-month stretch, as investors position themselves for the new year. Early December often is soft, possibly because tax-conscious investors are selling losing stocks to generate tax losses that they can balance against taxable gains in other stocks. If things are on a normal footing, that weakness should be over by late December, and stocks should be rising ahead of a strong January…

Link:
As Goes January, So Goes the Year?, E.S. Browning, Wall Street Journal, 1/4/2010. (Read Full Article)

Excerpts Copy + Paste:

Below are seven effects… that HFT has had on U.S. equity markets. Each is then followed with a suggestion or two about how we can adapt.

1. YOU WILL GET STOPPED OUT OF MORE POSITIONS

Average daily volume has skyrocketed 164 percent since 2005, according to NYSE data. Up to 73 percent of this volume is handled by algorithmic trading programs. One unpleasant side effect is that stocks touch more price points and may cause you to be stopped out of excellent positions.

Adapt: Use better stops…

[on a stock that breaks support]…Algo programs buy almost every new low because they bet that short-term shorts will get trapped and have to cover higher.

Adapt: Learn how to read the tape. Few retail and independent traders have developed the trading skills to read the tape. Reading the tape is the craft of watching Level II quotes and being able to determine a stock’s direction based on order flow. Although use of charts and technical analysis are important, they will only take you so far. It is harder to read the tape because of HFT, but it is a critical skill to develop nonetheless.

2. PAST PROVEN TRADING SETUPS WILL NO LONGER WORK

Certain trading plays are less effective now that algorithms exist. For example, it was once a high-percentage play to buy a stock when it broke out, making a significant new high. You would get long and play the momentum to the upside… Today, it rarely works. Meet the sell-the-new-high program turned on by high-frequency traders with more money and bullying power than you.

Lately, when a stock makes an important new high, it will inch even higher until a seller finally refuses to lift for higher ground. Immediately, the sell-the-new-high program will sell much lower than you bought. The longs are trapped and squeezed out of their positions.

Adapt: Change your entries. Shorting a new intraday low for a stock in a downtrend almost never works now, perhaps only if the Volatility Index (VIX) clears 45 again. So you must make the adjustment to short such a stock into an up move. But these stocks also tend to trade just a little higher than you would expect because so many more market participants are playing games.

 3. INSTITUTIONAL BUYING AND SELLING IS BETTER

When I began trading and there was a big buy order, say 50,000 shares, the buyer just cleared the offers until the order was filled. Today, we see much better buying.

Almost all big hedge funds or mutual funds possess passive algorithmic programs that can slowly fill an order, 100 shares at a time, without making any noise. The result is a slower up move.

And after an uptrend has been created, these buyers may just turn off their algorithms, let a stock drop and then restart the passive algorithms. Because of this, momentum trading has become less profitable at times and more difficult. (Again, a high VIX could change this.)

Adapt: Focus on buying into pullbacks. Wait for strong stocks—those that are trending up on an intraday basis—to pull back before you enter positions.

 4. FALSE BUY AND SELL SIGNALS WILL BE CREATED

False buy and sell signals may lead you to place trades that are nothing more than programs gone wild. On select days, HFT programs can go at each other like punks in a bar fight. A stock may triple its volume on a given day, close above previous resistance and signal a long to you. But remember, this may just be the bots doing their thing.

Adapt: Watch the Level II quotes to confirm information. Before entering a position, make sure you see real buyers and sellers on the tape.

 5. IT CAN BE DIFFICULT TO GET STOCKS AT CERTAIN PRICES

As high-frequency trading programs chisel your bids and offers, you have to recognize the situation. See my AIG rant at the beginning of the article.

Adapt: Place your orders at the prices you want and go make a sandwich. Don’t get lured into a match you cannot win against HFTs. Play your game on your terms or sit on your hands.

6. SLIPPAGE WILL INCREASE

Slippage is greater due to HFT, which seems contradictory to all that supposed new liquidity in the market.

Say you are long 1,000 shares and seek to exit a stock if it trades below an arbitrary price of $50.50 with a stop order at $50.49. The stock touches $50.49, and you expect this to be your fill price with some slight slippage to $50.48 and $50.47. Only it isn’t. It’s 100 shares at $50.48, 100 at $50.47, 200 at $50.45, 100 at $50.43, 100 at $50.41, 200 at $50.38 and, finally, 200 shares at $50.36.

Doing the math, that is an extra $63 out of your pocket that you were not expecting. And that was just one trade!

The programs are so fast and sensitive that they drop the bids for lower prices when they sense a sell order. Where you may have exited the whole thing for no lower than $50.48 before, HFT has now made you take another trip to the ATM after its latest pickpocket.

Adapt: Reduce your manual stops and enter limit orders. Limit orders give you the control over your exit price, minimizing the likelihood of slippage.

7. MORE OF THE V

One trader at my firm always chirps the following: “Beware of the V move.”

Trading 101 teaches us that when stocks break from an important level that they should continue in the direction of the break. For example, I was trading Visa (V) in October, and $77 was an important intraday level. Visa consolidated near $77 but then broke to the downside quickly trading to $76.

The fundamental trading play is to short: If V pops after it has failed at $77, then you short. Generally, if Visa trades down to $76 and jumps to $76.50, this is an opportunity to add to a short position. I saw what I needed, and the sellers beat the buyers at $77. Visa should have trended lower.

Well not so much in this market with these programs and in this trade. As Figure 3 demonstrates, Visa went right back to the battle area of $77. The V pattern can happen from time to time, but the frequency with which it occurs in today’s market has grown. When some of the HFT strategies are done cutting each other after this technical breakdown, then the stock just goes back to where it started. It makes no sense, but it’s reality.

Adapt: Be mentally agile while you trade. When your stock is trending, consider the possibility that a V move may be about to make an unwelcome visit.

Link:
Adapt to Survive High-Frequency Trading, Mike Bellafiore, Stocks, Futures, and Options Magazine, January 2010.

The U.S. stock market is poised to end 2009 with a comeback of historic proportions, with the Dow Jones Industrial Average up 61% from its March nadir and 20% for the year.

But the history of such rebounds suggests the biggest gains may already be over, making it hard to expect a blockbuster 2010….

… Early in the rally, the gains were fueled by the realization that the financial system and the economy would escape total meltdown. But then signs of an improving economy and company earnings that consistently bettered expectations took hold, helping drive market gains.

The biggest worry for many investors is whether the rise in stocks reflects an overly optimistic view of what lies ahead for the economy.

For the stock rally to endure, investors say, the U.S. economy must avoid slipping back into recession — a “double-dip” scenario — and start adding jobs. Companies also will need to deliver earnings fueled by better sales, rather than by the aggressive cost-cutting that many undertook in 2009….

You can read the whole thing through the link below.

Last year around this time, I had a conversation with a Private Equity Director over dinner about the stock market. He was convinced that we would end this year lower. I was a bit more optimistic and convinced my argument was better than his. It looks like I win. =P

Link: 2009: Banner Year for Stocks, Joanne Slater, Wall Street Journal, 12/31/09.

Your Majesties, Your Royal Highnesses, distinguished members of the Norwegian Nobel Committee, citizens of America, and citizens of the world:

I receive this honor with deep gratitude and great humility. It is an award that speaks to our highest aspirations — that for all the cruelty and hardship of our world, we are not mere prisoners of fate. Our actions matter, and can bend history in the direction of justice.

And yet I would be remiss if I did not acknowledge the considerable controversy that your generous decision has generated. (Laughter.) In part, this is because I am at the beginning, and not the end, of my labors on the world stage. Compared to some of the giants of history who’ve received this prize — Schweitzer and King; Marshall and Mandela — my accomplishments are slight. And then there are the men and women around the world who have been jailed and beaten in the pursuit of justice; those who toil in humanitarian organizations to relieve suffering; the unrecognized millions whose quiet acts of courage and compassion inspire even the most hardened cynics. I cannot argue with those who find these men and women — some known, some obscure to all but those they help — to be far more deserving of this honor than I.

But perhaps the most profound issue surrounding my receipt of this prize is the fact that I am the Commander-in-Chief of the military of a nation in the midst of two wars. One of these wars is winding down. The other is a conflict that America did not seek; one in which we are joined by 42 other countries — including Norway — in an effort to defend ourselves and all nations from further attacks.

Still, we are at war, and I’m responsible for the deployment of thousands of young Americans to battle in a distant land. Some will kill, and some will be killed. And so I come here with an acute sense of the costs of armed conflict — filled with difficult questions about the relationship between war and peace, and our effort to replace one with the other.

Now these questions are not new. War, in one form or another, appeared with the first man. At the dawn of history, its morality was not questioned; it was simply a fact, like drought or disease — the manner in which tribes and then civilizations sought power and settled their differences.

And over time, as codes of law sought to control violence within groups, so did philosophers and clerics and statesmen seek to regulate the destructive power of war. The concept of a “just war” emerged, suggesting that war is justified only when certain conditions were met: if it is waged as a last resort or in self-defense; if the force used is proportional; and if, whenever possible, civilians are spared from violence.

Of course, we know that for most of history, this concept of “just war” was rarely observed. The capacity of human beings to think up new ways to kill one another proved inexhaustible, as did our capacity to exempt from mercy those who look different or pray to a different God. Wars between armies gave way to wars between nations — total wars in which the distinction between combatant and civilian became blurred. In the span of 30 years, such carnage would twice engulf this continent. And while it’s hard to conceive of a cause more just than the defeat of the Third Reich and the Axis powers, World War II was a conflict in which the total number of civilians who died exceeded the number of soldiers who perished.

In the wake of such destruction, and with the advent of the nuclear age, it became clear to victor and vanquished alike that the world needed institutions to prevent another world war. And so, a quarter century after the United States Senate rejected the League of Nations — an idea for which Woodrow Wilson received this prize — America led the world in constructing an architecture to keep the peace: a Marshall Plan and a United Nations, mechanisms to govern the waging of war, treaties to protect human rights, prevent genocide, restrict the most dangerous weapons.

In many ways, these efforts succeeded. Yes, terrible wars have been fought, and atrocities committed. But there has been no Third World War. The Cold War ended with jubilant crowds dismantling a wall. Commerce has stitched much of the world together. Billions have been lifted from poverty. The ideals of liberty and self-determination, equality and the rule of law have haltingly advanced. We are the heirs of the fortitude and foresight of generations past, and it is a legacy for which my own country is rightfully proud.

And yet, a decade into a new century, this old architecture is buckling under the weight of new threats. The world may no longer shudder at the prospect of war between two nuclear superpowers, but proliferation may increase the risk of catastrophe. Terrorism has long been a tactic, but modern technology allows a few small men with outsized rage to murder innocents on a horrific scale.

Moreover, wars between nations have increasingly given way to wars within nations. The resurgence of ethnic or sectarian conflicts; the growth of secessionist movements, insurgencies, and failed states — all these things have increasingly trapped civilians in unending chaos. In today’s wars, many more civilians are killed than soldiers; the seeds of future conflict are sown, economies are wrecked, civil societies torn asunder, refugees amassed, children scarred.

I do not bring with me today a definitive solution to the problems of war. What I do know is that meeting these challenges will require the same vision, hard work, and persistence of those men and women who acted so boldly decades ago. And it will require us to think in new ways about the notions of just war and the imperatives of a just peace.

We must begin by acknowledging the hard truth: We will not eradicate violent conflict in our lifetimes. There will be times when nations — acting individually or in concert — will find the use of force not only necessary but morally justified.

I make this statement mindful of what Martin Luther King Jr. said in this same ceremony years ago: “Violence never brings permanent peace. It solves no social problem: it merely creates new and more complicated ones.” As someone who stands here as a direct consequence of Dr. King’s life work, I am living testimony to the moral force of non-violence. I know there’s nothing weak — nothing passive — nothing naïve — in the creed and lives of Gandhi and King.

But as a head of state sworn to protect and defend my nation, I cannot be guided by their examples alone. I face the world as it is, and cannot stand idle in the face of threats to the American people. For make no mistake: Evil does exist in the world. A non-violent movement could not have halted Hitler’s armies. Negotiations cannot convince al Qaeda’s leaders to lay down their arms. To say that force may sometimes be necessary is not a call to cynicism — it is a recognition of history; the imperfections of man and the limits of reason.

I raise this point, I begin with this point because in many countries there is a deep ambivalence about military action today, no matter what the cause. And at times, this is joined by a reflexive suspicion of America, the world’s sole military superpower.

But the world must remember that it was not simply international institutions — not just treaties and declarations — that brought stability to a post-World War II world. Whatever mistakes we have made, the plain fact is this: The United States of America has helped underwrite global security for more than six decades with the blood of our citizens and the strength of our arms. The service and sacrifice of our men and women in uniform has promoted peace and prosperity from Germany to Korea, and enabled democracy to take hold in places like the Balkans. We have borne this burden not because we seek to impose our will. We have done so out of enlightened self-interest — because we seek a better future for our children and grandchildren, and we believe that their lives will be better if others’ children and grandchildren can live in freedom and prosperity.

So yes, the instruments of war do have a role to play in preserving the peace. And yet this truth must coexist with another — that no matter how justified, war promises human tragedy. The soldier’s courage and sacrifice is full of glory, expressing devotion to country, to cause, to comrades in arms. But war itself is never glorious, and we must never trumpet it as such.

So part of our challenge is reconciling these two seemingly inreconcilable truths — that war is sometimes necessary, and war at some level is an expression of human folly. Concretely, we must direct our effort to the task that President Kennedy called for long ago. “Let us focus,” he said, “on a more practical, more attainable peace, based not on a sudden revolution in human nature but on a gradual evolution in human institutions.” A gradual evolution of human institutions.

What might this evolution look like? What might these practical steps be?

To begin with, I believe that all nations — strong and weak alike — must adhere to standards that govern the use of force. I — like any head of state — reserve the right to act unilaterally if necessary to defend my nation. Nevertheless, I am convinced that adhering to standards, international standards, strengthens those who do, and isolates and weakens those who don’t.

The world rallied around America after the 9/11 attacks, and continues to support our efforts in Afghanistan, because of the horror of those senseless attacks and the recognized principle of self-defense. Likewise, the world recognized the need to confront Saddam Hussein when he invaded Kuwait — a consensus that sent a clear message to all about the cost of aggression.

Furthermore, America — in fact, no nation — can insist that others follow the rules of the road if we refuse to follow them ourselves. For when we don’t, our actions appear arbitrary and undercut the legitimacy of future interventions, no matter how justified.

And this becomes particularly important when the purpose of military action extends beyond self-defense or the defense of one nation against an aggressor. More and more, we all confront difficult questions about how to prevent the slaughter of civilians by their own government, or to stop a civil war whose violence and suffering can engulf an entire region.

I believe that force can be justified on humanitarian grounds, as it was in the Balkans, or in other places that have been scarred by war. Inaction tears at our conscience and can lead to more costly intervention later. That’s why all responsible nations must embrace the role that militaries with a clear mandate can play to keep the peace.

America’s commitment to global security will never waver. But in a world in which threats are more diffuse, and missions more complex, America cannot act alone. America alone cannot secure the peace. This is true in Afghanistan. This is true in failed states like Somalia, where terrorism and piracy is joined by famine and human suffering. And sadly, it will continue to be true in unstable regions for years to come.

The leaders and soldiers of NATO countries, and other friends and allies, demonstrate this truth through the capacity and courage they’ve shown in Afghanistan. But in many countries, there is a disconnect between the efforts of those who serve and the ambivalence of the broader public. I understand why war is not popular, but I also know this: The belief that peace is desirable is rarely enough to achieve it. Peace requires responsibility. Peace entails sacrifice. That’s why NATO continues to be indispensable. That’s why we must strengthen U.N. and regional peacekeeping, and not leave the task to a few countries. That’s why we honor those who return home from peacekeeping and training abroad to Oslo and Rome; to Ottawa and Sydney; to Dhaka and Kigali — we honor them not as makers of war, but of wagers — but as wagers of peace.

Let me make one final point about the use of force. Even as we make difficult decisions about going to war, we must also think clearly about how we fight it. The Nobel Committee recognized this truth in awarding its first prize for peace to Henry Dunant — the founder of the Red Cross, and a driving force behind the Geneva Conventions.

Where force is necessary, we have a moral and strategic interest in binding ourselves to certain rules of conduct. And even as we confront a vicious adversary that abides by no rules, I believe the United States of America must remain a standard bearer in the conduct of war. That is what makes us different from those whom we fight. That is a source of our strength. That is why I prohibited torture. That is why I ordered the prison at Guantanamo Bay closed. And that is why I have reaffirmed America’s commitment to abide by the Geneva Conventions. We lose ourselves when we compromise the very ideals that we fight to defend. (Applause.) And we honor — we honor those ideals by upholding them not when it’s easy, but when it is hard.

I have spoken at some length to the question that must weigh on our minds and our hearts as we choose to wage war. But let me now turn to our effort to avoid such tragic choices, and speak of three ways that we can build a just and lasting peace.

First, in dealing with those nations that break rules and laws, I believe that we must develop alternatives to violence that are tough enough to actually change behavior — for if we want a lasting peace, then the words of the international community must mean something. Those regimes that break the rules must be held accountable. Sanctions must exact a real price. Intransigence must be met with increased pressure — and such pressure exists only when the world stands together as one.

One urgent example is the effort to prevent the spread of nuclear weapons, and to seek a world without them. In the middle of the last century, nations agreed to be bound by a treaty whose bargain is clear: All will have access to peaceful nuclear power; those without nuclear weapons will forsake them; and those with nuclear weapons will work towards disarmament. I am committed to upholding this treaty. It is a centerpiece of my foreign policy. And I’m working with President Medvedev to reduce America and Russia’s nuclear stockpiles.

But it is also incumbent upon all of us to insist that nations like Iran and North Korea do not game the system. Those who claim to respect international law cannot avert their eyes when those laws are flouted. Those who care for their own security cannot ignore the danger of an arms race in the Middle East or East Asia. Those who seek peace cannot stand idly by as nations arm themselves for nuclear war.

The same principle applies to those who violate international laws by brutalizing their own people. When there is genocide in Darfur, systematic rape in Congo, repression in Burma — there must be consequences. Yes, there will be engagement; yes, there will be diplomacy — but there must be consequences when those things fail. And the closer we stand together, the less likely we will be faced with the choice between armed intervention and complicity in oppression.

This brings me to a second point — the nature of the peace that we seek. For peace is not merely the absence of visible conflict. Only a just peace based on the inherent rights and dignity of every individual can truly be lasting.

It was this insight that drove drafters of the Universal Declaration of Human Rights after the Second World War. In the wake of devastation, they recognized that if human rights are not protected, peace is a hollow promise.

And yet too often, these words are ignored. For some countries, the failure to uphold human rights is excused by the false suggestion that these are somehow Western principles, foreign to local cultures or stages of a nation’s development. And within America, there has long been a tension between those who describe themselves as realists or idealists — a tension that suggests a stark choice between the narrow pursuit of interests or an endless campaign to impose our values around the world.

I reject these choices. I believe that peace is unstable where citizens are denied the right to speak freely or worship as they please; choose their own leaders or assemble without fear. Pent-up grievances fester, and the suppression of tribal and religious identity can lead to violence. We also know that the opposite is true. Only when Europe became free did it finally find peace. America has never fought a war against a democracy, and our closest friends are governments that protect the rights of their citizens. No matter how callously defined, neither America’s interests — nor the world’s — are served by the denial of human aspirations.

So even as we respect the unique culture and traditions of different countries, America will always be a voice for those aspirations that are universal. We will bear witness to the quiet dignity of reformers like Aung Sang Suu Kyi; to the bravery of Zimbabweans who cast their ballots in the face of beatings; to the hundreds of thousands who have marched silently through the streets of Iran. It is telling that the leaders of these governments fear the aspirations of their own people more than the power of any other nation. And it is the responsibility of all free people and free nations to make clear that these movements — these movements of hope and history — they have us on their side.

Let me also say this: The promotion of human rights cannot be about exhortation alone. At times, it must be coupled with painstaking diplomacy. I know that engagement with repressive regimes lacks the satisfying purity of indignation. But I also know that sanctions without outreach — condemnation without discussion — can carry forward only a crippling status quo. No repressive regime can move down a new path unless it has the choice of an open door.

In light of the Cultural Revolution’s horrors, Nixon’s meeting with Mao appeared inexcusable — and yet it surely helped set China on a path where millions of its citizens have been lifted from poverty and connected to open societies. Pope John Paul’s engagement with Poland created space not just for the Catholic Church, but for labor leaders like Lech Walesa. Ronald Reagan’s efforts on arms control and embrace of perestroika not only improved relations with the Soviet Union, but empowered dissidents throughout Eastern Europe. There’s no simple formula here. But we must try as best we can to balance isolation and engagement, pressure and incentives, so that human rights and dignity are advanced over time.

Third, a just peace includes not only civil and political rights — it must encompass economic security and opportunity. For true peace is not just freedom from fear, but freedom from want.

It is undoubtedly true that development rarely takes root without security; it is also true that security does not exist where human beings do not have access to enough food, or clean water, or the medicine and shelter they need to survive. It does not exist where children can’t aspire to a decent education or a job that supports a family. The absence of hope can rot a society from within.

And that’s why helping farmers feed their own people — or nations educate their children and care for the sick — is not mere charity. It’s also why the world must come together to confront climate change. There is little scientific dispute that if we do nothing, we will face more drought, more famine, more mass displacement — all of which will fuel more conflict for decades. For this reason, it is not merely scientists and environmental activists who call for swift and forceful action — it’s military leaders in my own country and others who understand our common security hangs in the balance.

Agreements among nations. Strong institutions. Support for human rights. Investments in development. All these are vital ingredients in bringing about the evolution that President Kennedy spoke about. And yet, I do not believe that we will have the will, the determination, the staying power, to complete this work without something more — and that’s the continued expansion of our moral imagination; an insistence that there’s something irreducible that we all share.

As the world grows smaller, you might think it would be easier for human beings to recognize how similar we are; to understand that we’re all basically seeking the same things; that we all hope for the chance to live out our lives with some measure of happiness and fulfillment for ourselves and our families.

And yet somehow, given the dizzying pace of globalization, the cultural leveling of modernity, it perhaps comes as no surprise that people fear the loss of what they cherish in their particular identities — their race, their tribe, and perhaps most powerfully their religion. In some places, this fear has led to conflict. At times, it even feels like we’re moving backwards. We see it in the Middle East, as the conflict between Arabs and Jews seems to harden. We see it in nations that are torn asunder by tribal lines.

And most dangerously, we see it in the way that religion is used to justify the murder of innocents by those who have distorted and defiled the great religion of Islam, and who attacked my country from Afghanistan. These extremists are not the first to kill in the name of God; the cruelties of the Crusades are amply recorded. But they remind us that no Holy War can ever be a just war. For if you truly believe that you are carrying out divine will, then there is no need for restraint — no need to spare the pregnant mother, or the medic, or the Red Cross worker, or even a person of one’s own faith. Such a warped view of religion is not just incompatible with the concept of peace, but I believe it’s incompatible with the very purpose of faith — for the one rule that lies at the heart of every major religion is that we do unto others as we would have them do unto us.

Adhering to this law of love has always been the core struggle of human nature. For we are fallible. We make mistakes, and fall victim to the temptations of pride, and power, and sometimes evil. Even those of us with the best of intentions will at times fail to right the wrongs before us.

But we do not have to think that human nature is perfect for us to still believe that the human condition can be perfected. We do not have to live in an idealized world to still reach for those ideals that will make it a better place. The non-violence practiced by men like Gandhi and King may not have been practical or possible in every circumstance, but the love that they preached — their fundamental faith in human progress — that must always be the North Star that guides us on our journey.

For if we lose that faith — if we dismiss it as silly or naïve; if we divorce it from the decisions that we make on issues of war and peace — then we lose what’s best about humanity. We lose our sense of possibility. We lose our moral compass.

Like generations have before us, we must reject that future. As Dr. King said at this occasion so many years ago, “I refuse to accept despair as the final response to the ambiguities of history. I refuse to accept the idea that the ‘isness’ of man’s present condition makes him morally incapable of reaching up for the eternal ‘oughtness’ that forever confronts him.”

Let us reach for the world that ought to be — that spark of the divine that still stirs within each of our souls. (Applause.)

Somewhere today, in the here and now, in the world as it is, a soldier sees he’s outgunned, but stands firm to keep the peace. Somewhere today, in this world, a young protestor awaits the brutality of her government, but has the courage to march on. Somewhere today, a mother facing punishing poverty still takes the time to teach her child, scrapes together what few coins she has to send that child to school — because she believes that a cruel world still has a place for that child’s dreams.

Let us live by their example. We can acknowledge that oppression will always be with us, and still strive for justice. We can admit the intractability of deprivation, and still strive for dignity. Clear-eyed, we can understand that there will be war, and still strive for peace. We can do that — for that is the story of human progress; that’s the hope of all the world; and at this moment of challenge, that must be our work here on Earth.

Thank you very much. (Applause.)

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Obama’s Big Sellout

The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway.

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?

Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

How did we get here? It started just moments after the election — and almost nobody noticed.

‘Just look at the timeline of the Citigroup deal,” says one leading Democratic consultant. “Just look at it. It’s fucking amazing. Amazing! And nobody said a thing about it.”

Barack Obama was still just the president-elect when it happened, but the revolting and inexcusable $306 billion bailout that Citigroup received was the first major act of his presidency. In order to grasp the full horror of what took place, however, one needs to go back a few weeks before the actual bailout — to November 5th, 2008, the day after Obama’s election.

That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar — former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett — the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama’s chief advisers during the campaign, didn’t make the cut. Neither did Karen Kornbluh, who had served as Obama’s policy director and was instrumental in crafting the Democratic Party’s platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive “a Nobel Prize — for evil.”

But come November 5th, both were banished from Obama’s inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president’s new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama’s biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama’s economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin’s son. At the time, Jamie’s dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments.

Now here’s where it gets really interesting. It’s three weeks after the election. You have a lame-duck president in George W. Bush — still nominally in charge, but in reality already halfway to the golf-and-O’Doul’s portion of his career and more than happy to vacate the scene. Left to deal with the still-reeling economy are lame-duck Treasury Secretary Henry Paulson, a former head of Goldman Sachs, and New York Fed chief Timothy Geithner, who served under Bob Rubin in the Clinton White House. Running Obama’s economic team are a still-employed Citigroup executive and the son of another Citigroup executive, who himself joined Obama’s transition team that same month.

So on November 23rd, 2008, a deal is announced in which the government will bail out Rubin’s messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees. It is a terrible deal for the government, almost universally panned by all serious economists, an outrage to anyone who pays taxes. Under the deal, the bank gets $20 billion in cash, on top of the $25 billion it had already received just weeks before as part of the Troubled Asset Relief Program. But that’s just the appetizer. The government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets, many of them those toxic CDOs that Rubin had pushed Citi to invest in. No Citi executives are replaced, and few restrictions are placed on their compensation. It’s the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin’s fuck-up-rich tenure at Citi. “If you had any doubts at all about the primacy of Wall Street over Main Street,” former labor secretary Robert Reich declares when the bailout is announced, “your doubts should be laid to rest.”

It is bad enough that one of Bob Rubin’s former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama’s Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government’s bailout generosity would not die with George W. Bush and Hank Paulson. “Geithner assures a smooth transition between the Bush administration and that of Obama, because he’s already co-managing what’s happening now,” observed Stephen Leeb, president of Leeb Capital Management.

Left unnoticed, however, was the fact that Geithner had been hired by a sitting Citigroup executive who still had a big bonus coming despite his proximity to Obama. In January 2009, just over a month after the bailout, Citigroup paid Froman a year-end bonus of $2.25 million. But as outrageous as it was, that payoff would prove to be chump change for the banker crowd, who were about to get everything they wanted — and more — from the new president.

The irony of Bob Rubin: He’s an unapologetic arch-capitalist demagogue whose very career is proof that a free-market meritocracy is a myth. Much like Alan Greenspan, a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters, Rubin has been held in awe by the American political elite for nearly 20 years despite having fucked up virtually every project he ever got his hands on. He went from running Goldman Sachs (1990-1992) to the Clinton White House (1993-1999) to Citigroup (1999-2009), leaving behind a trail of historic gaffes that somehow boosted his stature every step of the way.

As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year’s financial crisis: the repeal of the Glass-Steagall Act (passed specifically to legalize the Citigroup megamerger) and the deregulation of the derivatives market. Having set that time bomb, Rubin left government to join Citi, which promptly expressed its gratitude by giving him $126 million in compensation over the next eight years (they don’t call it bribery in this country when they give you the money post factum). After urging management to amp up its risky investments in toxic vehicles, a strategy that very nearly destroyed the company, Rubin blamed Citi’s board for his screw-ups and complained that he had been underpaid to boot. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said.

Despite being perhaps more responsible for last year’s crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around.

There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions — so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!

At Treasury, there is Geithner, who worked under Rubin in the Clinton years. Serving as Geithner’s “counselor” — a made-up post not subject to Senate confirmation — is Lewis Alexander, the former chief economist of Citigroup, who advised Citi back in 2007 that the upcoming housing crash was nothing to worry about. Two other top Geithner “counselors” — Gene Sperling and Lael Brainard — worked under Rubin at the National Economic Council, the key group that coordinates all economic policymaking for the White House.

As director of the NEC, meanwhile, Obama installed economic czar Larry Summers, who had served as Rubin’s protégé at Treasury. Just below Summers is Jason Furman, who worked for Rubin in the Clinton White House and was one of the first directors of Rubin’s Hamilton Project. The appointment of Furman — a persistent advocate of free-trade agreements like NAFTA and the author of droolingly pro-globalization reports with titles like “Walmart: A Progressive Success Story” — provided one of the first clues that Obama had only been posturing when he promised crowds of struggling Midwesterners during the campaign that he would renegotiate NAFTA, which facilitated the flight of blue-collar jobs to other countries. “NAFTA’s shortcomings were evident when signed, and we must now amend the agreement to fix them,” Obama declared. A few months after hiring Furman to help shape its economic policy, however, the White House quietly quashed any talk of renegotiating the trade deal. “The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement,” U.S. Trade Representative Ronald Kirk told reporters in a little-publicized conference call last April.

The announcement was not so surprising, given who Obama hired to serve alongside Furman at the NEC: management consultant Diana Farrell, who worked under Rubin at Goldman Sachs. In 2003, Farrell was the author of an infamous paper in which she argued that sending American jobs overseas might be “as beneficial to the U.S. as to the destination country, probably more so.”

Joining Summers, Furman and Farrell at the NEC is Froman, who by then had been formally appointed to a unique position: He is not only Obama’s international finance adviser at the National Economic Council, he simultaneously serves as deputy national security adviser at the National Security Council. The twin posts give Froman a direct line to the president, putting him in a position to coordinate Obama’s international economic policy during a crisis. He’ll have help from David Lipton, another joint appointee to the economics and security councils who worked with Rubin at Treasury and Citigroup, and from Jacob Lew, a former Citi colleague of Rubin’s whom Obama named as deputy director at the State Department to focus on international finance.

Over at the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading, Obama appointed Gary Gensler, a former Goldman banker who worked under Rubin in the Clinton White House. Gensler had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented deregulation of derivative instruments like CDOs and credit-default swaps that played such a big role in cratering the economy last year. And as head of the powerful Office of Management and Budget, Obama named Peter Orszag, who served as the first director of Rubin’s Hamilton Project. Orszag once succinctly summed up the project’s ideology as a sort of liberal spin on trickle-down Reaganomics: “Market competition and globalization generate significant economic benefits.”

Taken together, the rash of appointments with ties to Bob Rubin may well represent the most sweeping influence by a single Wall Street insider in the history of government. “Rather than having a team of rivals, they’ve got a team of Rubins,” says Steven Clemons, director of the American Strategy Program at the New America Foundation. “You see that in policy choices that have resuscitated — but not reformed — Wall Street.”

While Rubin’s allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama’s meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America’s never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President’s Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel “Siberia.”

Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had “excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system.” That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn’t even meet for the first time until last May. The lone progressive in the White House, economist Jared Bernstein, holds the impressive-sounding title of chief economist and national policy adviser — except that the man he is advising is Joe Biden, who seems more interested in foreign policy than financial reform.

The significance of all of these appointments isn’t that the Wall Street types are now in a position to provide direct favors to their former employers. It’s that, with one or two exceptions, they collectively offer a microcosm of what the Democratic Party has come to stand for in the 21st century. Virtually all of the Rubinites brought in to manage the economy under Obama share the same fundamental political philosophy carefully articulated for years by the Hamilton Project: Expand the safety net to protect the poor, but let Wall Street do whatever it wants. “Bob Rubin, these guys, they’re classic limousine liberals,” says David Sirota, a former Democratic strategist. “These are basically people who have made shitloads of money in the speculative economy, but they want to call themselves good Democrats because they’re willing to give a little more to the poor. That’s the model for this Democratic Party: Let the rich do their thing, but give a fraction more to everyone else.”

Even the members of Obama’s economic team who have spent most of their lives in public office have managed to make small fortunes on Wall Street. The president’s economic czar, Larry Summers, was paid more than $5.2 million in 2008 alone as a managing director of the hedge fund D.E. Shaw, and pocketed an additional $2.7 million in speaking fees from a smorgasbord of future bailout recipients, including Goldman Sachs and Citigroup. At Treasury, Geithner’s aide Gene Sperling earned a staggering $887,727 from Goldman Sachs last year for performing the punch-line-worthy service of “advice on charitable giving.” Sperling’s fellow Treasury appointee, Mark Patterson, received $637,492 as a full-time lobbyist for Goldman Sachs, and another top Geithner aide, Lee Sachs, made more than $3 million working for a New York hedge fund called Mariner Investment Group. The list goes on and on. Even Obama’s chief of staff, Rahm Emanuel, who has been out of government for only 30 months of his adult life, managed to collect $18 million during his private-sector stint with a Wall Street firm called Wasserstein-Perella.

The point is that an economic team made up exclusively of callous millionaire-assholes has absolutely zero interest in reforming the gamed system that made them rich in the first place. “You can’t expect these people to do anything other than protect Wall Street,” says Rep. Cliff Stearns, a Republican from Florida. That thinking was clear from Obama’s first address to Congress, when he stressed the importance of getting Americans to borrow like crazy again. “Credit is the lifeblood of the economy,” he declared, pledging “the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money.” A president elected on a platform of change was announcing, in so many words, that he planned to change nothing fundamental when it came to the economy. Rather than doing what FDR had done during the Great Depression and institute stringent new rules to curb financial abuses, Obama planned to institutionalize the policy, firmly established during the Bush years, of keeping a few megafirms rich at the expense of everyone else.

Obama hasn’t always toed the Rubin line when it comes to economic policy. Despite being surrounded by a team that is powerfully opposed to deficit spending — balanced budgets and deficit reduction have always been central to the Rubin way of thinking — Obama came out of the gate with a huge stimulus plan designed to kick-start the economy and address the job losses brought on by the 2008 crisis. “You have to give him credit there,” says Sen. Bernie Sanders, an advocate of using government resources to address unemployment. “It’s a very significant piece of legislation, and $787 billion is a lot of money.”

But whatever jobs the stimulus has created or preserved so far — 640,329, according to an absurdly precise and already debunked calculation by the White House — the aid that Obama has provided to real people has been dwarfed in size and scope by the taxpayer money that has been handed over to America’s financial giants. “They spent $75 billion on mortgage relief, but come on — look at how much they gave Wall Street,” says a leading Democratic strategist. Neil Barofsky, the inspector general charged with overseeing TARP, estimates that the total cost of the Wall Street bailouts could eventually reach $23.7 trillion. And while the government continues to dole out big money to big banks, Obama and his team of Rubinites have done almost nothing to reform the warped financial system responsible for imploding the global economy in the first place.

The push for reform seemed to get off to a promising start. In the House, the charge was led by Rep. Barney Frank, the outspoken chair of the House Financial Services Committee, who emerged during last year’s Bush bailouts as a sharp-tongued critic of Wall Street. Back when Obama was still a senator, he and Frank even worked together to introduce a populist bill targeting executive compensation. Last spring, with the economy shattered, Frank began to hold hearings on a host of reforms, crafted with significant input from the White House, that initially contained some very good elements. There were measures to curb abusive credit-card lending, prevent banks from charging excessive fees, force publicly traded firms to conduct meaningful risk assessment and allow shareholders to vote on executive compensation. There were even measures to crack down on risky derivatives and to bar firms like AIG from picking their own regulators.

Then the committee went to work — and the loopholes started to appear.

The most notable of these came in the proposal to regulate derivatives like credit-default swaps. Even Gary Gensler, the former Goldmanite whom Obama put in charge of commodities regulation, was pushing to make these normally obscure investments more transparent, enabling regulators and investors to identify speculative bubbles sooner. But in August, a month after Gensler came out in favor of reform, Geithner slapped him down by issuing a 115-page paper called “Improvements to Regulation of Over-the-Counter Derivatives Markets” that called for a series of exemptions for “end users” — i.e., almost all of the clients who buy derivatives from banks like Goldman Sachs and Morgan Stanley. Even more stunning, Frank’s bill included a blanket exception to the rules for currency swaps traded on foreign exchanges — the very instruments that had triggered the Long-Term Capital Management meltdown in the late 1990s.

Given that derivatives were at the heart of the financial meltdown last year, the decision to gut derivatives reform sent some legislators howling with disgust. Sen. Maria Cantwell of Washington, who estimates that as much as 90 percent of all derivatives could remain unregulated under the new rules, went so far as to say the new laws would make things worse. “Current law with its loopholes might actually be better than these loopholes,” she said.

An even bigger loophole could do far worse damage to the economy. Under the original bill, the Securities and Exchange Commission and the Commodity Futures Trading Commission were granted the power to ban any credit swaps deemed to be “detrimental to the stability of a financial market or of participants in a financial market.” By the time Frank’s committee was done with the bill, however, the SEC and the CFTC were left with no authority to do anything about abusive derivatives other than to send a report to Congress. The move, in effect, would leave the kind of credit-default swaps that brought down AIG largely unregulated.

Why would leading congressional Democrats, working closely with the Obama administration, agree to leave one of the riskiest of all financial instruments unregulated, even before the issue could be debated by the House? “There was concern that a broad grant to ban abusive swaps would be unsettling,” Frank explained.

Unsettling to whom? Certainly not to you and me — but then again, actual people are not really part of the calculus when it comes to finance reform. According to those close to the markup process, Frank’s committee inserted loopholes under pressure from “constituents” — by which they mean anyone “who can afford a lobbyist,” says Michael Greenberger, the former head of trading at the CFTC under Clinton.

This pattern would repeat itself over and over again throughout the fall. Take the centerpiece of Obama’s reform proposal: the much-ballyhooed creation of a Consumer Finance Protection Agency to protect the little guy from abusive bank practices. Like the derivatives bill, the debate over the CFPA ended up being dominated by horse-trading for loopholes. In the end, Frank not only agreed to exempt some 8,000 of the nation’s 8,200 banks from oversight by the castrated-in-advance agency, leaving most consumers unprotected, he allowed the committee to pass the exemption by voice vote, meaning that congressmen could side with the banks without actually attaching their name to their “Aye.”

To win the support of conservative Democrats, Frank also backed down on another issue that seemed like a slam-dunk: a requirement that all banks offer so-called “plain vanilla” products, such as no-frills mortgages, to give consumers an alternative to deceptive, “fully loaded” deals like adjustable-rate loans. Frank’s last-minute reversal — made in consultation with Geithner — was such a transparent giveaway to the banks that even an economics writer for Reuters, hardly a far-left source, called it “the beginning of the end of meaningful regulatory reform.”

But the real kicker came when Frank’s committee took up what is known as “resolution authority” — government-speak for “Who the hell is in charge the next time somebody at AIG or Lehman Brothers decides to vaporize the economy?” What the committee initially introduced bore a striking resemblance to a proposal written by Geithner earlier in the summer. A masterpiece of legislative chicanery, the measure would have given the White House permanent and unlimited authority to execute future bailouts of megaconglomerates like Citigroup and Bear Stearns.

Democrats pushed the move as politically uncontroversial, claiming that the bill will force Wall Street to pay for any future bailouts and “doesn’t use taxpayer money.” In reality, that was complete bullshit. The way the bill was written, the FDIC would basically borrow money from the Treasury — i.e., from ordinary taxpayers — to bail out any of the nation’s two dozen or so largest financial companies that the president deems in need of government assistance. After the bailout is executed, the president would then levy a tax on financial firms with assets of more than $10 billion to repay the Treasury within 60 months — unless, that is, the president decides he doesn’t want to! “They can wait indefinitely to repay,” says Rep. Brad Sherman of California, who dubbed the early version of the bill “TARP on steroids.”

The new bailout authority also mandated that future bailouts would not include an exchange of equity “in any form” — meaning that taxpayers would get nothing in return for underwriting Wall Street’s mistakes. Even more outrageous, it specifically prohibited Congress from rejecting tax giveaways to Wall Street, as it did last year, by removing all congressional oversight of future bailouts. In fact, the resolution authority proposed by Frank was such a slurpingly obvious blow job of Wall Street that it provoked a revolt among his own committee members, with junior Democrats waging a spirited fight that restored congressional oversight to future bailouts, requires equity for taxpayer money and caps assistance to troubled firms at $150 billion. Another amendment to force companies with more than $50 billion in assets to pay into a rainy-day fund for bailouts passed by a resounding vote of 52 to 17 — with the “Nays” all coming from Frank and other senior Democrats loyal to the administration.

Even as amended, however, resolution authority still has the potential to be truly revolutionary legislation. The Senate version still grants the president unlimited power over equity-free bailouts, and the amended House bill still institutionalizes a system of taxpayer support for the 20 to 25 biggest banks in the country. It would essentially grant economic immortality to those top few megafirms, who will continually gobble up greater and greater slices of market share as money becomes cheaper and cheaper for them to borrow (after all, who wouldn’t lend to a company permanently backstopped by the federal government?). It would also formalize the government’s role in the global economy and turn the presidential-appointment process into an important part of every big firm’s business strategy. “If this passes, the very first thing these companies are going to do in the future is ask themselves, ‘How do we make sure that one of our executives becomes assistant Treasury secretary?’” says Sherman.

On the Senate side, finance reform has yet to make it through the markup process, but there’s every reason to believe that its final bill will be as watered down as the House version by the time it comes to a vote. The original measure, drafted by chairman Christopher Dodd of the Senate Banking Committee, is surprisingly tough on Wall Street — a fact that almost everyone in town chalks up to Dodd’s desperation to shake the bad publicity he incurred by accepting a sweetheart mortgage from the notorious lender Countrywide. “He’s got to do the shake-his-fist-at-Wall Street thing because of his, you know, problems,” says a Democratic Senate aide. “So that’s why the bill is starting out kind of tough.”

The aide pauses. “The question is, though, what will it end up looking like?”

He’s right — that is the question. Because the way it works is that all of these great-sounding reforms get whittled down bit by bit as they move through the committee markup process, until finally there’s nothing left but the exceptions. In one example, a measure that would have forced financial companies to be more accountable to shareholders by holding elections for their entire boards every year has already been watered down to preserve the current system of staggered votes. In other cases, this being the Senate, loopholes were inserted before the debate even began: The Dodd bill included the exemption for foreign-currency swaps — a gift to Wall Street that only appeared in the Frank bill during the course of hearings — from the very outset.

The White House’s refusal to push for real reform stands in stark contrast to what it should be doing. It was left to Rep. Pete Kanjorski in the House and Bernie Sanders in the Senate to propose bills to break up the so-called “too big to fail” banks. Both measures would give Congress the power to dismantle those pseudomonopolies controlling almost the entire derivatives market (Goldman, Citi, Chase, Morgan Stanley and Bank of America control 95 percent of the $290 trillion over-the-counter market) and the consumer-lending market (Citi, Chase, Bank of America and Wells Fargo issue one of every two mortgages, and two of every three credit cards). On November 18th, in a move that demonstrates just how nervous Democrats are getting about the growing outrage over taxpayer giveaways, Barney Frank’s committee actually passed Kanjorski’s measure. “It’s a beginning,” Kanjorski says hopefully. “We’re on our way.” But even if the Senate follows suit, big banks could well survive — depending on whom the president appoints to sit on the new regulatory board mandated by the measure. An oversight body filled with executives of the type Obama has favored to date from Citi and Goldman Sachs hardly seems like a strong bet to start taking an ax to concentrated wealth. And given the new bailout provisions that provide these megafirms a market advantage over smaller banks (those Paul Volcker calls “too small to save”), the failure to break them up qualifies as a major policy decision with potentially disastrous consequences.

“They should be doing what Teddy Roosevelt did,” says Sanders. “They should be busting the trusts.”

That probably won’t happen anytime soon. But at a minimum, Obama should start on the road back to sanity by making a long-overdue move: firing Geithner. Not only are the mop-headed weenie of a Treasury secretary’s fingerprints on virtually all the gross giveaways in the new reform legislation, he’s a living symbol of the Rubinite gangrene crawling up the leg of this administration. Putting Geithner against the wall and replacing him with an actual human being not recently employed by a Wall Street megabank would do a lot to prove that Obama was listening this past Election Day. And while there are some who think Geithner is about to go — “he almost has to,” says one Democratic strategist — at the moment, the president is still letting Wall Street do his talking.

Morning, the National Mall, November 5th. A year to the day after Obama named Michael Froman to his transition team, his political “opposition” has descended upon the city. Republican teabaggers from all 50 states have showed up, a vast horde of frowning, pissed-off middle-aged white people with their idiot placards in hand, ready to do cultural battle. They are here to protest Obama’s “socialist” health care bill — you know, the one that even a bloodsucking capitalist interest group like Big Pharma spent $150 million to get passed.

These teabaggers don’t know that, however. All they know is that a big government program might end up using tax dollars to pay the medical bills of rapidly breeding Dominican immigrants. So they hate it. They’re also in a groove, knowing that at the polls a few days earlier, people like themselves had a big hand in ousting several Obama-allied Democrats, including a governor of New Jersey who just happened to be the former CEO of Goldman Sachs. A sign held up by New Jersey protesters bears the warning, “If You Vote For Obamacare, We Will Corzine You.”

I approach a woman named Pat Defillipis from Toms River, New Jersey, and ask her why she’s here. “To protest health care,” she answers. “And then amnesty. You know, immigration amnesty.”

I ask her if she’s aware that there’s a big hearing going on in the House today, where Barney Frank’s committee is marking up a bill to reform the financial regulatory system. She recognizes Frank’s name, wincing, but the rest of my question leaves her staring at me like I’m an alien.

“Do you care at all about economic regulation?” I ask. “There was sort of a big economic collapse last year. Do you have any ideas about how that whole deal should be fixed?”

“We got to slow down on spending,” she says. “We can’t afford it.”

“But what do we do about the rules governing Wall Street . . .”

She walks away. She doesn’t give a fuck. People like Pat aren’t aware of it, but they’re the best friends Obama has. They hate him, sure, but they don’t hate him for any reasons that make sense. When it comes down to it, most of them hate the president for all the usual reasons they hate “liberals” — because he uses big words, doesn’t believe in hell and doesn’t flip out at the sight of gay people holding hands. Additionally, of course, he’s black, and wasn’t born in America, and is married to a woman who secretly hates our country.

These are the kinds of voters whom Obama’s gang of Wall Street advisers is counting on: idiots. People whose votes depend not on whether the party in power delivers them jobs or protects them from economic villains, but on what cultural markers the candidate flashes on TV. Finance reform has become to Obama what Iraq War coffins were to Bush: something to be tucked safely out of sight.

Around the same time that finance reform was being watered down in Congress at the behest of his Treasury secretary, Obama was making a pit stop to raise money from Wall Street. On October 20th, the president went to the Mandarin Oriental Hotel in New York and addressed some 200 financiers and business moguls, each of whom paid the maximum allowable contribution of $30,400 to the Democratic Party. But an organizer of the event, Daniel Fass, announced in advance that support for the president might be lighter than expected — bailed-out firms like JP Morgan Chase and Goldman Sachs were expected to contribute a meager $91,000 to the event — because bankers were tired of being lectured about their misdeeds.

“The investment community feels very put-upon,” Fass explained. “They feel there is no reason why they shouldn’t earn $1 million to $200 million a year, and they don’t want to be held responsible for the global financial meltdown.”

Which makes sense. Shit, who could blame the investment community for the meltdown? What kind of assholes are we to put any of this on them?

This is the kind of person who is working for the Obama administration, which makes it unsurprising that we’re getting no real reform of the finance industry. There’s no other way to say it: Barack Obama, a once-in-a-generation political talent whose graceful conquest of America’s racial dragons en route to the White House inspired the entire world, has for some reason allowed his presidency to be hijacked by sniveling, low-rent shitheads. Instead of reining in Wall Street, Obama has allowed himself to be seduced by it, leaving even his erstwhile campaign adviser, ex-Fed chief Paul Volcker, concerned about a “moral hazard” creeping over his administration.

“The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted,” Volcker told Congress in September, expressing concerns about all the regulatory loopholes in Frank’s bill. “Ultimately, the possibility of further crises — even greater crises — will increase.”

What’s most troubling is that we don’t know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn’t be surprised. Maybe it’s our fault, for thinking he was different.

Link: Obama’s Big Selllout, Matt Taibbi, Rolling Stones, 12/9/09.

Anyways, here’s a cool graphic from the New York Times explaining the consequences of a falling dollar. 

(Click picture to get edumacated)

Link:
Winners and Losers as the Dollar Falls, by Bill Marsh, New York Times, 12/6/2009.

another case of art imitating life.

Link: Bailout Ben

Copy + Paste from Bloomberg (my highlights in blue):

Nov. 20 (Bloomberg) — Brandon Adams, who teaches behavioral finance at Harvard University’s Department of Economics, says some of the best candidates for Wall Street trading jobs are the professional card players at FullTiltPoker.com and similar Web sites.

“They’ve essentially been the survivors in the system, a very difficult system where 95 percent of people lose money,” the 30-year-old Adams, who plays at the site, said in a telephone interview. “Anyone smart enough and disciplined enough to survive that system is probably going to do very well in the trading world.”

An increasing number of hedge funds and brokerages are scrutinizing professional poker to find talent and analytical tools, according to financial recruiters including Options Group, a New York-based executive-search company. Susquehanna International Group LLP, the Bala Cynwyd, Pennsylvania-based options and equity trading company, uses poker to teach strategic thinking.

“Someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t,” said Aaron Brown, a 53-year-old former poker pro who is now a risk manager at AQR Capital Management LLC in Greenwich, Connecticut, which oversees $23 billion. “They know to push when they have the edge and they know how not to bust, and that’s a tough combination to find.”

Skill Sets

Skills that define successful traders — rational approach toward risk, speedy decision-making under pressure, discipline and a well-trained memory — are the same ones that separate elite poker players from ones known as “dead money,” financial recruiters say.

After the World Series of Poker started in Las Vegas four months ago, Options Group recruiter Simon Satanovsky said he received a hedge-fund request for online poker players with no financial experience. He wouldn’t identify the client.

“Before, we were asking about GPA or the Math/Physics Olympiad,” Satanovsky, a former Russian national bridge champion, said in a telephone interview. “Now, we’re asking questions about poker successes.”

Satanovsky said Wall Street firms and recruiters have been paying increasing attention to poker players as job candidates since 2003, when amateur Chris Moneymaker beat hundreds of professionals to win the World Series of Poker’s No-Limit Texas Hold ‘Em main event.

The Right Game

Adams, who has taught at Harvard in Cambridge, Massachusetts, each spring since 2003, said disciplined poker players can be spotted on sites such as Full Tilt and PokerStars.com waiting for particular games, not tempted by those outside their area of expertise or financial comfort level.

Their self-control and confidence would be useful in trading where large profits are possible, the probability of going broke high and the competition formidable, he said. Adams cited as an example a trader who notices a slight imperfection in the way options are being priced, then works to come up with the proper bet per trade.

“In poker, people are used to not sitting back and waiting for the fat pitch,” Adams said. “They’re used to skirting the edge of ruin and they learn the tools of how to do that.”

Susquehanna has been using poker to teach its new traders since it was founded in 1987, said Pat McCauley, who heads the privately held firm’s trader-development program.

College Friends

The company’s founders played the game as college friends at the State University of New York-Binghamton. Susquehanna has held in-house poker tournaments to recruit traders and monitor decision-making skills.

The trainees learn to use information they see in the marketplace to infer what motivates others, helping them make better prices. It’s the same way poker pro Phil Ivey, considered among the game’s greats, makes bets based on what he sees among his opponents, McCauley said.

“What professional poker players are really good at is taking this information that’s relatively subjective, quantifying it and making it objective, and that’s what trading is about,” McCauley said.

The ability to write complex poker algorithms, which either run poker Web sites or try to beat them, will get hedge funds interested, said Todd Fahey, a recruiter who specializes in quantitative finance at New York-based Exemplar Partners.

“There have been a few guys that I’ve placed in the industry that come from the poker software side of the house,” Fahey said in a telephone interview. “Two Sigma, D.E. Shaw and any of your larger computationally-based hedge funds are going to want to see people like this.”

Two Sigma Investments LLC and D.E. Shaw Group, both based in New York, declined to comment.

Begleiter’s Try

The worlds of poker and finance often intersect. Steven Begleiter, who headed corporate strategy at Bear Stearns Cos. before its 2008 collapse, earned $1.6 million earlier this month with a sixth-place finish in the main event. Greenlight Capital LLC founder David Einhorn was 18th in 2006. The annual “Wall Street Poker Night,” benefiting Math for America, was started by billionaire James Simons, the founder of hedge-fund firm Renaissance Technologies Corp. This April, the $5,000 buy-in tournament drew 100 entrants — 90 percent from hedge funds or other Wall Street jobs — raising $1.3 million.

Even though poker players make good traders, they aren’t necessarily good with their own investments, said Adams, adding that he is almost “famously unsuccessful” as an investor.

“Poker players are lazy and they’re gossipers,” he said. “If you look at the way they trade, they tend to latch onto other people’s ideas.”

Texas Hold ‘Em

One person who has chosen poker over finance is Joe Cada, who this month outlasted Begleiter and Ivey at the main event final table. Cada, who plays the game professionally, was first among 6,494 entrants and took home the $8.55 million top prize, giving half to financial backers Cliff Josephy and Eric Haber, poker pros with Wall Street backgrounds. The Texas Hold ‘Em contest had a $10,000 entry fee.

“As a little kid, I used to watch the stock markets day in and day out,” Cada, 22, said in an interview. “My parents always thought I was going to get into banking or become a stockbroker because I was really good with math and logic, and I was obsessed with money.”

Cada said he plans to remain a poker pro. AQR’s Brown, the author of “The Poker Face of Wall Street” and a life-long player, long ago gave up the game professionally after a couple years of trying.

“I eventually decided finance was easier,” he said.

To contact the reporter on this story: Mason Levinson in New York at mlevinson@bloomberg.net.

Link: Harvard Poker Pro Says Texas Hold ‘Em Can Teach Traders to Fold, Mason Levinson, Bloomberg, 11/20/2009.

Link: Mint

Haven’t done an equity trading post in a while. So, here is one instrument I’ve been playing with.

Disclosure: Do not currently own FAS.

Enjoy.

Here’s a Copy+Paste of the article:

WHEN, back in 2003, economists at Goldman Sachs bracketed Brazil with Russia, India and China as the economies that would come to dominate the world, there was much sniping about the B in the BRIC acronym. Brazil? A country with a growth rate as skimpy as its swimsuits, prey to any financial crisis that was around, a place of chronic political instability, whose infinite capacity to squander its obvious potential was as legendary as its talent for football and carnivals, did not seem to belong with those emerging titans.

Now that scepticism looks misplaced. China may be leading the world economy out of recession but Brazil is also on a roll. It did not avoid the downturn, but was among the last in and the first out. Its economy is growing again at an annualised rate of 5%. It should pick up more speed over the next few years as big new deep-sea oilfields come on stream, and as Asian countries still hunger for food and minerals from Brazil’s vast and bountiful land. Forecasts vary, but sometime in the decade after 2014—rather sooner than Goldman Sachs envisaged—Brazil is likely to become the world’s fifth-largest economy, overtaking Britain and France. By 2025 São Paulo will be its fifth-wealthiest city, according to PwC, a consultancy.

And, in some ways, Brazil outclasses the other BRICs. Unlike China, it is a democracy. Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbours. Unlike Russia, it exports more than oil and arms, and treats foreign investors with respect. Under the presidency of Luiz Inácio Lula da Silva, a former trade-union leader born in poverty, its government has moved to reduce the searing inequalities that have long disfigured it. Indeed, when it comes to smart social policy and boosting consumption at home, the developing world has much more to learn from Brazil than from China. In short, Brazil suddenly seems to have made an entrance onto the world stage. Its arrival was symbolically marked last month by the award of the 2016 Olympics to Rio de Janeiro; two years earlier, Brazil will host football’s World Cup.

At last, economic sense

In fact, Brazil’s emergence has been steady, not sudden. The first steps were taken in the 1990s when, having exhausted all other options, it settled on a sensible set of economic policies. Inflation was tamed, and spendthrift local and federal governments were required by law to rein in their debts. The Central Bank was granted autonomy, charged with keeping inflation low and ensuring that banks eschew the adventurism that has damaged Britain and America. The economy was thrown open to foreign trade and investment, and many state industries were privatised.

All this helped spawn a troupe of new and ambitious Brazilian multinationals. Some are formerly state-owned companies that are flourishing as a result of being allowed to operate at arm’s length from the government. That goes for the national oil company, Petrobras, for Vale, a mining giant, and Embraer, an aircraft-maker. Others are private firms, like Gerdau, a steelmaker, or JBS, soon to be the world’s biggest meat producer. Below them stands a new cohort of nimble entrepreneurs, battle-hardened by that bad old past. Foreign investment is pouring in, attracted by a market boosted by falling poverty and a swelling lower-middle class. The country has established some strong political institutions. A free and vigorous press uncovers corruption—though there is plenty of it, and it mostly goes unpunished.

Just as it would be a mistake to underestimate the new Brazil, so it would be to gloss over its weaknesses. Some of these are depressingly familiar. Government spending is growing faster than the economy as a whole, but both private and public sectors still invest too little, planting a question-mark over those rosy growth forecasts. Too much public money is going on the wrong things. The federal government’s payroll has increased by 13% since September 2008. Social-security and pension spending rose by 7% over the same period although the population is relatively young. Despite recent improvements, education and infrastructure still lag behind China’s or South Korea’s (as a big power cut this week reminded Brazilians). In some parts of Brazil, violent crime is still rampant.

National champions and national handicaps

There are new problems on the horizon, just beyond those oil platforms offshore. The real has gained almost 50% against the dollar since early December. That boosts Brazilians’ living standards by making imports cheaper. But it makes life hard for exporters. The government last month imposed a tax on short-term capital inflows. But that is unlikely to stop the currency’s appreciation, especially once the oil starts pumping.

Lula’s instinctive response to this dilemma is industrial policy. The government will require oil-industry supplies—from pipes to ships—to be produced locally. It is bossing Vale into building a big new steelworks. It is true that public policy helped to create Brazil’s industrial base. But privatisation and openness whipped this into shape. Meanwhile, the government is doing nothing to dismantle many of the obstacles to doing business—notably the baroque rules on everything from paying taxes to employing people. Dilma Rousseff, Lula’s candidate in next October’s presidential election, insists that no reform of the archaic labour law is needed.

And perhaps that is the biggest danger facing Brazil: hubris. Lula is right to say that his country deserves respect, just as he deserves much of the adulation he enjoys. But he has also been a lucky president, reaping the rewards of the commodity boom and operating from the solid platform for growth erected by his predecessor, Fernando Henrique Cardoso. Maintaining Brazil’s improved performance in a world suffering harder times means that Lula’s successor will have to tackle some of the problems that he has felt able to ignore. So the outcome of the election may determine the speed with which Brazil advances in the post-Lula era. Nevertheless, the country’s course seems to be set. Its take-off is all the more admirable because it has been achieved through reform and democratic consensus-building. If only China could say the same.

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.

Goldman.

HILARIOUS!!!

Link: Tom Gregory: Huffington Post

I think this would be time because you really need to bring China into the creation of a new world order, a financial world order. They are kind of reluctant members of the IMF. They play along, but they don’t make much of a contribution because it’s not their institution. Their share is not commensurate … their voting rights are not commensurate to their weight, so I think you need a new world order that China has to be part of the process of creating it and they have to buy in. They have to own it the same way as, let’s say, the United States owns the Washington consensus, the current order, and I think this would be a more stable one where you would have co-ordinated policies. I think the makings of it are already there because the G20, in agreeing to peer reviews, effectively is moving in that direction.

Since 1972, the Himalayan nation of Bhutan adopted an economic policy that stressed wellbeing and the quality of its citizens’ lives, termed Gross National Happiness (GNH), over material growth, or Gross Domestic Product (GDP). 

The idea of General National Happiness rests on four pillars: economic self-reliance, a pristine environment, the preservation and promotion of Bhutan’s culture, and good governance in the form of a democracy.

Sounds pretty cool. I could get behind that.

Random Fact: The current King of Bhutan, Jigme Khesar Namgyel Wangchuk, is the same age as me.

Links:
Ann Muller (where the photo in this post came from)
Gross National Happiness: Centre of Bhutan Studies
The Kingdon of Bhutan

 Link: Stand up Economist

I share values and beliefs from both sides.

Link: Information is Beautiful

We introduce Game Theory by playing a game. We organize the game into players, their strategies, and their goals or payoffs; and we learn that we should decide what our goals are before we make choices. With some plausible payoffs, our game is a prisoners’ dilemma. We learn that we should never choose a dominated strategy; but that rational play by rational players can lead to bad outcomes. We discuss some prisoners’ dilemmas in the real world and some possible real-world remedies. With other plausible payoffs, our game is a coordination problem and has very different outcomes: so different payoffs matter. We often need to think, not only about our own payoffs, but also others’ payoffs. We should put ourselves in others’ shoes and try to predict what they will do. This is the essence of strategic thinking.

Still LMAO.

High-frequency trading from Marketplace on Vimeo.

This is a great article, in that Taibii explains in plain english how the storied investment bank was responsible for and profited from the Great Depression, Tech Stock bubble, Housing Craze, $4 gas, Rigging the Bailout, and soon, Global Warming (a la carbon credits)….

Honestly, I think the whole scheme is sad, but am reluctantly fascinated by the genius of the banksters. Specifically, their ability to find and exploit loopholes is incredible.

Like how the author concluded his article…

…This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.

If you’re a stock trader, or investor, the takeaway might be to go Long alternative energy names and maybe even Goldman Sachs. =P

Inside The Great American Bubble Machine

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

MATT TAIBBI

From Matt Taibbi’s “The Great American Bubble Machine” in Rolling Stone Issue 1082-83.

The first thing you need to know about Goldman Sachs is that it’s everywhere. 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.

Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. 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.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.

Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.

And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

The history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who’s Who of Goldman Sachs graduates. By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman.

But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.

Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliché that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline the committee to save the world. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin’s complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.

After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.

It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman’s last real competitors — collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investment-banking competitor, Lehman, goes away.”) The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank-holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.

Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.

The collective message of all of this — the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.”

Fast-forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.

Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

The collapse of many storied institutions, like Bear Stearns, Lehman Brothers, AIG, and the auto industry, are explored. The faulty reasoning behind the US Fed and Treasury’s current actions are presented. Most importatly though, root causes are identified, and how events of the last 30 years institutionalized Moral Hazard, which led to the Financial Crisis of 2008, are explained.  There is some financial jargon but for the most part, everything is defined and written in plain english – a major plus that keeps this book flowing at a good pace.

In addition to the amusingly appropriate book cover, there are also pictures and graphs galore to illustrate points…

Click on the picture for a better view.

….as well as cartoons and quotes to keep things in perspective, like these gems:

Ritholtz does a fine job at keeping things concise, while providing enough details for the layman to understand the role of the myriad of contributing players. People (Alan Greenspan seems to get most of the blame), government actions and policies (both Democrat- and Republican-driven), as well as long-held belief systems (i.e. free market and deregulation) are questioned and analyzed for their role in turning us into a Bailout Nation (sheepishly supporting corporate welfare and asset prices).

Jam-packed with facts intertwined in the Bailout Nation story, the book is rounded out with thoughts and interesting ideas from some of Ritholtz’s respected contemporaries, like Doug Kass and Ned Davis, that the current administration would be hard-pressed to ignore.

To truly appreciate the historical time we are in, this book is highly recommended; I don’t get any kick backs for promoting this book. With that said, the book can be had for cheap at Amazon.com.

Links:
BarryRitholtz’ Blog, The Big Picture
Strip’s Classic Designs
John Sherffius

Thomas Friedman giving an outstanding (non-boring) lecture…

Lecture Description

Pulitzer Prize winning New York Times columnist Thomas Friedman speaks on the MIT campus to discuss the 2007 update to his bestseller The World is Flat. He also provides a preview of his latest book, Hot, Flat, and Crowded.

I’m currently reading Hot, Flat, and Crowded… and I highly recommend it!

Links:
Thomas Friedman’s website
Closet Ambitions (Joiji’s website)

Anyways, I first heard about this museum last week while listening to a Wall Street Journal podcast. They were talking about their newest exhibit that will help the public understand the whole economic mess we are currently in.

The following is a copy + paste from the museum’s website:

“Tracking the Credit Crisis: A Timeline” traces the development of the current financial crisis, which is the most severe and complex economic and financial challenge in modern experience.

Presented as a monumental 8’ x 20’ graphical wall accompanied by a video presentation, the timeline begins with the bursting of the U.S. housing bubble in late 2006 through the unprecedented trillions being guaranteed and injected into the private sector in 2008-2009 by the government. President Barack Obama’s stimulus package of almost $800 billion is part of the stabilization effort to forestall a financial collapse, in a global environment in which some $40 trillion in wealth has been lost (on paper) in the last 18 months. The U.S. government’s actions represent a watershed in American economic and political history.

 You can download the giganormous timeline in pdf form from the museum’s website. 

Link:
Museum of American Finance
New York museum opens exhibit on credit crisis, Reuters, published 3/25/09

Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.

At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.

Link:  The Long and the Short, The Economist, 3/12/09

Why? …. because it determines the profitability of a trade. Generally, trading on order flow (longer term) will yield much better gains than trading on momentum (shorter term).

What? … order flow is what the ”big money” is doing. Individual traders are best served by piggy backing on insitutional moves.

How? … by paying attention to a stock’s price action and its moving averages on the 15-minute, hourly, and daily charts. When all three are moving in the same direction, it’s due to order flow.

When the price is moving against the larger trend, it is due to momentum, and only good for a quick scalp… like today.

Looking at the S&P 500 ($SPX):

Daily Chart: Simple Moving Average is Down.

Hourly Chart: Simple Moving Average is Down.

15-minute Chart: Simple Moving Average is Up?!

Today. Using Fast Stochastics to confirm Buy and Sell activity.

Excerpt from John Murphy’s (1997? ) seminar, Applying Technical Method to Today’s Trading.

“For those of you that trade the futures markets, there are a lot of other things outside the future markets that you should be following. But, I guess my bigger message is… for those of you that aren’t in the futures markets, whether you trade them or not, the futures markets have a tremendous impact on what happens in the other markets.

I keep pointing out to the Wall Street crowd for example, that if you’re going to trade stocks, you have to know what’s happening in the futures markets, because they affect inflation, they affect interest rates, they affect stock groups, and they play a tremendously important part in the whole financial spectrum.”

Link:  John Murphy’s seminar, Applying Technical Method to Today’s Trading.
You can watch all 90-minutes of it for free at Ino.com (link above)

In this 90-minute video, veteran market analyst John Murphy explains how he looks at the markets using non- traditional methods. Using sector rotation, John will guide you through his thought process in selecting markets to trade. You will also get to see John`s intermarket analysis in action and just how commodities can put a drag or a rocket under a stock. John further explains the relationship between the U.S. Dollar and Gold prices.

Topics (and my notes) -

• John Murphy: Started off in stocks, then futures, then back to stocks.
• A Different Approach
• March Bonds: First half of 1996, prices went down. Around May, it went up. 200DMA – good indicator of trends. Generally see a weak first half and a strong second half.
• CRB Index: Commodity Index. Commodities do move in trends. In the first half of 1996, commodities were strong. However, in the second half of the year, starting in May, it was weak. This chart is the reverse of the Bonds chart. In general, commodity prices and bond prices tend to move in opposite directions. For example, commodities up, bonds down.
• Leading Indicator:  Commodities are a leading indicator (warning sign) of inflation. When commodity markets get to high in price, typically, there are concerns that the Fed will raise interest rates. If you are a bond trader or are just interested in tracking interest rates, you must know what is going on in the commodity pits. The normal relationship is that bonds and commodities should move in the opposite direction.
• Ratio Chart: Relative Strength Chart. Dividing the CRB Index by the Bond Prices. When the line goes up, commodity prices are outperforming bonds. To trade the spread, long commodities and short bonds. In May, you want to do the opposite. This ratio is a good economic indicator. When the line is moving up, economy is strengthening. It is also good for assett allocation in the stock market.
• Sector Rotation: Prior to May, when the ratio was rising, and inflation was building up, you wanted to be in commodity stocks (copper and metals). After May, when commodity prices peaked and the Fed talked about raising interest rates, want to rotate money to the financial stocks.
• Bond Influence: Generally, stocks are influenced by bonds, and do best when bond prices are rising (positive coorelation).
• Food Stocks: Corn vs. Food stocks (ADM). When price of corn drops, the price of ADM goes up.
• Copper and Metal Stocks: How individual commodity (Copper) affect whole stock groups (Metals). Very often, the stock leads the commodities, but commodities still influence the stock. These markets (copper and aluminum) are good economic indicators – they are not influenced by the weather.
• Oil Index: Transportation stocks influenced by the price of oil. Oil Index (XOI) vs. Crude Oil. The stock leads the price of the commodity. Oil stock trader has to watch the price of oil.
• Natural Gas vs Stocks: Stock prices lead the commodity price. Look at the divergence. When they stop moving in the same direction, it is a warning of some type. Natural Gas stocks go up, why not natural gas? Eventually, natural gas catches up.
• Financial Stocks: Historically, rising financial stocks are good for bonds; they lead.
• Aluminum Shares: London Aluminum. Looking at 1995 to 1996. Rising prices of Aluminum shares (S&P index, include such stocks like AA) led the price of London Aluminum (commodity). Can act as an economic indicator. If these commodities are tied to the economy, then if aluminum is going up, wouldn’t that imply economic strength, which would put upward pressure on interest rates. Higher interest rates diminish bond prices. There should also be strength in the US dollar. If US rates are moving higher relative to overseas rates, it is bullish for the dollar. So, the strength of the dollar is tied to the increase in Aluminum shares. Still, need to look how the Aluminum shares are doing relative to the overall market – look at the relative strength chart (vs. S&P 500). Draw a trend line off of the releative strength chart to identify the breakout and timing to rotate into that sector.
• Mutual Funds: There are mutual finds (like Fidelity Select Energy fund) that match sectors. Can’t buy the index, but can buy the mutual fund. You can apply technical analysis to these funds.
• Mutual Funds Gold: Fidelity Select precious metals.
• Gold/Dollar Relationship: Basic intermarket principle. When the dollar is very strong, gold is normally very weak.
• Gold vs Russell 2000 Index: The rising dollar also affects the Russell 2000 Index (small stocks). Small stocks do better when the US dollar is strong; they are primarily domestic. Large stocks have international exposure.
• John Wraps It Up: Point:  The futures market has a tremendous impact on the other markets. If you trade stocks, you must know what is going on in the futures.
• Q&A: The Visual Investor (his book) was written for the general audience.  Generally speaking, John Murphy uses the 50 (10wk) and the 200 (40wk) DMA when looking at a stock chart. When looking at Futures, uses 20 and 40DMA.

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. – John Murphy

Reminded of the quote:

Politicians don’t make economic decisions, they make political decisions that have economic consequences.

Link: The Economist

You can read/download it here:

berkshireletter 2009

Link: http://www.berkshirehathaway.com/letters/2008ltr.pdf

Since the S&P just broke the 741 Support level (established November of last year), now is as good a time as any to say This is BAD!

According to John Murphy:

If the support level is violated, then a trend reversal from up to down is likely… As a benchmark, some chartists use a 3% penetration as a criteria for major support and resistance levels [to reverse roles]. Shorter term support and resistance areas would probably require a much smaller number, like 1%…It’s important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convnced they become.

From Investopedia:

Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you’re bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.  

Sources:
Investopedia on Support and Resistance

For those looking for a good book on Technical Analysis, I highly recommend Technical Analysis of the Financial Markets by John J. Murphy. Almost every serious trader has read this book.
If free is your thing, you can read it online using google (link).

The activity in the nation’s banks suggests that investors believe they are circling the drain, zombies needing only a blow to the head once and for all, or facing an imminent restructuring at the hands of the government. Once again, the market ended lower, and once again, the financial sector bore the brunt of the losses…

It should be noted, however, that some of the trading reflects upcoming options expiry Friday. “Today into tomorrow is a different scenario for banks because of expiration tomorrow. When they are down the whole month going into expiration, you have the continued leap down into expiration,” said Dave Rovelli, managing director of U.S. equity trading for Canaccord Adams. Options activity puts pressure on the underlying stocks as traders attempt to push an option to its strike price, possibly even by shorting the security — it’s not an accident, Mr. Rovelli noted, that these stocks hit a bottom on Nov. 20 and Nov. 21 of last year, just before expiration.

Link:
Four at Four: Banks Get Blasted — Again , David Gaffen, Wall Street Journal, 2/19/09

Triple The Upside/Downside On Financials
The Direxion Financial Bull 3X Shares ETF (NYSE:FAS) is designed to return three times the performance of the Russell 1000 Financial Services Index (“Financial Index”). The underlying financial services index is a capital weighted index of financial service providers ranging from large capitalization banks, like Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS), to insurance providers, like Aflac (NYSE:AFL) and Allstate (NYSE:ALL). True to form, the FAS ETF carried out its mission and posted a negative return in slight excess of 64% for year-to-date ended February 11, while the Russell 1000 Financial Services Index declined approximately 22% over the same period. (These funds seem simple, but more goes on behind the scenes. Read Dissecting Leveraged ETF Returns to learn more.)

How Does It Work?
The FAS ETF will invest a minimum of 80% of its net assets in long positions of the individual securities that make up the Financial Index. The fund also invests in financial instruments that provide leveraged and unleveraged exposure to the Financial Index, thus, creating the ability for returns of the underlying index to be tripled. The balance of the net assets are held in money market instruments.

Link: The Joys And Pains Of 3X Returns (FAS, FAZ, TYH), Gregory Davis, 2/17/09

SIX STEPS that every trader needs to know to succeed in the markets.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders’ information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Step 2: Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Step 3: A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Step 4: Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Step 5: A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called “gurus” start to tout the market.

Step 6: As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The Final Step: The move ends, the market falls, and investors lose money.

Link: Six Insider Steps that every trader needs to know, Adam Hewison.

1) Must have a Game Plan. There is a business saying, If you fail to plan, you plan to fail. I will not go into all of the planning theories here, but understand that planning is important. Before entering a single trade, I have to come up with and write down five important numbers for the ticker symbol: 

The first number is my i) Targeted Return On Investment (ROI). At minimum, I seek 10% and at most, 30%. Though it depends on the market condition, it is necessary to have a clear goal to drive towards. To get my return, I digest news headlines, study charts, and stare at technical indicators (<add link to post>) to identify suitable ii) Entry Prices and iii) Exit Price Ranges.

Not all trades will be successful. No one wins them all. If they say they do, they’re lying to you, and you should tell them they’re a dumbass. As such, it is important to not only prepare yourself to take some losses but to expect them. What iv) Percentage Loss on Investment can you endure and still sleep at night? Myself, I am comfortable with spending between 5 to 10% for the thrill of the game. To control my losses, I enter Stop Loss orders right after my intial (limit) Buy order. The v) Stop Loss Price is an ugly number, but it is necessary to calculate it when determining your entry price.

2) Must have Discipline to follow through on the Game Plan. Rather than let greed or fear dictate my trading, I focus my energy to exercise discipline and carry out the Game Plan. That means not hoping losers will rebound, but cutting my losses like I planned to. It also means locking in profits and not worrying about leaving money on the table. Normally, the Game Plan would be sound and crafted with thought and careful consideration to everything. 

3) Diversify with non-correlating assets. To some, diversifying means having a mixture of stocks, bonds, and cash equivalents. Myself, I gravitate more towards stocks. As such, diversify then means holding stocks from different sectors (i.e. Financials, Energy, Technology, Healthcare, etc.) that are not generally dependent upon each other. Note, this rule does not really apply to day traders who generally close out positions everyday. 

4) Trade in the major trends. If a stock is trending up, I go long and later sell. I will not short it. You can watch what happened to Le Chiffre in the movie, Casino Royale, to see what could happen if you do! Conversely, if a stock is trending down, Short orders are due.

5) Research always. In general, fundamental analysis becomes more important the longer one holds a position (think, investors like Warren Buffett). Technical analysis is key for day traders and swing traders (like me) who are in and out of positions many times a week. Nevertheless, it is important to be aware of what is going on in the world and of the general economic environment.

When it comes to triple leveraged ETFs, I tread with caution. However, one that keeps on tickling my pickle is FAS. It is an exchange traded fund (ETF) that seeks daily investment results of 300% of the price performance of the Financial Select Sector Index (“Financial Index”). The Fund seeks to create long positions by investing at least 80% of its net assets in the equity securities that comprise the Financial Index.

With almost everyone’s attention on the United States’ financial institutions, playing FAS is a very quick way to yield an incredible amount of money in a very short period of time, or conversely, a frightening way to wipe out wealth.

In any case, this morning, while going through my watch list, I noticed a big drop in FAS at the stock market open. Scouring all of the relevant news outlets for a brief minute, I could not find a fundamental reason why the market would sell off. So, I watched the chart for a bit, as well as the Bid and Ask orders come through. Noticing an initial support around $8, I took the plunge and started a position at $8.03. Soon after, I was in the green with a plan to make another 20%. However, as the day progressed I saw my position drop and drop and drop. A serious WTF?! moment.

With additional capital to play with, I took on additional shares (1/2 the original order) at $7.60. I was confident that the stock would reach my exit price, and figured I should average down my cost basis (now at $7.89).

Toward the end of the day, news dropped on the wire that the government was working on a plan to help out homeowners with problem loans. That triggered a surge of buying volume to enter the marketplace. FAS followed and went up to close at $8.70,  creating a respectable +10% in paper profits. =)

Again, my goal is to yield at least 20% before I exit the position. Cheers!

Context: Yesterday, as Treasury Secretary Tim Geithner addressed the nation on the government’s plan to fix the financial system, the stock market tanked BAD. He gave no details whatsoever. The stock market hates uncertainty.

I took the opportunity to take another long position in UYG at $2.99 a share, hoping to make another 20+% in the near term.

The cartoon is by Tom Cheney.

Yesterday morning, while going through my watch list, I found UYG trading below $3.00 a share. Granted, the financial sector deserved to be beaten down but not this much, especially since the U.S. government made it clear they were near a plan to save these institutions, and were not looking to nationalize banks.

Anyhow, looking at the technical indicators I performed a quick analysis. Short-term, the chart looked pretty neutral, with a faint of bullishness. After gauging the risk:reward ratio, I took a long position in UYG with a limit order for some shares at $2.90; it was trading in the $2.92-2.95 range. My plan was to exit around $3.50 for a 20% return, or cut my losses if the stock hit $2.65 (~9%).

As I watched the price fluctuate and eventually head up for a moment, it took great discipline to not modify my order to execute at market price. Eventually, after 5 minutes or so, patience paid off. Immediately after my order was filled, the stock shot up and my position ended the day  11%.

Today, on the heels of news that the government would announce plans to fix the banking system next Monday, the market experienced a short-covering rally. Consequently, my plan was coming to fruition a lot quicker than anticipated. I thought about holding the stocks over the weekend, but I already had a plan and needed to stick with it so I placed my order and exited the position at $3.56 for a 22.76% return. Not bad, huh? =) 

Paulson Advantage Plus, the largest of his funds, returned 37.6% net of fees on $7B in assets. For the coming year, he says…

We remain bearish on the outlook for the U.S. economy and believe the recession will extend into late 2009 and likely into 2010. The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009. While the U.S. stimulus package will likely cushion the decline we don’t think it can halt the downturn and will likely have longer term negative consequences..

For all of the itty-bitty details, this is a must-read.

Source:  John Paulson’s Funds Shine in the Gloom,  NYTimes Dealbook

Related Article: The Man Who Made Too Much, Gary Weiss for Portfolio Magazine, Feb 2009

Link: Origins of the Economic Crisis? In One Chart! NY Times.

click the source link below to play along. 

Link: How the Government Dealth with Past Recessions, Interactive Graphics, NY Times

In my view, an equity injection scheme based on realistic valuations, followed by a cut in minimum capital requirements for banks, would be much more effective in restarting the economy. The downside is that it would require significantly more than $1,000bn of new capital. It would involve a good bank/bad bank solution, where appropriate. That would heavily dilute existing shareholders and risk putting the majority of bank equity into government hands.

Source:
The right and wrong way to bail out the banking sector,
by George Soros, Financial Times, 1/22/09

If a bank were to sell its “bad” assets into a “bad bank,” it would still be left with lower earnings power from higher losses on “good loans” and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both…The greatest unknown regarding the “bad bank” is at what price the gov’t would pay for “toxic assets.” If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov’t pays above market, the burden on an increasingly “taxed” taxpayer grows…We would be most encouraged by banks selling “crown jewel” assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

Source:
Meredith Whitney: A Bad Bank Won’t Save Banks, by John Carney, Clusterstock, 1/29/09

Yesterday, the markets advanced in anticipation that the U.S. government was near a plan to fix the crap economy. Near the peak of buying, I concluded my UYG swing trade for a nice +14% ROI.

After hours, the Democrat-controlled U.S. House of Representatives passed a pricey $819 billion stimulus plan with no Republican support. Today, the market sold off.