Making Unique Observations in a Very Cluttered World

Sunday, 16 August 2009

Fractured Wall Street Fairy Tales #3: It's a Kinder, Gentler, Chastened Wall Street

Reading - Fractured Wall Street Fairy Tales #3: It's a Kinder, Gentler, Chastened Wall Street http://seekingalpha.com/a/3clv

In his interview with the Wall Street Journal on Friday, Treasury Secretary Timothy Geithner said the Obama administration “wouldn't allow Wall Street to return to such old habits as taking on excessive risk,” or that Wall Street could be “returning to business as usual.”

"I don't think the financial system is reverting to past practice, and we won't let that happen," Mr. Geithner said.

Secretary Geithner said it and I believe him. He’s right, they aren’t ‘reverting to past practice.’ They never stopped their business as usual practice! OK, maybe long enough for Hank Paulson, as Treasury Secretary, to dispatch his personal nemesis, Dick Fuld of Lehman Brothers (and coincidentally, 24,0000 other employees in the process.)

And maybe long enough to slurp at the taxpayer trough when taxpayer-funded loans were offered. The scent of free money will attract Wall Street like corn brings in the pigs. So they cried poor and talked about how dreadful their exposure was to risk that could bring the whole economic system of the United States crashing down if they didn’t get a few tens of billions of that free money themselves. It was only when they discovered that the free money came with a cap on salaries and bonuses that – miraculously – they all managed to unwind all those apocalyptic positions and were suddenly solvent enough to return our money – after ensuring their bonuses were covered, of course.

What planet is Secretary Geithner living on?

Using Goldman Sachs (
GS) as but one example, The Firm went from “we’re drowning out here! Send us a taxpayer lifeline!” to (less than six months after “nearly going under”) a quarter in which 97% of all trading days reflected massive profits. That is a statistically impossible feat – unless somebody was lying one of those times. Which is it, Goldman? Did you really not need that lifeline from us? Or did you not resort to front-running and other chicanery – you know, Wall Street business as usual – in your most recent reporting period?

Mr. Geithner further notes, "The consequence of achieving stability is that people can raise money, can raise equity, can borrow more easily at lower rates, that these markets have liquidity again.”

How’s that working for you, Mr. and Mrs. American? Can you raise money? Borrow more easily at lower rates? And with nearly a third of all American homes carrying mortgages in “negative-equity” (there is more owed on the mortgage than the property is worth) are you feeling like you have ‘liquidity’ again?

Mr. Geithner and the rest of the Administration aren’t so much worried about the
cause of the problem – Wall Street continuing to cheat the rest of America via shady trading practices – as they are about the effect. As the article notes, “the administration is concerned about the potential for populist anger, particularly as banks resume paying high salaries and bonuses to executives.”

Populist anger? How very condescending of them! Rather than worry about the effect, “populist anger” – which shifts the responsibility to those of us poor unwashed out here unable to control our frustration instead of discussing this over a 40-year-old scotch at The Club, the way gentlemen do – let’s place the onus back where it should be: on the cause.

It’s business as usual on Wall Street. Program trading, dark pools, algorithmic trading and high-frequency trading are but a few of the terms you may have heard that evince ways in which Wall Street ensures the playing field is uneven versus individual investors.

These terms are tossed around all to freely, so let’s take a moment to try to define them. They mean very different things to different people so I’ll stick with the best plain vanilla definitions I can.

For instance “
program trading” means, in common usage, massive “black box” computer-generated trading in which computers are programmed to execute hundreds of millions of shares in toto based upon some event like a close above x or CPI coming in below y or the price of oil going to z, all without the pesky time-wasting hand of man getting in the way. If the order can’t be executed within 25 milliseconds – less time than your brain can comprehend that the period at the end of this sentence means the end of a thought, then some other computer on Wall Street beat you to the trade. (And I do mean “on” Wall Street. If you’re more than a couple blocks from Wall and Broad, the delay in transmission of an extra 10 milliseconds will lock you out of every trade.)

Actually, that definition refers more to algorithmic trading. The NYSE defines program trading rather more benignly as "a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more." Of course the NYSE is an organization that defines one of those delightfully Orwellian terms Wall Street lawyers are so fond of: it is an SRO, or a Self-Regulatory Organization. The definition of a Self-Regulatory Organization? “Foxes guarding the henhouse.”