Goldman's new money machine: warehouses
reuters.com
reuters.com
Unfortunately I think we're reaching the point of banks overstepping their bounds and creating far more problems than they really should.
This strategy seems similar to the "demand shock" approach they used in driving up wheat prices in recent years. And of course the subprime crisis was the result of lax regulation, arguably criminal negligence by Standard & Poor's and Moody's (who rated certain baskets of loans as AAA) and a lot of players who simply didn't have to bear any risk.
I'm really not sure what the solution is here but something really needs to bring this system into check. Such paper shenanigans are having real negative consequences.
In Australia we have a strict financial regulation regime, arguably too strict in some cases, but we didn't have the bubble in real estate prices that the US did. "No doc" and "low doc" lending never reached the point of collapsing the market.
One could argue that financial regulation is to blame and you're probably right but I have no faith in the US government's ability to correct this or pretty much anything else. Washington now seems to be nothing more than a battleground for special interest lobbying and ideologues devoid of rationality.
In the past ~30 years or so investment banks have generally undergone a change from being a partnership to being a corporation. The major difference between the two is partnerships have unlimited liability. Much like a law firm, the partners are personally liable for losses.
I've come to the conclusion that this change has been detrimental to the function of the financial industry as a whole. Combine this with Federal government bailouts and investment bankers seem to act with complete impunity with regards to risk.
Something needs to change.
We have a significant asset bubble here. It hasn't popped primarily because we've had government-sponsored inflation of prices via the First Home Owner's Grant.
The unwinding of the asset bubble finally seems to be happening in Australia now and will trigger many of the same financial issues for our banks (for instance Commonwealth bank is holding far more housing debt than any of the US and UK banks at the point their markets went south).
To suggest the FHOG (which is $7,000 now and only ever got as high as $14,000) is responsible for this is disingenuous at best. What's your argument for this?
There are two basic components in house prices: the cost of land and the cost of construction.
Land is essentially scarce. Sure there is lots more land that we haven't built on than we have (particularly in Australia) but desirability comes into play here as do infrastructure costs. There is only so far you can effectively live from work centres. The further you have to build out the more roads, public transport (if you even have it), water, electricity, etc cost.
Land has certainly increased in value in Australia but a huge component of the increases is in the cost of construction. Nowadays it's hard to build a house for less than about $200,000. That is (IMHO) a huge problem. Building apartments now is in most capital cities prohibitively expensive for the middle class.
To give you an example, I pay less for my one bedroom in downtown Manhattan than the apartment I used to live in in West Perth now costs. Manhattan.
Conventional wisdom is that property is a good hedge against inflation. The massive inflation in construction costs should tell you something about inflation. Despite what the ABS may say about the CPI, the standard of living in Australia has dropped massively in the last decade, particularly in Perth.
This probably mirrors the massive housing inflation and the after-effects you saw in Sydney in the 70s and 80s, which results in those with homes being cash-poor and asset-rich and those left standing when the music stopped just being poor.
You just can't compare what's happening in the US and Australia. In the US in many large cities you can still buy a house for <$100,000. Where can you say that in Australia?
We were recently looking at relocating to Sydney and were blown away by how prices (including rents) had increased since I last lived there (in 2002).
The interesting thing to me is that rents in Australia seem to have skyrocketed while prices have not (they're high, but rents are higher). In the US the housing bubble was characterized by prices increasing far faster than rents (which led to an illusory improvement in standard of living as people borrowed against "equity" and spent the difference). It looks to me as though Australian rents have risen faster than prices, which presumably has the reverse effect.
US prices were driven by rampant speculation fueled by shady lending practices where the lenders weren't accountable for defaults and a product that was doomed to failure from the start.
While there has been speculation in Australia, it seems driven largely by structural changes in the economy. Resources has brought a lot of money in. Those people traded up for property closer to the ocean and/or the city, driving up those prices leaving new entrants to live further and further out.
This is basically a natural phenomenon that happened in a somewhat accelerated fashion. I see a plateauing of prices for some years to come as a result.
Rents are simply playing catch up with the change in house prices. They always lag. There's nothing surprising here.
It is however concerning because Australia is very much dividing between the haves (construction/resources) and the have nots (everyone else).
I largely missed this bubble as I was working in Europe at the time (2001-2004). As it turns out, financially speaking I would've been better off buying a house for $80k (in 2000, worth $350k+ in 2004-2005) and sitting on a beach in Spain for 4 years than working.
Australia just isn't that attractive a place to live (for me) now and that's kinda sad.
Those are the components of house cost, not price. Price is determined by supply and demand. Take two identical houses on the same street, the one in the superior school district will command a much higher price.
I hear this argument a lot. While I think it would be an exaggeration to say that what Wall Street does benefits no one, at the same time it's clear that what Wall Street does is designed primarily to benefit themselves. Any benefit to society is merely a happy accident that gets leveraged for propaganda purposes, whereas on a day to day basis what they're really doing is earning money off the backs of those that are actually trying to do things that benefit society.
So what?
I don't begrudge them making a profit. Capitalism is the engine that propelled us from riding around on horses to putting a man on the Moon in the span of one man's lifetime.
But there are builders and extractors [1]. Allowing a farmer to forward-sell his crop so his income is known adds value. It also allows consumers to know what price they're paying in advance. Both of these make a profit for the bank but they provide value to both parties. This is not a zero sum game.
But when banks create funds that stockpile food for the purpose of driving up prices, the only real beneficiary is the bank's investors. In the short term, suppliers benefit from higher prices but long term you face increased inflation if the price rise is sufficiently large and you start applying the inevitable "me too" to other industries.
If you'd like to see how well denying the profit motive works you need look no further than the former Soviet Union.
The solution in the aftermath of the Great Depression was Glass-Steagal and capital controls globally. This meant,
1. The money supply effectively only circulated within each country and transfers between countries were always linked to trade. Since jobs follow business investment, this meant very high employment per nation.
2. Financial instability had minimal to zero systemic impact in advanced countries because banks were only permitted to engage in funding and financing directly related to the real economy.
3. In addition, a side effect due to the partitioning and lack of artificial wealth interconnectedness, TBTF was not possible.
4. All manner of speculators were able to exist even then, but they knew they only had one chance with the capital they had since completely different types of financial activity were not allowed to co-mingle under the same organisation or group.
5. Finally, money was linked to the gold standard and debt creation (including printing) that did not relate to trade was very difficult - though not impossible, especially for governments which wanted to run or extend huge war machines for their empires.
Having to pay for the Vietnam War and coinciding with domestic inflation, caused Nixon to move the dollar off the gold standard in 1971, a fitting end to the Golden Age on 15 August 1971. Almost exactly 40 years later, here we are - in real (inflation-adjusted) economic terms per capita for median person effectively back to square zero with the worst in the real economy still to come as the ripples of the crises continue on through entire sovereigns.
An alternative way to look at it, is that the combination of financial deregulation and financial "innovation" since 1980 caused capital to move well-ahead of the globalisation of the real economy. Like a very strong wave, it caused ripples and bubbles in the assets available to it before real growth and high quality assets (including highly educated workers) backing it caught up. In a sense, the financial industry became too efficient at shifting liquidity and wealth transfer relative to the underlying economy. Combine this with the enormous increase in money supply generated by the political masters of the new fiat currencies, this meant the mother of all deleveraging and financial crisis was being deferred into the future. Well, the future is here now.
In short, there is a reason why in every country above subsistence level in the world, the financial industry is almost as heavily regulated as the nuclear industry. Like writing a good, large and complex computer program, having a few huge procedures with many side effects is far worse along every dimension than having many much smaller and well-organised functions with minimal to no side-effects.
The solution is "Compartmentalization" aka. Glass-Steagall on steroids for the financial industry. It is even advocated by high profile economists and others who publicly foresaw the 2007 crisis.
Um, the dotcom bubble happened under Glass-Steagall. So did 1987, the 1997 Asian financial crisis, and the 73-74 crash.
3. In addition, a side effect due to the partitioning and lack of artificial wealth interconnectedness, TBTF was not possible.
No. The Savings&Loan bailout and LTCM bailout both occurred under the Glass-Steagall regime.
4. All manner of speculators were able to exist even then, but they knew they only had one chance with the capital they had since completely different types of financial activity were not allowed to co-mingle under the same organisation or group.
You have no idea what you are talking about. The decline of product-specific trading desks was caused by the onset of stat-arb and had nothing to do with Glass-Steagall.
40 years later, here we are - in real (inflation-adjusted) economic terms per capita for median person effectively back to square zero...
This is a statistical artifact. The median person who's parents were in the united states in 1968 has income (adjusted for chained CPI, which is not the same as inflation) 29% higher than their parents. Immigrants lower the average/median.
http://crazybear.posterous.com/did-immigrants-and-simpsons-p...
Except for that it was actually socialism that put a man on the moon, seeing as it was a government project.
Ironic that it was Communism that beat us at every milestone except for the last one, and only due to an accident of history (the death of the leader of the Soviet space program just before a push for a moon mission and the lack of someone to fill his shoes).
Let's be honest: massive technological pushes that do not deal with production efficiency have nothing to do with capitalism or even democracy.
Unfortunately, having your own former employees moving into positions holding political power (http://en.wikipedia.org/wiki/Jon_Corzine , http://en.wikipedia.org/wiki/Henry_Paulson) is not Capitalism, it's Oligarchy.
The "no doc" and "low doc" lending was "encouraged" by US govt regulation, specifically "if you're not loaning enough money to {the disadvantaged}, we're going to shut you down". Meanwhile, the "govt sponsored enterprises" that ran the secondary market for mortgages were buying portfolios of crap and lying about it. The latter meant that no one knew how much crap was in the market.
> Combine this with Federal government bailouts and investment bankers seem to act with complete impunity with regards to risk.
Of course they're going to bail out their buddies, future employers, and campaign funders (I'm talking about Obama here).
> Much like a law firm, the partners are personally liable for losses.
Partners at major law firms are NOT personally liable. They've all moved to LLPs and the like.
"From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression -- and they're about to do it again"
http://www.rollingstone.com/politics/news/the-great-american...
You'll find out that the Goldman you're using is not the same Goldman that the elite have access to.
So... how exactly would one go about this? Possible?
http://www.trulymovingpictures.org/festival-years/2010/movie...
Linked is a review of the movie Zero Currency, about a former social worker who stopped using money or barter. Disclaimer: I haven't seen it.
A good place to start would be to own your own home, aggressively invest in solar energy, and grow your own food.*
All that's pretty expensive though...maybe you could go work in finance and save up?
*3D printing might also be worth a look for some items.
Bottom line, it's difficult to fully opt out. But what you suggest is not a bad start.
http://www.simplerna.com/2011/11/who-are-biggest-commodity-t...
Futures markets have a purpose, in food and energy for example, but GS along with others has been manipulating them in dodgy ways. Ditto for this article and aluminum. They helped Greece cook the books to enter the eurozone, and then insured against Greek default knowing there would be bailouts. They recommended to various customers to invest in all sorts of CDOs while at the same time betting against them having internally decided they were going to fail. There is absolutely no doubt in my mind that there should be numerous prosecutions in relation to GS but incompetence in public officials with a generous sprinkling of corruption makes this unlikely.
I'm a big fan of America but I've never understood the romanticism around the mafia (the Godfather films and the Sopranos TV series for example). If I had friends in the mafia I would disown them, and I'd seriously rather die than join it. While GS is perhaps not as bad directly, indirectly the consequences of their actions have been and are enormously immoral. I recommend you challenge your friends on these issues firmly, send them a link to Salman Khan's story[1] and tell them to put their (no doubt considerable) talents to better use: doesn't have to be a non-profit either. Even if they decide not to leave they should be made aware that there is social sanction associated with being linked to, if not directly involved in, the vortex of corruption surrounding that company.
> Please tell us about the time you, {name}, most successfully hacked some (non-computer) system to your advantage.
Other than the allegations of misleading clients regarding CDOs -- which, if true, are criminal and utterly reprehensible -- pretty much everything else on that list fits this criterion. Amoral and mercenary, but about hacking the system to their advantage.
It's regulators' jobs to close loopholes, but we should hardly be surprised when capitalist enterprises exploit them until they're closed.
Regulators set stupid rules, Goldman makes money. The US gov't offers insurance via the Federal Reserve, there's nothing immoral about taking advantage of someone else's stupid offer.
If the government opened an Apple store selling 17" MacBook Pros for $200 why would you not buy as many as you could, and resell them for $1500? I don't give a shit if it eventually put every Apple store employee out of business. Oh you have a one laptop per person rule? Ok, I'll pay people to stand in line. Problem sovled.
As for market manipulation of wheat prices, Goldman is only following suit in the official policy of the United States gov't. Exactly why do you think FDR ordered wheat to be burned while people were starving?
As for metal price manipulation you may also want to look at FDR and devaluing the dollar and making holding gold illegal to force the sale.
To accept employment there requires a conscious relinquishing of moral culpability - i.e., these people have decided that, yes, what the company does is fundamentally wrong, but for whatever reason (money, fame, power, the thrill of the hack, satisfaction of working on the winning team, etc) they don't care.
I'm not sure what use it would be to preach to people like this.
You can't preach to people like that, they're fully rational and immune to patriotic emotional dulce et decorum est bullshit.
They don't care that their going to hell for their actions because they know hell doesn't exist.
The world isn't some retarded star wars black and white fantasy, it's black and black pretending to be white. Stop naming shadows in platos cave and get out into the sunshine.
Google didn't succeed because open source is some miracle of business, they succeeded because they created a platform for clicking ads and open source software makes that platform cheaper. Gmail isn't a gift to the internet community, it's more ads. If they didn't make money from it, they'd shut it down.
But yet I'm not out there destroying livelihoods for personal profit. Way to pander to the stereotype that fear of the hereafter/almighty is the only way to get people to act morally/curb antisocial behavior.
I police my own behavior because, by some lucky stroke of evolutionary development, I have been granted the ability for high-level thought. Many people have been able to use this tremendously powerful ability to better us all collectively. Some seem only interested in using theirs for self-interest, even at the (grave) expense of everyone else.
This really is the core of it though: many people I've met in finance do believe wholeheartedly in "might makes right" - that morality and what the system allows them to do are one and the same.
I fear these people greatly.
That thing you automated? Someone who doesn't know how to program lost their job because of it, and it ain't coming back.
You'll tell yourself that you've created opportunities for two more programming jobs for someone else to enhance your automation work, but that guy with the GED is still out of work. Tough shit buddy, should have learned to program.
The difference between you and people in finance is they've stopped lying to themselves about what they do. Btw, I'm a programmer whose going into finance. Why? Because I can eliminate more jobs and make more money for myself doing that then I could eliminating jobs as a programmer. Now I'm just eliminating big money financier jobs instead of 40K grunt jobs. Hey broker dude, screw your 5% finders fee, my program will take 1% instead. Hit the bricks pal. Middle men need to eat just as much as producers and consumers.
We put people out of work for our own personal profit, the only difference is you're pretending about what you do and I'm not.
And you know the really funny thing is? We'll all be better off because the next generation of people won't have to do those silly jobs, but in the mean time people are going to be out of work.
Do you know how many researchers, secretaries, etc are out of work because of Google? Stop kidding yourself and get real about how the world works.
I could write a brilliant essay filled with bullshit about how I'm making the world a better place increasing efficiency, allowing one person to do more, and live a better life, and it would be just as true as what I just wrote. Financiers know double entry accounting and they know that for every credit there is a debit, both sides of the leger are equally true.
I don't know. Nobody does. But there is some measure of balance to what we do. What we do has a benefit - a benefit to someone other than just ourselves. Right now I work in travel informatics. What I do empowers tens of millions of customers to make better choices about how they travel, find better prices, put more information at their fingertips, keeping them informed.
The price of this is that I'm also putting airline service agents out of work, not to mention travel agents. I've made an end run around them and made it easier to get all of this information than going and talking to a human.
Personally, I think this is a worthwhile balance. The loss of these jobs also means a massive improvement to the efficiency of travel, and the happiness of tens of millions of travelers. This isn't a clueless assumption either - the emails I've seen from users demonstrates that people are passionate about what we do. You can disagree - and you wouldn't be wrong. I am, after all, not the arbiter of what is and isn't a worthwhile trade.
There's a difference between this and what Goldman does, though. The balance is way on the other end of the scale. The artificial supply squeeze on industries benefits... what exactly, besides Goldman itself? The price is obvious - rising consumer prices, starving people who can no longer afford to eat (re: the food crisis that Goldman is also accused of contributing to), wars and revolutions caused by desperate, hungry people.
So what's the upside? What did we gain for this price Goldman has exacted?
> "Financiers know double entry accounting and they know that for every credit there is a debit, both sides of the leger are equally true."
Please name the "credit" of what Goldman has done here.
We're not idiots, we know there's a credit and a debit. The question is, this doesn't seem to be the case in situations like these, where it seems we're all paying the price, and the only "credit" is to the financier.
Except, his breed of evil is considerably more extreme than ours.
If aluminum becomes more scarce in the future (Goldman seems to be betting that it will be), then Goldman has done us all a favor by conserving it in the present.
If it is not more scarce in the future, then Goldman will lose money.
False.
If your self-justification works for you -- great. But you're lying to yourself if you think it has to be that way or that that is the only way. Computers (& technology generally) enable new business models at the same time as they make other models obsolete, such is life. Whether you think that balance tips one way or another is your business -- but your blatant cynicism and "oh, the world has to work this way" seems like you just letting yourself off easy.
That said, i wish you the best putting those big-money financier jobs out of work :)
I suppose you could have engineers drive around with clipboards, but the amount of data collected and the frequency its collected at would suffer. In other words, that job could never exist for a human.
Is that close enough to count for your "theoretically"? I don't think so, personally, as it could never make business sense to have that job be needed for the operation of the business, so...
You give people great intellectual credit in one breath and then decrease their worth vis a vis your bottom line the next. Which is it? Are they smart enough to look through BS or are they cattle for you to replace with a small shell script?
Remember, people voted for Bush for the same reasons you feel they are above: They believed he was a good Christian man that they could share a beer with. His put-upon Southern accent (I mean, really, what born-and-raised New Englander you know has a drawl? Honestly?) won "hearts and minds"
"The world isn't some retarded star wars black and white fantasy, it's black and black pretending to be white"
Yes, and I guess those billions given to the Red Cross were rounding errors on some software somewhere and only robots volunteer at homeless shelters and everyone walks past rape victims on their way to Cabaret. We get it, you're hardcore and you see the world as a gigantic Somalia with money as the single, thin veneer of civilization keeping us from eating each other.
I suppose Lloyd Blankfein is the philosopher-king of this post-apocalyptic wasteland of "black on black" you describe, sitting forlornly on his throne of skulls. I'd laugh if you weren't so goddamn serious about it.
"Google didn't succeed because open source is some miracle of business"
And, yet, Red Hat made $1 Billion last year, gives every stick of code away. So does Wordpress, and Sourcefire. And, before being acquired, so did Xensource and MySQL. Github makes millions from the Git open source SCM.
From how I understand the article Goldman has rediscovered a valid business opportunity that has been around for centuries. People always stockpiled supplies for later times and Goldman is doing it on a large scale. Even if they would be able to dominate the world market by this strategy, this situation would only sustain to the point when other material can be used as a substitute. So I personally don't see there a problem with this as long as they do not influence the market on the legislative side.
If there is a consensus among society that this is wrong, than it will be regulated. I personally condemn this increasingly popular idea that business should conduct self-infliction by neglecting opportunities just because certain parts of society disagree with perfectly legal practices.
This is caused by legally mandated chinese walls, designed to give banking customers confidence that the bank is behaving in their best interest.
The sales/structuring desk is legally obligated to structure/sell CDO's after agreeing to do so. They are also obligated to maintain a fair bit of internal secrecy. They structure the CDO, write the contracts, package and sell it. That's all they do, and they do this because the loan originators paid them to do so.
Meanwhile, probably in a different building, the prop desk is shorting the CDO because they think it's a bad bet. The prop desk knows nothing about the CDO except what is contained in the sales prospectus sent out by the sales desk (which is usually quite a lot).
It's highly illegal for either of these groups of people to talk to one another. Their computer systems don't talk to each other and compliance will fire people if they send each other email. By law, the left hand can't know what the right hand is doing.
The prospectus presumably described the security being sold as long on housing. If housing went up, it would have increased in value. Since housing went down, it decreased.
The security did what it was supposed to do. The fact that the people who bought it made an incorrect bet doesn't make the people selling it evil.
I'm not really sure what he means by this, although some stuff I read recently suggested that traders will often sell and buy a security at the same time in order to make the stock look more active/liquid and encourage other investors to join in. Anyone care to elaborate on this?
The chinese wall explanation offered elsewhere makes more sense though.
However, persuading a potential buyer that something is worth a high value while secretly you believe the value is low is another matter. That's what people do all the time, though, not just bankers. For example, a lot of sales people do that.
However, there is a difference. Most people know to take what a sales person says with a grain of salt. Besides, if you don't like the sales person or his product, you can always walk away. In the case of banks, there is a lack of integrity somewhere. People were expecting the government to protected their interest by making and enforcing the right regulations. The government didn't do that and banks made off with public money. The government involved the public in its complicated legal and financial system that is hard to understand for common people, and failed to make it work for them.
Somebody should just start a new metals exchange that caters to the needs of its clients rather than trying to squeeze them. There is no reason why America has to do its metals trading in some ancient London exchange.
I don't completely understand what is going on in the original story but it also wouldn't surprise to find out that it is only via the existance of various regulations that this scheme is viable.
Interestingly, the propaganda used to win public support for these moves is that "big government is bad, and we should let the market decide".
Your opinion of regulations needs to take a 180, in my opinion :)
"The date was November 4, 1999. Senator Byron Dorgan was captured only by the cameras of CSPAN2.
"I want to sound a warning call today about this legislation," he declared, "I think this legislation is just fundamentally terrible."
The legislation was the repeal of the Glass-Steagall Act (alternatively known as Gramm Leach Bliley), which allowed banks to merge with insurance companies and investment houses.
The title of the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."
Ten years later, Dorgan has been vindicated. His warning that banks would become "too big to fail" has proven basically true in the wake of the current financial crisis. He seems eerily prescient for claiming then that Congress would "look back ten years time and say we should not have done this."
http://www.huffingtonpost.com/2009/05/11/glass-steagall-act-...
Even the titles of bills in this country are propaganda. It's frustrating.
People like Christopher Dodd should definitely be in prison. Take a look at his role and support in the article linked above, and then take a look at this:
https://secure.wikimedia.org/wikipedia/en/wiki/Chris_Dodd#Co...
Regulations that enhance and encourage fair competition should be supported. Regulations that reduce competition or hinder commerce should not be supported.
There is always concern for negative externalities and this is an area where regulations can have a role.
If prices rise due to increased demand, the free market usually solves it by increasing supply. In this case, Goldman doesn't actually use the aluminium. I guess that suppliers don't ramp up production because Goldman slowly sells the aluminium back to the market. The purpose is probably to influence the price at specific times, and to make it more volatile in general. Which counters the purpose of exchanges and futures contracts.
Somebody should just start a new metals exchange that caters to the needs of its clients rather than trying to squeeze them.
The clients of the exchange are aluminium consumers and suppliers, and they have different needs: while the consumers prefer low prices, suppliers want them high, to get a better margin. If prices were lower at one exchange (good for consumers), two things would happen:
1: Suppliers would sell their products at another exchange for a better price. Lower supply at the cheap exchange means that prices rise.
2: Arbitrageurs would buy at the cheap exchange and sell at other exchanges. Increased demand also leads to rising prices.
There is no reason why America has to do its metals trading in some ancient London exchange.
True, but "America" chose to trade in Olde Europe: aluminium was available at the New York Mercantile Exchange until 2009.
However, I think stockpiling cancer drugs is a market distortion, which might justify government intervention in the form of price ceilings for various generic drugs.
It sounds like metal traded on the LME must be stored in an LME certified warehouse. The LME-certified warehousing market doesn't appear to be very competitive, as Metro/GS can take its sweet time getting you your metal yet not go out of business. _LME's_ conflict of interest is that it's supposed to regulate warehousers when one of its biggest members (GS) owns said warehouses. The alleged "warehouse strategy" then was for GS to buy the warehouses and create the conflict in the first place.
Did I get it?
The stuff Goldman Sachs is doing pales in comparison to what China has been doing over the past 5-8 years.