Britannia Radio

The Daily Reckoning | Friday, December 31, 2010 The year that Goldman "became the house" and won all bets, The Bernanke connection and why John Q. Public is now the sucker bet, Plus, Bill Bonner on the maybe recovery and seeking the gods' advice in Nicaragua... The Daily Reckoning Presents Goldman's Perfect Quarter Eric Fry [Reckoning on May 12, from Laguna Beach, California] While the European Central Bank (ECB) was busy manipulating markets and making headlines Monday, Goldman Sachs was quietly revealing a different story of market manipulation...or something that walks and quacks very much like a market manipulation duck. In an SEC filing, Goldman disclosed its first-ever "perfect" quarter. The firm's proprietary trading desk navigated the first quarter without producing a single day of losses, the first time it had accomplished such a feat. How is this possible? Please permit us to offer a simple explanation: It's not. Imagine a poker player who competes against skilled competitors for 63 sessions of 6 1/2 hours each, then walks away with a profit after all 63 sessions. Would that be possible? Not unless the poker player is holding a stack of aces up his sleeve. But Goldman accomplished this improbable feat. Its trading desk turned a profit on each and every day of the first quarter - that's 63 trading sessions of 6 1/2 hours each, not counting whatever additional shenanigans Goldman was conducting in foreign markets. There is something wrong with this picture...very, very wrong. And yet, Goldman trumpets this success as an example of something that is very, very right. "This is the first time we have reported zero trading loss days in a quarter," crowed Samuel Robinson, a Goldman Sachs spokesman. "We believe it shows the strength of our customer franchise and risk management." An alternative interpretation would attribute Goldman's uncanny trading success to the strength of its "political franchise," subsidized risk- taking and various forms of de facto front-running. If, as James Howard Kunstler asserts, the US stock market has become "a robot combat arena where algorithms battle for supremacy of the feedback loops," Goldman Sachs must control the "Supreme Combat Robot." But we wonder whether this robot is abiding by all applicable securities laws, or vaporizing them with his special "Mega-fraud laser beam." "If you ever wanted to see what a monopoly looks like in chart form," jokes Tyler Durden from Zero Hedge, "here it is: "The firm did not record a loss of even $0.01 on even one day in the last quarter," Durden says. "The statistic probability of this event is itself statistically undefined. Goldman is now the market - or, in keeping with modern market reality, Goldman is the 'house,' it controls the casino, and always wins. Congratulations America: you now have far, far better odds in Las Vegas that you have making money with your E- Trade account." In fairness to Goldman, JP Morgan also produced a perfect quarter of proprietary trading. Morgan Stanley, the relative loser in the crowd, managed to produce a trading profit on only 93% of its trading days. "The rape and pillage of the middle class was not isolated to Goldman," Durden continues. "JP Morgan also had a flawless quarter. And if the odds of Goldman making 63 out of 63 are virtually impossible in any universe in which risk goes hand in hand with return (but in those in which monopolies are encouraged and bailed out), the coincidence of the two main firms that control the world having a perfect track record is impossible. And since things in reality tend to be zero sum, when everyone makes money, someone may be tempted to ask the question, just who is losing money? And the answer, dear taxpayers, and [Goldman/JPMorgan] clients, is you." Perfection is either a religious virtue or a devilish fraud, dear reader; it is never a financial market reality. So there's something a little troubling about the perfection achieved by Goldman's (and Morgan's) trader-bots. In fact, there might be something a lot troubling about their trader-bots, as well as their investment-bank- atrons. Perhaps the truth will come to light in the fullness of time...or in the details of a future SEC complaint. Goldman acknowledged in Monday's SEC filing that it still faces a large and diverse number of criminal and quasi-criminal investigations. In addition to a bevy of investigations by the SEC, Goldman is facing detailed probes by the Justice Department, the Financial Industry Regulatory Authority and the UK's Financial Services Authority related to CDO offerings and related matters. "We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions [will be] commenced against us with respect to offering of CDOs," Goldman's filing somberly disclosed, "[These probes] could result in collateral consequences to us that may materially adversely affect the manner in which we conduct our businesses." Hmmm...we'd guess that the list of "collateral consequences" would include reducing Goldman's trading success from 100% to something much lower. And since trading revenues accounted for 80% of Goldman's revenue in the first quarter, we'd guess that much lower net profit will be another "collateral consequence." Outing Ben Bernanke by Eric Fry [Reckoning on Dec. 15, from Laguna Beach, California] Deception in the financial markets is not always costly, but it is rarely remunerative. Investors cannot afford to ignore this tendency. Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis. These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed. Thanks to these spectacularly large taxpayer-funded bailouts, Goldman was able to continue "doing God's Work" - as CEO Lloyd Blankfein infamously remarked - like the work of producing billion-dollar trading profits without ever suffering a single day of losses. Thanks to the Fed's massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve. By repaying its TARP loan, for example, Goldman wriggled out from under the nettlesome compensation limits imposed by TARP, while also conveying an image of financial strength. But this "strength" was illusory. Goldman repaid the TARP loans with funds it procured days earlier from the Federal Reserve. Then, over the ensuing months, Goldman recapitalized its balance sheet by selling tens of billions of dollars of mortgage-backed securities to the Fed. And the public never knew anything about these activities until two weeks ago, when the Fed was forced to reveal them. In a free-market economy, certain precepts seem fundamental...and essential: 1) Taxpayers have a right to know who's spending their money. 2) Dollar-holders have a right to know who's debasing their money. 3) Investors have a right to know who's cheating them out of their money...by hiding the truth. All three camps have a very large and legitimate bone to pick with the Fed's secret bailouts of 2008 and 2009. But let's consider only the case of the deceived investor... Secret bailouts do not merely benefit recipients; they also deceive investors into mistaking fantasy for fact. Such deceptions often punish honest investors, like the honest investors who sold short the shares of insolvent financial institutions early in 2009. Some of these investors had done enough homework to understand that no private-market remedy could ride to the rescue of certain financial firms. Therefore, these investors sold short the shares of certain ailing institutions and waited for nature to take its course. But the course that nature would take would be shockingly unnatural. We now know why. The Federal Reserve altered the course of nature, and did so without telling anyone. Many of the investors who sold short ailing financial firms in 2009 were alert to the possibility that bailouts by the Federal Reserve could change the calculus. In other words, the Fed could make the bearish case less bearish...at least temporarily. Therefore, many of these investors studied the Federal Reserve's disclosures, as well as corporate press releases, in order to quantify the Fed's influence. Based on all available public disclosures, the story remained fairly grim into the spring of 2009. Accordingly, the short interest - i.e., number of shares sold short - on Goldman Sachs common stock hit a record 16.3 million shares on May 15, 2009 - about 3.3% of the public float. But over the ensuing six months, Goldman's stock soared more than 30% - producing roughly $500 million in losses for those investors who had sold short its stock. Not surprisingly, the total short interest during that timeframe plummeted to less than 6 million shares, as short-sellers closed out their losing positions. Was it just bad luck? Or was something more nefarious at work here? Let the reader decide. But before deciding, let the reader carefully examine the chart below, while also carefully considering a selection of public announcements from Goldman Sachs during this timeframe. Based upon contemporaneous public disclosures, Goldman Sachs was "forced" by the Federal Reserve to accept a $10 billion loan from the TARP facility in October 2008. But Goldman's top officers repeatedly - and very publically - bristled under the compensation limits the TARP loan imposed. Therefore, as early as February 5, 2009, Goldman's chief financial officer, David Viniar, remarked, "Operating our business without the government capital would be an easier thing to do. We'd be under less scrutiny..." And on February 11, 2009, CEO Blankfein magnanimously remarked, "We look forward to paying back the government's investment so that money can be used elsewhere to support our economy." But at that exact moment, we now know, Goldman was operating its business with at least $25 billion of undisclosed "government capital." In April, 2009, The Wall Street Journal observed, "Goldman Sachs group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government's thumb... Goldman's managers have a big incentive to escape the state's clutches. Last year, 953 Goldman employees - nearly one in 30 - were paid in excess of $1 million apiece... But tight federal restrictions connected to the financial-sector bailout have severely crimp the Wall Street firm's ability to offer such lavish pay this year." On May 7, 2009, a Goldman press release states: "We are pleased that the Federal Reserve's Supervisory Capital Assessment Program has been completed... With respect to Goldman Sachs, the tests determined that the firm does not require further capital... We will soon repay the government's investment from the TARP's Capital Purchase Program." On June 17, 2009, Goldman finally got its wish, thanks to some timely, undisclosed assistance from the Federal Reserve. Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman "repaid" the Treasury by secretly selling illiquid assets to the Fed. One month later, Goldman's CEO Lloyd Blankfein beamed, "We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake." As it turns out, the government continued to "revitalize" that small sliver of the economy known as Goldman Sachs. During the three months following Goldman's re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman's TARP re-payment. Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman's balance sheet during this period? Did they not deserve to know that the Fed's MBS buying was producing Goldman's "perfect" trading record during this timeframe? Yes, would seem to be the obvious answer. "There's a saying in poker: If you don't know who the patsy is at the table, it's you," observes Henry Blodget, the once and again stock market analyst, "Next time you feel like bellying up to the Wall Street poker table, therefore, ask yourself again who the sucker is." Regards, Eric Fry for The Daily Reckoning Bill Bonner Continuing on the Path of Economic Stupidity Bill Bonner Reckoning from Los Perros, Nicaragua... New Year's Eve Not much action in the markets yesterday. So, let's pass along some good information from the economic front. The latest news reports tells us that the economy is improving! Bloomberg: Businesses in the US expanded in December at the fastest pace in two decades, adding to evidence the world's largest economy is accelerating heading into 2011. The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed by Bloomberg News and the highest level since July 1988. Figures greater than 50 signal expansion. Gains in business investment on new equipment and growing exports to emerging economies will keep factories churning out goods in the coming year, contributing to the recovery. Reports showing consumer spending is also picking up mean retailers will need to restock shelves, giving manufacturing a further lift. The report today from the Labor Department showed claims for jobless benefits fell last week to the lowest level since July 2008, showing the labor market is improving heading into 2011. Filings decreased by 34,000 to 388,000 in the week ended Dec. 25, fewer than the lowest estimate of economists surveyed. The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge, figures from the National Association of Realtors also showed today. The index of pending resales increased 3.5 percent after jumping a record 10 percent in October. Retailers' 2010 holiday sales jumped 5.5 percent for the best performance since 2005, MasterCard Advisors' SpendingPulse, which measures retail sales by all payment forms, said this week. That compared with a 4.1 percent gain a year earlier. The numbers include Internet sales and exclude automobile purchases. Automakers are also seeing sales increase. Vehicles sold at an annualized 12.3 million rate in November for a second month, the fastest pace since the US government's "cash for clunkers" program in 2009, said Autodata Corp. Hey, we've got our ideas. The gods could have different ones. Who knows? They don't talk to us directly. So, maybe the economy is finally recovering. Or maybe it is just enjoying a brief bounce...before returning to its Great Correction funk. One thing we're sure of: stupidity got us into this mess; stupidity will get us out. Stay tuned for 2011. Happy New Year. *** "This place was booming three years ago. People did crazy things. Everyone thought prices would just keep going up, just like they were in the US." Yesterday, we took a horseback ride. The purpose was to look at some land for sale - about 900 acres of it, not too far from our house down here. "The owners thought they could develop this property and sell lots," continued the real estate agent. "But they ran into trouble with zoning. And by the time that problem was resolved the boom was over." The agent was a very handsome young man who came down to Nicaragua to surf. Like many others, he fell in love with the place and has been here ever since. "Prices never got as high here as they were in Costa Rica. And the beaches are actually nicer here. But it was amazing how fast prices were going up. And then, when the crash came, I guess nobody wanted to take a chance on Nicaragua. Or maybe it was just that the buyers ran out of money." We recall the bubble-like atmosphere around here in 2006. Buyers came in loaded with money and up to the brim with enthusiasm. All up and down the coast, properties were being bought up, carved up, and sold at higher and higher prices. Lots that cost $50,000 in 2002 or 2003 went for $300,000 or more 3 years later. As connoisseurs of financial foolishness, we knew what it meant. A bubble was happening, right in front of us. Heck, in a way, we were responsible for it. We had kicked off the development boom on the Southwest Coast of Nicaragua back in the '90s. We were among the first buyers. We came. We saw. We put down contracts. The "Pacific Riviera," we named it. In the year 2000, we bought one stretch of land - about 700 acres - on the ocean, for about $1.4 million. Then, in 2006, when a single 1-acre lot near our house, on the same land, sold for $500,000 we knew the end must be getting close. We alerted Dear Readers that the bubble was ready to pop. Then, ka-pow! In 2007, development on this part of the coast came to a stop. The boom was over. It wasn't so much that prices fell - of course they did; more importantly, the buyers disappeared. North Americans stayed home. Our own development projects slowed down. But since we had no debt, we could keep going. Other developers weren't so lucky. Some went bust. Some just went away. Up the coast, we saw a gated community. Only the gate was falling off its hinges. It looked abandoned. In another one, the homeowners were forced to take charge when the developer left the country; apparently they succeeded in keeping the project alive. "Almost every project on the coast is in trouble," said our real estate guru, Ronan MacMahon. "Real estate markets go through booms and busts too. But when you are in an area like this the busts really shake out the marginal developers. They don't have the money to continue." So, we mounted a few skinny local horses in order to look at one of them. This was a project that never even got started. Which was a good thing. There were no roads or water lines to repair. There was nothing at all. We rode up a mountain for nearly an hour. The horses struggled...stopped by exhaustion...and then went up some more. Water ran off their hindquarters. Foam lathered their mouths. Each time we thought we had reached the summit, a new hill appeared. Up...up...up ..steeper and steeper. Harder and harder. Finally, we reached the peak. What a view! We could see for 30 miles in every direction. On one side was a huge tract of government land, confiscated during the Sandinista period. On the other were the developments along the Pacific Coast. On the one side were the mistakes of government. On the other were the mistakes made by private investors. On the one side were the bankrupt land-redistribution schemes of the world-improvers. On the other were the bankrupt land sales projects of the developers. We looked left. We looked right. We breathed deeply and turned our face to the Heavens. We beckoned to the gods themselves. We beseeched them. "Tell us your secrets," we begged. Then, we went back down the mountain and had a drink. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com The Economic Flop that Was 2010 In America, the year ends with the private economy a little better off and the public economy a lot worse off. Two trillion worth of debt and liabilities were added to federal accounts this year. In terms of federal finances, the average man, woman or child will be about $7,000 poorer when he rings out the old year. More Risk Appetite for Fiscal Gluttons Government Spending, GDP and Nonsense In Between Them The Last Angry Man’s Problem With IMF Gold Sales Adrian Ash of BullionVault.com writes that “the International Monetary Fund said it has completed the gold bullion sales program begun in October 2009,” and now 403 tonnes of gold have been sold. I bring this up all the time because the whole thing pisses me off because we gave those IMF bastards the gold to provide gold-standard legitimacy for their stupid fiat currency, the Special Drawing Right (SDR). And yet here they are selling the gold we loaned them! Gaaahhh! Investing in Gold Ahead of the Chinese The Year of Living Quantitatively The Amphora Report’s 2010 Topics in Review (3 of 4) In 14 editions of the Amphora Report this year we have covered nearly 30 topics, many of which overlap in some way. What binds them all into a coherent set is our view that the economic policies being implemented in nearly all major countries are not just unsustainable but in some cases outright reckless. These countries include the US, the issuer of the world’s reserve currency. The Present: On the Brink of Disaster The Amphora Report’s 2010 Topics in Review (2 of 4) The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor