Sunday, August 9, 2009

The scam of the century

As the bankster crisis broke last fall, I recall commenting in this blog about how Hank Paulson should be investigated for conflict of interest at least, if not outright criminal activity for his relationship with Goldman Sachs. Now, suddenly, this idea is
gaining traction in the MSM. Even the NY Times has run an investigative piece, focusing on the ethics (or lack thereof) exhibited by Paulson during the bailouts.

In a somewhat humorous twist, the Times reports that Paulson requested and received an “ethics waiver” so he and Goldman CEO Blankfein could spend more quality time together. WTF – since when do government officials need prior approval for “ethical waiver”? Apparently the topic of discussion was having the Treasury funnel billions of bailout funds to Goldman, and helping to off a couple of major competitors (Bear Stearns and Lehman). As we know, mission was accomplished on all counts.

Well, the bailouts did their job, and today Goldman is solidly in the black. Actually, they are so successful that it raises some interesting questions about just how they are generating such impressive profits while the rest of the financial industry struggles.

A recent
news item surfaced, concerning a former Goldman Sachs programmer that was arrested for stealing proprietary stock trading software. Goldman made a nearly hysterical plea for authorities to hold him without bail, implying the software theft represented a threat to the entire financial system, though he was later released on $750,000 bail. Didn’t the judge think of asking what the nature of the threat could be?

Just what does this stolen software do? According to reports, it allows traders at Goldman Sachs to monitor stock trades in real time. Since most trades are now funneled through the computer network that Goldman controls, the program can analyze transactions during a split-second window while still pending but not finalized. And, it can execute programmed buy or sell orders based on the pending transactions, and conceivably profit from market trends that are about to happen. Thus, the stolen software is the ultimate insider trading tool. So now we know why Goldman’s stock brokerage operation has become so profitable, and why they are so desperate to keep the stolen copy out of play.

For some reason, this story has not gained much traction in the MSM. Wouldn't you think people ought to be asking questions about this software? Such as, just what legitimate use could there be for it? Perhaps the recent uptick of scrutiny on Paulson is a signal that the spotlight will be placed on Goldman, so this story could become really huge.

Of course, if the “green shoots” of recovery were real, folks might be more apt to forgive and forget the criminal activity surrounding the bankster crisis of ’08. Alack and alas, such fortune was not meant to be. Recall that nothing has changed regarding the vast derivative bubble that precipitated the crisis – the 700 billion TARP certainly was inadequate in the face of trillions in toxic debt.

The outlook that I foresee includes another major banking crisis by the end of the year, as the toxic derivative monster makes its presence unmistakably felt. This and other factors will converge for the perfect economic storm.

The federal annual deficit reached a trillion with 3 months left in the fiscal year. Tax revenues are diving, while spending is escalating. Keynesian economic theory normally would call for this scenario, except that this might finally be our day of reckoning. The rest of the world will likely cut off the flow of credit now. When the Treasury attempts to auction hundreds of billions in bonds, as they must do several times per year now, and nobody bids – then what?

No matter how you slice it, the model we have been pursuing is just not sustainable. It would have crashed sooner, except for the bubbles that were inflated to forestall the inevitable. Even in good years, the nation ran many billions of monthly deficit in balance of payments. With most productive jobs moved offshore, this means that we relied on borrowing from the rest of the world to keep our consumer lifestyle humming. Most jobs in recent years were created in the services sector, which meant that we simply pretended we were creating more wealth. The tangible goods we need have been produced by virtual slave labor in China, and we just added the bill to our growing tab. Now what happens if our credit gets cut off?

The home foreclosure situation is worse than reported, because banks have been reluctant to move troubled mortgages off their balance sheet. This will catch up at some point and the news will not sound upbeat any longer.

The unemployment statistics are distorted because those who ran out of unemployment benefits are not longer counted – keep that in mind when the pundits engage in happy talk over this. The stories circulating of skilled workers competing with thousands of others for each open position tells the tale. When widespread hiring actually resumes, rather than just the rate of reported lob loss declining, then I will be willing to believe in "green shoots of recovery".

A year from now we will definitely be looking at greatly changed scenery. Inflation may kick up to accelerated levels, especially on imported goods. The feds will either fund the deficit by printing vast amounts of money (and abandoning the pretense of "borrowing"), or else government operations will begin to fail. People may begin to measure wealth in terms of food and tangible goods rather than money.
Therefore, it behooves everyone to understand the nature of Paradigm Shift, for this is what we are witnesssing. Understand what it is and where it is leading us, for all is not necessarily doom and gloom.


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