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Goldman's new money machine: warehouses (reuters.com)
182 points by amaranand on Nov 5, 2011 | hide | past | web | favorite | 82 comments



Investment banks do provide valuable services: market making (providing liquidity in many markets), capital raising, the creation of financial instruments so investors can hedge against certain kinds of risk and so on.

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.


"Investment banks do provide valuable services: market making (providing liquidity in many markets), capital raising, the creation of financial instruments so investors can hedge against certain kinds of risk and so on."

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.


> at the same time it's clear that what Wall Street does is designed primarily to benefit themselves.

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.

[1]: http://cdixon.org/2010/06/19/builders-and-extractors/


> 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.

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).


And the Apollo program was hardly a poster-child for capitalism: federal government-run program, very centralized and partly militarized, very wasteful and expensive, at a time when marginal rates of taxation where above 70%.

Let's be honest: massive technological pushes that do not deal with production efficiency have nothing to do with capitalism or even democracy.


in addition all this was motivated by the stiff rivalry with the centralized and militarized soviet union,


"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."

Except for that it was actually socialism that put a man on the moon, seeing as it was a government project.


Paid for with... Magic beans?


There is really only ONE possible and proven sustainable solution to this mess. It was realised in the aftermath of worst financial crisis ever seen, the Great Depression. It worked so well to create such stability, or at least certainly did not cause any harm to the real economy for so long, that the world saw the longest sustained period of growth it has ever seen and is also considered by all economists to be the "golden age" of capitalism from 1945 to 1971 (they only differ on precisely how the combination of all factors came together).

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.


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.

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...


> 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.

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.


Why do you assert that Australia "didn't have the bubble in real estate prices that the US did"?

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).


You're either understating (or simply unaware of) the extent of the real estate bubble in the US or you're overstating that bubble in Australia (or both).

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?


As an Aussie living in the US and somewhat out of touch with what's going on back home, I'm fascinated and confused by this. Are you arguing FOR or AGAINST the idea that there's a significant asset bubble 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.


I'm saying what's happened in the US and Australia is different.

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.


> There are two basic components in house prices: the cost of land and the cost of construction.

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.


Unfortunately I feel not much is going to change until something even more drastic happens (think brink of revolution), and that makes me sad.


> 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.

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.


We go back to having banks regulated similar to the laws in the 1970s or ask banks to pay off the Fed deficit to keep them un-regulated..


Goldman is the great american bubble machine, and it's disgusting.

"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...


So hypothetically if someone wanted to opt-out of this essentially corrupt system completely, how would they go about it? I mean paying taxes in a country with bailouts certainly ties you up into the system. Even without bailouts, living in a country tied to a dollar that's being printed like mad kind of ties you up into it too right?

So... how exactly would one go about this? Possible?


It's not trivial, but one way you could opt out would be...opting out.

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.


Even if you own your own home, you typically still have to pay taxes. You may have to earn some income if you don't have money saved up for your taxes, so you'll probably have to pay income taxes as well.

Bottom line, it's difficult to fully opt out. But what you suggest is not a bad start.


I'll check it out. I've always been fascinated by this way of living.



If only they had a solution for defending themselves and an answer to why national governments would deal with them (i.e., seasteads are unlikely to be self-sufficient, even in the aggregate, for many years if ever and therefore dependent on trade with existing national polities).


That's pretty interesting. If only it were more wife friendly.


It is not just Goldman doing this and not just for metals

http://www.simplerna.com/2011/11/who-are-biggest-commodity-t...


Like JP Morgan renting Supertankers to hold their oil: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...


Goldman is good but not THAT good. If Goldman knew everything why would anyone take their iBanking elsewhere?


Try investing $1,000 with Goldman and asking if you can get in on the next IPO.

You'll find out that the Goldman you're using is not the same Goldman that the elite have access to.


This has been posted here before. Part of me respects then for being such excellent hackers of the letter of the law, but mostly I agree that this firm in specific is a. Armpits squid which is out of control and distorts markets, causes widespread harm to markets and individuals, and is not effectively controlled by regulators (who are largely Goldman alumni, in their revolving door system). I have no idea what the right solution is to this problem. I am kind of ashamed to have several friends who now work for Goldman.


I think you raising "hackers" with this is the perfect way to describe the situation. Goldman are hackers in the same sense the main stream media refers to crackers as hackers, not hackers in the creative sense used by this community.

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.

[1]http://en.wikipedia.org/wiki/Salman_Khan_(educator)


The type of people that Goldman employs aren't stupid, or ignorant. I've known a few - they are perfectly aware of what the company does, and the moral minefield they are in.

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.


I'm going to take massive downvotes on this but...

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.


I don't care that I'm going to hell, because I know hell doesn't exist. Indeed, no matter how pious I act, by some religion's definition I'm damned anyways.

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.


You're a programmer, most of what you is put people out of work.

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.


Ah yes, you're right of course - there is no objective measure of the balance of good and evil. What I do does eliminate jobs. Does the benefit to everyone else outweigh the loss of these jobs? Many people would say yes, some would say no. Some job eliminations open the door for more jobs - for different people. Does this balance the morality of putting people out of work?

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.


The artificial supply squeeze on industries benefits... what exactly, besides Goldman itself?

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.


It's troubling that a comment like this has to be buried deep in a thread about religion, Platonic ideals, might-makes-right, higher-order thought, and the nature of morality --- most of it stipulating Goldman is evil.


In an ideal scenario that is what would happen. Unfortunately the invisible hand of adam is now tied behind his back. When 2008-2009 happened I was mildly optimistic that a new kind of finance firm would emerge - one which would use technology more intelligently, have a lower cost structure by virtue of having no bad assets on their books and one that would accept lower margins in order to make a headstart against established firms. In a well functioning market that is what would have happened - established players who got it wrong would have gone out of business leaving room for newer younger firms to spring up and do things in a better way. I still cannot place my finger on what exactly broke but the deadwood does not seem to burn in forest fires anymore.


In case you didn't read the preceding comment carefully, he knows that what you say is true, he just doesn't give a shit -- and, moreover, knows that you can't do a damn thing about it.


I suppose - though I got some sense that he thinks the engineering he does is the same as what we do. To be slightly snarky about it, his argument seems to be "we're all evil, I just own up to being evil, the rest of you suckers are just in denial".

Except, his breed of evil is considerably more extreme than ours.


We can overthrow existing power structures and execute him. Has happened before, will happen again. Amusingly, the harder he works and the better he is at his job, the closer this gets.


Right around the time you get around to execute him he'll have hired a private security force, bought off judges and police with all his millions and jet off to the next laissez faire economy. Don't kid yourself.


Where do I sign up?


The moral issue raised above was one of corruption and fraud, not efficiency. It seems you are trying to pretend that the issue is increased efficiency taking away people's jobs.


You're just describing one kind of programming. I write code that does things that literally couldn't be done by people. it's a job where there wasn't one before -- and it helps create other jobs where there weren't any before. I don't want to say our company wouldn't be able to exist without that code, because my code wouldn't exist without the rest of the company, either, but the point remains:

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 :)


Really? I'm curious to know what code you write then? I write code that does things faster/better/cheaper/easier -- but theoretically at least a person could perform whatever task I'm writing.


It collects measurements from distributed renewable energy installations and uses those measurements to measure & optimize the systems' performance.

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...


Because there's only so much value to be created, and we've reached "peak value"?

False.


"they're fully rational and immune to patriotic emotional dulce et decorum est bullshit."

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.


Isn't it more a case that they divorce themselves from reality by dealing with pure numbers? I gather they would only focus on prices and not even think about the impact it has on other companies and people.


If you knew the gov't would bail you out for any bad market moves made, why WOULDN'T you do exactly what Goldman is doing?

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.


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.

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.


So sales produces a prospectus that suggests this is a bad investment. Then they continue agreeing to package and promote these securities. Were there some information excluded from the prospectus which suggested to the sales force that they were actually a good investment, I might still be able to see them as honest. Otherwise, this sounds like an attempt to apply the Nuremberg defense where remaining in the situation of having immoral rules to follow was voluntary.


So sales produces a prospectus that suggests this is a bad investment.

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.


Right, but they do talk to each other.


If you have evidence of this, please notify the SEC.


No, I think it's still in the creative sense. Consider this question from the Y Combinator application:

> 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.


I think that most people love the idea of finding opportunities which others haven't discovered. Some take it in their own hands to leverage this advantage by products (e.g. app developers) others take a more collective approach (e.g. open source developers).

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.


I remember a clip on the news with a GS employee saying to the tribunal (or inquest or whatever) that selling CDOs to some customers while betting against them at the same time was 'not a problem in the context of market-making.'

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.


Perhaps it means that you can't dictate the value of an instrument to somebody else. Everyone makes his own assessment of an item, so if someone wants to buy it from you above what you think it's worth, or conversely, sell it to you below what you think it's worth, it's your freedom to trade and not your business to try to change his mind.

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.


A normal person would never starve a child to better his own lot. Instead he will give his pension fund savings to Goldman Sachs, who will then promptly cause a world-wide famine by manipulating the food markets. Which is why GS gets paid the big bucks - they absolve the future retirees of the moral responsibility for the starvation of the less fortunate.


What makes you think that Goldman is doing this for anyone other than themselves?


This is pretty awful, but it seems like one of these problems that could and should be solved by the free market.

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.


It wouldn't surprise me to find out that it is next to impossible to create a new metals exchange due to onerous government regulations that effectively keep out new competitors.

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.


Actually Goldman tends to exploit a lack of regulations, and will lobby to get regulations removed in order for them to exploit markets further.

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...


Arguing about 'regulation' with no context or means to evaluate them doesn't get us very far.

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.


And it wouldn't surprise me that the same companies that talk about the free market solving its own problems lobby against any change in onerous government regulations.


This is pretty awful, but it seems like one of these problems that could and should be solved by the free market.

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.


A similar thing is happening with generic chemotherapy drugs. Profit margins for generics are thin, so few companies manufacture them. When a supply issue arises, distributors stockpile the drug and charge hospitals one or two scales of magnitude of the generic price.


... which is a perfect example of why we need derivatives markets. If hospitals purchased drugs a year in advance of anticipated demand, they would pay a slight premium, but wouldn't be subject to squeezes like this.


...unless Goldman stopped selling derivatives on chemotherapy drugs and instead began to stockpile a large fraction of the available chemotherapy drugs in warehouses in Detroit.


You are absolutely correct that futures or call options could ameliorate this issue.

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.


My understanding of this is you buy a futures contract that says you get so much metal on a certain date. The date arrives, and Goldman Sachs tells you that you own the metal, but it is in our warehouse. Further, you have to wait months before you can get it out of the warehouse, and you owe rent until then.


Did anyone else feel this was a poorly written article? Maybe I'm obtuse, but I found it _very_ difficult to understand. I felt like the writers were too busy sexing up the article to focus on explaining what's going on here...

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?


I realise these are quite hyperbolic, but you might be interested to watch this short profile of commodities giant Glencore, mentioned in the article: http://www.youtube.com/watch?v=u6rSBifsvwg


I find it curious the article never mentions the real culprit in hogging resources - China. When I was working in the bike industry, over the course of a few years, ALL of our bikes jumped in price considerably. After talking with one the reps from Specialized, they said China has put a huge strain on raw materials like Aluminum, Titanium, and Steel. By doing so, they've pushed the prices up across the board.

The stuff Goldman Sachs is doing pales in comparison to what China has been doing over the past 5-8 years.


Please can someone stage a protest outside their warehouse to prevent all movement in and out?


Wow, finally this months old story is making the rounds here?


How is this any different to stockpiling gold?




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