Sunday, April 25, 2010

Goldman-Sachs I

I have been researching the recent news about the Goldman-Sachs Abacus fund. I hope to digest its complexities enough to blog it in the near future: as soon as I have finished grading my very last class. (I am officially a retired math professor, but I agreed last year to teach one more course.)

The only "nice" thing about the G-S story is that it has put the usually obstructionist Party for The Rich in an untenable position. They had been spreading the Big Lie about the Democrats' financial reform plan: that it would encourage the "too-big-to-fail" syndrome and lead to more bailouts. Of course this is just the opposite of what it would do, but that is the nature of the Big Lie. However, the S.E.C. suit against G-S -- especially the entire plausibility of the charges -- has made the public more anxious than ever for action against the financial industry, and made Republican posturing more evident and dangerous to the PTR. After all, if they are so concerned about protection from a rapacious industry, and concerned about bailouts, how come they did zilch for all the years that Reagan and the Bushes were in power -- including the time under Bush junior when they controlled both houses of Congress?

The looming scandal has also made the Dems pull back their support for G-S, whose execs Obama was just praising. As Frank Rich says in today's Times column: "He was no longer describing Blankfein [chair of G-S], sitting before him, as a “very savvy” businessman — a compliment he had bestowed on him and Jamie Dimon of JPMorgan Chase just 10 weeks earlier." G-S has been a big contributor to the Dems the past few years, though now they are shifting back to the PTR, their natural protector.

The financial industry treats its customers with many levels of deceit, and reserves its loyalties ultimately only to itself and, to some extent, its best ( = largest and wealthiest) customers. You can read details about this in, for example, Michael Lewis's "Liar's Poker." When an institution thinks a stock is about to go up, it will try to get its less favored customers to sell their shares so that its more favored ones can buy them; conversely, it unloads loser shares from the latter onto the former. They can also play timing games with buy and sell orders -- for example, supplying a customer with shares at a higher price than they actually paid for those shares. This can be done with high-speed computerized buy-sell programs, taking advantage of minute-by-minute fluctuations in prices. Much of this is legal. However, what G-S did in the Abacus fund case certainly seems to border on fraud. Actually, more than just border. More next time.

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