Was Goldman’s trading software stolen?
–Matthew Goldstein is a Reuters columnist. The views expressed are his own.–
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution.
Authorities did not identify the firm, but sources say the institution is none other than Goldman Sachs .
The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman’s automated stock and commodities trading business.
Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.
The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.
from Commentaries:
Fink reaches for Wall Street’s crown
You have to marvel at the seemingly Midas touch of Larry Fink.
The BlackRock Inc. chief executive avoided taking over the helm of Merrill Lynch -- something John Thain probably wishes he had done. Fink's firm emerged from the financial crisis as the Federal Reserve's favorite private money manager, with BlackRock getting the lion's share of the government's work for managing troubled assets. And the $13 billion deal Fink just reached with Barclays Global Investors has turned BlackRock into the outright titan of the asset management world with $2.7 trillion in other peoples' money under management.
It's often been said Jamie Dimon is the new king of Wall Street. But one can argue that the 56-year-old Fink, who started BlackRock as a small bond investment shop two decades ago, can also rightfully lay claim to that honor. Even as the Obama administration is about to announce its plan for managing so-called "too big to fail" financial institutions, Fink's BlackRock is getting bigger and more consequential than ever.
The deal puts BlackRock's fingers firmly into every significant asset class-corporate bonds, mortgage-backed securities, mutual funds, stocks, cash, hedge funds and now the ever popular exchange traded funds -- a stock index-like security. Barclays now joins Bank of America and PNC Financial in having major equity stakes in BlackRock and a vested interest in the money manager's long-term health.
The danger, of course, in creating a money management firm the size of BlackRock is that it puts a lot of people's retirements at risk if the firm were to collapse, or its investment funds were to implode. To put BlackRock's size in perspective, it's now bigger than the combined assets managed by mutual fund giant Fidelity Investments and the entire hedge fund industry.
Wall Street historian Charles Geisst says money managers traditionally have not posed the same kind of risk to the financial system as a commercial bank or investment. But Geisst worries whether Wall Street is laying the groundwork for a new kind of systemic risk, if the BlackRock deal with Barclays encourages a consolidation of too much pension and retirement money into the hands of just a few players. "We could have big problems with these huge asset managers down the road," he says.
To be sure, BlackRock is not too big to fail in the way that phrase came to be used during the current crisis. The firm is not a primary lender to other institutions and BlackRock is not widely leveraging its own balance sheet to fund its operations. The firm has just $1 billion in debt on its balance sheet. More significant, the investments that BlackRock manages aren't insured by the federal government -- so a collapse of its many investment vehicles wouldn't require any direct payout by taxpayers. And it's hard to imagine all of BlackRock's many funds going south at the same time.
How to fix the SEC
– Matthew Goldstein is a Reuters columnist. The views expressed are his own –
Many critics of the Securities and Exchange Commission point to Christopher Cox’s appointment as chairman in August 2005 as the day the wheels came off Wall Street’s top cop.
But in some ways, the SEC began to veer off course a few months earlier, when the agency moved its Washington headquarters into a sparkling new office building that would make even a corporate law firm jealous.
The plush environs made it all too comfortable for lawyers and investigators and discouraged them from venturing out to discover what the Wall Street banks were doing with all that leverage or sniffing out what Bernie Madoff and R. Allen Stanford were really up to.
As she fights to keep Congress from diminishing her agency’s mandate, Mary Schapiro, the commission’s chairwoman, vows to put an end to the regulatory lethargy. Schapiro, according to The Wall Street Journal, recently told some of her senior lawyers, “We need to demonstrate that we’re going to make changes.”
That’s great news. Here are five things Schaprio can do right away to dust the cobwebs off and get the 75-year-old agency back into the business of protecting investors.
Reforming the SEC is a laudable goal, but “reform” carries different meanings for different constituencies of the SEC. Prior to deciding what actions we need to start effecting, we need to restate the mission of the SEC.
The stated mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. We can’t protect the greedy or naive from making bad decisions although these people the mission of the SEC is to do so. We can’t facilitate efficient markets without financial innovation, although innovation often has unexpected costs.
The first step in reforming the SEC has to be to convene a congressional hearing to obtain a commitment of the Congress to support legislative changes to reduce political interference that has restricted the SEC in the past.
The next step would be to hold a series of public hearings before an appointed panel of industry and political representatives charged with delivering a report to be submitted to Congress that would outline changed needed in the SEC.
Having set forth the mission statement for the SEC, we would then need to discuss what the SEC does well and what functions the SEC does not do well.
Finally, we would need to agree on jurisdictional limitations of the SEC, the CFTC, FINRA and FERC such that the changed effected in the SEC compliment needed changes in the overall regulatory structure of the financial and commodity markets.
Anyone who thinks one or two tweaks in the SEC will bring about material or substantive changes is sadly mistaken. The problems within the SEC and the regulatory structure of our nation’s financial markets are too broad and too complex to be solved with a few cosmetic changes.
When hedge funds lose their mojo, humble pie is in order
– Matthew Goldstein is a Reuters columnist. The views expressed are his own –
We’re not quite there yet, but hedge fund managers may soon need to start giving away toasters – or perhaps plasma TVs — to woo new investors. Forcing the funds to eat a little humble pie now would benefit hedge fund investors in the long run.
Most hedge funds are off to a decent start this year — the average return to date is 9.43 percent, says Hedge Fund Research. Yet it’s a particularly tough time for launching a new fund. In the first five months of 2009, just 40 new funds have begun reporting performance figures, BarclayHedge reports.
Less than 1% of all hedge funds are worth looking at to invest. There are now abut 7-8000 funds where most have large volatility and have not controlled risk like they should have, nor do they show consistency of profits. There are only a few very elite managers that make money year after year as they have a very good shop with many expereinced anaylsts people that have traded in difficult markets. Today anyone who has an MBA thinks they can run a hedge fund. They have had a huge rude awakening gthis past year. Invstors no matter how they are should do their homework, and do not rely on other opinions. Due yourown due diligence, subscribe to databases and do not invest with thir party marketers who will pitch fund that pay them a fee. Stay away from fund of funds as they have double fees and are an excercize in mediocrity. Pay attentionto fund that have high Sharpe ratios over a minimun of 1.5. do not go with a manager under a 5 year track record no matter how good the short term record looks.
A pledge drive for toxic assets
– Matthew Goldstein is a Reuters columnist. The views expressed are his own –
Three months after the Obama administration proposed the Public-Private Investment Program, banks remain lukewarm to the notion of selling ailing securities at a deep discount. Potential hedge fund buyers, meanwhile, are wary about government officials looking over their shoulders.
But it’s not too late for team Obama to change course and put in place a program that might actually entice the banks and hedge funds to participate, while also serving a civic good.
Let’s call this new bank detox plan CDOs for Charity. It may sound a bit wacky but the idea is quite simple: Encourage the banks through a series of favorable IRS rulings to donate ailing collateralized debt obligations and other untradeable real-estate related securities to private investment trusts set up by charitable organizations.
The banks that donate to these charitable trusts would be able to take a corresponding tax deduction, enabling them to reduce their corporate tax rate. The charities could then go out and hire asset managers, including hedge funds, to oversee their investments with an eye toward generating a profit if the securities recover in value.
The CDOs for Charity program would make it easier for banks to take big haircuts on the value of the securities they donate, since they’ll be able to offset some of that loss with a charitable tax deduction.
Any investors holding credit default swaps — insurance-like derivatives — on bank-donated securities probably would also have to qualify for a charitable tax write-off.
If loss of this software is feared for its potential to manipulate the stock market, how has Goldman Sachs been using it. Read “The Losing Game: Why You Can’t Beat Wall Street by T.E. Scott and Stephen Edds.