Monday, January 25, 2010

Goldman Sachs has software to manipulate carbon trading market

"Carbon markets were central to the Kyoto Protocol, which expires in 2012 and obliged developed countries that exceed their targets to purchase credits from clean energy projects in the developing world.
  • Policymakers will meet again in Mexico in November in an attempt to revive the climate change talks."********
"Goldman Sachs, the Wall Street leviathan that is heavily invested in the cap-and-trade carbon market scam, has admitted it has developed and used software that can manipulate such financial markets.

The revelation came during proceedings in a legal case with enough plot twists to make even John Grisham proud; it was made, not by Goldman, but by an assistant U.S. Attorney.
  • "(B)ecause of the way this software interfaces with the various markets and exchanges, the bank has raised a possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways," Joseph Facciponti told a federal magistrate in an unusual Saturday afternoon bail hearing -- and not just any Saturday afternoon, but the Fourth of July.
Facciponti's comments came at a hearing for Sergey Aleynikov, a former Goldman Sachs programmer, who had been arrested the day before, disembarking from a plane at Newark's Liberty International Airport. Aleynikov is accused of
  • absconding with the code for the Goldman program and uploading it to a server in Germany, shortly before leaving the firm to take a job with a Chicago start-up for three times his $400,000 a year Goldman salary.
Aleynikov denies the charges.

Goldman uses the program for all of its trades

While Facciponti's remarks that the Goldman computer program could "manipulate markets in unfair ways" have received attention in the financial press, another, almost equally important statement made by Facciponti has gone virtually unnoticed. According to transcripts of the hearing, as posted at the Wall Street Journal:
  • "What the defendant is accused of having stolen from the investment bank (later identified by defense counsel as Goldman Sachs) is their proprietary, high-quantity, high-volume trading platform with which they conduct all of their trades in all major markets in the United States and other places." (emphasis added)
Goldman can be trusted not to manipulate markets but others can not.
Even if Goldman hasn't actually rigged markets, the program could be used to give Goldman other unfair advantages; business commentator and author of Bailout Nation Barry Ritholz outlines some possibilities at his blog:
  • Theoretically, this would allow GS to buy (or sell) stocks, selling (or covering) them back to the now compromised trader towards the end of their purchase (sale). Or, they could take a position, assuming there was more flow behind the initial order. Or, they could arbitrage a few fractional cents each trade.
Coincidentally or not, Bank of America analyst Guy Moszkowski says that Goldman Sachs is on pace this year to beat its trading-revenue record in 2007.

Goldman wouldn't manipulate markets, would they?

But what are we to make of Facciponti's comment that "there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

Which leads the inquiring mind to ask, How does Goldman know that its program has that capability?

Goldman, being the good corporate citizens they are, would never have used it that way.

Or would they?

A recent article by Matt Taibbi in Rolling Stone accuses Goldman of manipulating markets to create speculative bubbles, including the internet bubble, last year's crazy ride in oil prices, and the current economic bust initiated by the sub-prime mortgage meltdown.

In his thoroughly-researched and well-sourced book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street ($27.95 Doubleday), William D. Cohan writes of a crucial moment in that meltdown. He quotes an unnamed Bear executive describing how they were trying to value, or "mark", mortgage-backed securities, a process by which the SEC required that they averaged the highest and lowest marks provided by other firms. The executive said the marks were coming in at 97 or 98 cents on the dollar, when Goldman Sachs pushed the market over the cliff:"...from American Thinker, 7/14/09,by William Tate, "Will Dems Allow Goldman Sachs to Manipulate a Cap and Trade Market?"

No comments:

Post a Comment