17 JUL 2009, Friday

1. Sooo...how exactly does Goldman Sachs make $4 billion in 3 months (click link). They do it through what's known as "High Frequency Trading" via a couple of supercomputers constantly swapping orders back and forth in milliseconds to raise or drop prices to where they want.
2. The problem with this? Hmm....didn't they get TARP Money (recently paid back), get more TARP money that was funneled to them through AIG as a payment? Our tax dollars are the backstop for this?
3. Another thing, didn't they have to become a bank when they verged on implosion? And who backs banks? FDIC??? Your tax dollars at risk again...especially if this all goes sour because then you'll make good on their deposits. Reminder: After the 1929 Crash, Glass Steagle was a law put into place to stop commercial banks from trading because many banks were destroyed. Ahem, that law was repealed under the Clinton Administration. Deja vu?
4. You should be scared....this reminds me of the mindset of 2 particular periods that were gut wrenching when they failed...the computerized Portfolio Insurance prior to the 1987 Crash and the Computer Modeling by Long Term Capital Management in 1998. Neither ended well as I recall. In both instances, the precepts of the computer models failed miserably because the programmers planned on normal trading environments with no sudden shocks. When the sudden shock did happen, the computers dutifully went about doing what they were programmed to do at a faster and faster pace, with more and more leverage, until...BOOM! Thing is, that the humans trust their programs to the bitter end. However, at some point, all machines fail and require human oversight / intervention.
5. Predicition: If there's a sudden shock, the subsequent crash will be blamed on HFT. Then the headlines will be "The end of the financial world" which will then require more bailouts. Seeing a trend here? The US Taxpayer is slowly but surely being robbed in the biggest bank heist of history by guys in suits, not ski masks.
6. Oddly enough, Friday 17 July 1998 was the closing high before LTCM went poof...and it happened after a straight up run like we're having now...maybe it means something, maybe not.
7. UPDATE: 24 JUL... HFT is a Scam!