Let's get right to it...
QUESTION #1: Has the government given Goldman Sachs carte blanche as far as manipulating the stock market's concerned?
THE ANSWER: appears to be, "Yes," according to ZeroHedge's quite detailed review of Goldman's shenanigans over the past six months.
It's an extremely compelling read, and that's an understatement (however, it is pretty technical): "Observations On NYSE Program Trading."
Apparently, ZeroHedge's thorough research has rattled enough cages over at Goldman Sachs to elicit a response today from none other than Goldman spokesman Ed Canaday:
The NYSE report that Zero Hedge discussed shows Goldman Sachs trading over 1 billion shares in the principal program trading category. What the table doesn't show, but a deeper look at the numbers reveals is that the vast majority of this total is trades by our quantitative trading desk. This desk is participating in a relatively new NYSE program called Supplemental Liquidity Providers. The NYSE started the program to attract liquidity to the exchange. As an SLP, this the desk makes markets in NYSE stocks. They often do high-frequency trading (which is simply auto-quote market making) where they send out hundreds of "baskets" of stocks at one time. Program trading, as defined by the NYSE report is any strategy that sends out a "basket" of 15+stocks at one time. I am happy to discuss this with you if that description doesn't make sense.
ZeroHedge's historical analysis tells us that Goldman's to the point where they're behind more than HALF of all program trading on the Street these days, and program trading accounts for the lion's share of most trading, in general.
Our government's efforts to impose stability upon extremely volatile stock markets, immediately after the implosion of Lehman Brothers and AIG, back in September, 2008, included establishing a new status of "market participants" for certain, massive Wall Street firms. They're calling this status: "Supplemental Liquidity Providers."
Funny thing, that.
You see, it may very well be the case, as Zero Hedge's Tyler Durden has thoroughly researched it (although he cannot confirm it, but presents a very compelling case with his numbers), that Goldman is the only active Supplemental Liquidity Provider in the marketplace!
Can you say: "Sweetheart deal?"
The potential problems with all of this--as with any situation where one is given absolute power--are as far as the creative mind can wander. Perhaps most importantly, Zero Hedge infers that most of the entire upswing in the market may be attributable to this single reality!
Saturday, May 2, 2009
Observations On NYSE Program Trading
Posted by Tyler Durden at 6:58 PM
Recently, there has been quite a bit of discussion of Goldman Sachs' principal program trading dominance in the NYSE...
In order to dig deeper into Canaday's statement, Zero Hedge performed a historical analysis of NYSE Program Trading (PT) data (which is public) and came up with some curious observations...
Here's the background info on Goldman's (tacitly exclusive?) status, per the NYSE:
Supplemental Liquidity Providers (SLPs) are upstairs, electronic, high-volume members incented to add liquidity on the NYSE.
* The pilot SLP program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.
* SLPs are obligated to maintain a bid or offer at the National Best Bid or Offer (NBBO) in each assigned security at least 5 percent of the trading day.
* The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.
* SLPs trade only for their proprietary accounts, not for public customers or on an agency basis.
* An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
* A member organization cannot act as a Designated Market Maker and SLP in the same security.
* SLPs have the same publicly available trading information and market data that all other NYSE customers have available to them.
As Zero Hedge notes:
Another relevant question is just who are the current SLPs? It seems the answer is difficult to pin point. It is known for a fact that Goldman Sachs and Spear, Leeds and Kellogg (owned by GS) are currently definitive SLPs, with Knight Trading and Barclays also presumably becoming SLPs as well, but there has been no confirmation either way, potentially implying that Goldman could have a monopoly in liquidity provisioning. If the program is truly as attractive as GS' spokesman makes it seem, why are other major equity players not clamoring to participate in it? After all, the benefits to SLPs are "obvious."
Following up on that, has there been an extension of the SLP program recently? Zero Hedge has not heard of one. The SLP, which was approved in late October (see above) was supposed to terminate on April 30, this last Thursday: "The proposed pilot program will commence on the date upon which the SEC will approve the New Market Model and will continue for six months thereafter ending on April 30, 2009." If the SLP is now over, should one expect GS's principal volume trading to drop dramatically, if, as Canaday says, the volume is mostly SLP driven? Also, does that mean volatility in the market is about to spike....?
QUESTION #2: Did as many as 14 of the 19 banks that just went through the Fed's stress test fail it?
THE ANSWER: appears to be, "Maybe," according to one respected analyst, Paul Miller of FBR Capital Markets Corp.
The link to this is right here: "Stress Test May Push 14 Banks to Raise Money, FBR's Miller Says."
Stress Test May Push 14 Banks to Raise Money, FBR's Miller Says
By Christine Harper
May 2 (Bloomberg) -- U.S. Regulators may compel as many as 14 of the nation's 19 largest banks to raise common equity based on financial stress tests due to be completed next week, said Paul Miller, an analyst at FBR Capital Markets Corp.
Miller, a former bank examiner, said his estimate assumes regulators will require banks to maintain tangible common equity, one of the most conservative measures of capital, equal to 4 percent of their risk-weighted assets over the next two years, to withstand losses in case the recession worsens. The tests, originally scheduled for release on May 4, are set to be disclosed after U.S. markets close on May 7, according to a government official who spoke on condition of anonymity.
Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and the 16 other banks received preliminary results last week and have been debating the findings with regulators. Officials favor tangible common equity of about 4 percent of a bank's assets and so-called Tier 1 capital worth about 6 percent, people familiar with the tests say. Tangible common equity, or TCE, is a gauge of financial strength that excludes intangibles such as trademarks that can't be used to make payments. Tier 1 capital is a broader measure monitored by regulators.
"When you start talking about 4 percent on risk-weighted assets based on the stress test two years out, most banks will be required to raise more capital," Miller said in an interview yesterday. "I believe it will be as high as 14." He declined to name them.
QUESTION #3: Are the much ballyhooed "Quantitative Easing" efforts of Fed Chair Ben Bernanke failing miserably out of the gate?
THE ANSWER: Initial results indicate this may be the case.
In an effort to keep interest on the federal debt low (read: manageable), the Fed poured the first piece of its $1.2 trillion 2009 QE budget, or $300,000,000,000 of taxpayers' funds, into the purchase of US T-bills in mid-March. Interest rates immediately dropped dramatically as a result of that. But, market activity over the past week now has 10-year notes eclipsing rates in the market from the day before Bernanke flipped the proverbial Quantitative Easing switch, roughly six weeks ago. $300 billion to keep interest rates on our debt suppressed for six weeks? That's only $50 billion a week to buy down interest on our debt, only to see market demand for U.S. debt slacken dramatically shortly thereafter. Such a deal!
The link to the chart for all of this market activity may be found right here: "Oh, Beeeeeennnn..."
QUESTION #4: From a purely market-driven perspective, are Wall Street bailout funding efforts inherently at odds with efforts to fund most of the other government-sponsored stimulus/bailout/Main Street programs?
THE ANSWER: also appears to be, "Yes."
Come to think of it, it's really just common sense, as the Business Insider blog tells us: "How Government Guaranteed Bank Debt May CRUSH Public Borrowing." If other government programs are offering better, guaranteed returns than T-bills and municipal bonds, etc., it's only logical that investors will be driven to those other investment vehicles.
How Government Guaranteed Bank Debt May CRUSH Public Borrowing
John Carney Apr. 29, 2009, 10:42 AM
It's no secret the the federal government's need to borrow has sky-rocketed. Thanks to the various bailouts and stimulus measures, expenditures by the feds have increased by one third and are likely to grow even higher. Meanwhile, the economic slowdown has decreased the amount the government collects in taxes. The only way to bridge the gap is more borrowing.
While many are confident that the global appetite for the soveriegn debt of the United States will remain robust, some of the government's own programs may start to diminish that appetite. The government's guarantees of various kinds of debt issued by financial institutions essentially makes some bonds issued by banks as "risk free" as Treasuries. But these bonds pay higher yields than government debt, which should make them more attractive for risk-adverse investors looking to maximize their returns on investment.
A financial sector panel took up this risk yesterday in Washington DC's Hays Adams hotel. The occassion was a meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Finacial Markets Association, the leading securities industry trade association.
--SNIP--
"One member stated that many of these assets were directly competing with Treasuries and cited an expected $50 billion of issuance of Build America bonds as an example. Another member noted that FDIC-backed debt offered a significant pick-up in yield over comparable Treasury debt and that substitution by traditional Treasury investors was occurring," the offical minutes of the meeting explain.
The blog post tells us that, quite bluntly, this is a big, hidden cost to offering guarantees of private debt. "Even if banks don't default and so those guarantees never have to be paid out, at some point the growth of the quasi-government debt market will make it more difficult and more expensive for the government to borrow."
And, speaking of one public rescue program being at odds with another, did I miss something, or did Rahm Emanuel, et al, just inadvertently send a torpedo broadside into Sheila Bair's FDIC?
QUESTION #5: Guess who loses when White House bailout funding efforts are inherently at odds with the FDIC's agenda? (At least from a political standpoint.)
THE ANSWER: It would seem to me that the one office that exists specifically to deal with "bad banks" is, once again, being undermined this weekend.
Here's the story over at Naked Capitalism:
"The White House Threatened to Destroy Perella Weinberg's Reputation."
The White House Threatened to Destroy Perella Weinberg's Reputation
May 2, 2009
As the story tells us, Perella Weinberg is a law firm that represents some of the investors in Chrysler. Like approximately 20 other firms in a similar position, Perella Weinberg was against the proposed, government-sanctioned, bankruptcy/bailout plan of our nation's third largest auto manufacturer.
In an interview of momentous importance, WJR's Frank Beckmann interviews Tom Lauria, the Head of Restructuring at law firm White & Case, in which the lawyer, who represents Chrysler hold-out hedge funds Stairway Capital and Oppenheimer Funds, discusses on the record the amazing treatment by the White House of Perella Weinberg, which initially had been a transaction hold out but after threats by the White House (not my words) was forced to drop their objection and go with the administration. Says Lauria:
"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."
Perella Weinberg "...is the very firm advising the rapidly sinking FDIC on transactions and strategies to stabilize the banking system, and also on the proper way to dispose failed institutions and how to handle delinquent securities assumed from banks, as well as the creation of the aggregator bank.' "
At the end of the day, as the story tells us, Perella Weinberg had a change of heart and now supports the Chrysler plan.
QUESTION #6: Why are we beginning to hear of 'glimmers of hope' for the economy, and of things 'reaching bottom,' when there are so many inconvenient facts which are concurrently being swept under the rug now that fly in the face of these pangs of optimism?
THE ANSWER: Optimism doesn't put food on the table, pay the rent, send the kids to college or pay for one's healthcare insurance.
There are $5.2 trillion in off-balance sheet assets yet to make it to the books of Wall Street banks, and at least $1 trillion of that is worth nothing more than 20 to 30 cents on the dollar.
Upwards of 600,000 homes which have been foreclosed upon by banks throughout the U.S. that the financial services sector isn't even acknowleding exist. Yet, home prices continue their downward spiral due to the adverse market conditions of which we are aware.
And, it's going to take nothing short of a major miracle for the unemployment rate to not be below 10% by Labor Day, which, going full circle, means the very indicators being used to gauge Wall Street's recovery--the stress tests--are inherently a waste of time.
The real answer to this question was provided by the very straight-talking Warren Buffet, today: "Buffett Says He Sees `No Signs' of Recovery in Housing, Retail."
Buffett Says He Sees `No Signs' of Recovery in Housing, Retail
By Erik Holm and Andrew Frye
May 2 (Bloomberg) -- Billionaire investor Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., said he's seen no indication of recovery from the real estate slump that helped cause the U.S. recession.
"There's no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing," said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based company's annual shareholder meeting today. "You never know for sure, even if there's a leveling off, which way the next move will be."
Paul Volcker, one of President Barack Obama's economic advisers, said this week that the economy was "leveling off at a low level" and doesn't need a second fiscal stimulus package after the $787 billion plan signed by Obama in February. The U.S. economy contracted at a 6.1 percent annual rate in the first quarter, weaker than forecast, making this recession the worst since 1957-1958.
QUESTION #7: Given the harsh realities that have been hitting us everyday, it seems, how can confidence and candy-coating the truth be considered a viable strategy?
THE ANSWER: It's not. Historically, confidence and misjudgements about the severity of these types of downturns rule the day. Even Frank Rich, in an otherwise exceptionally positive piece about the Obama administration in today's New York Times entitled, "Enough With the 100 Days Already," had this to say:
Enough With the 100 Days Already
New York Times
By FRANK RICH
Published: May 2, 2009
...There are at least two toxic fiefdoms to keep the president and us awake at night: Pakistan and Wall Street. Both could wreak further untold catastrophe. Obama has control over neither, and in the case of the financial sector, he is fielding a team dominated by Robert Rubin protégés whose wisdom remains, to put it generously, unproven...
...But this is funny only up to a point. It was in 1937 -- the year after the Democratic landslide left the Republican national ticket with a total of eight electoral votes -- that a hugely empowered F.D.R. made two of the biggest mistakes of his presidency. He tried to pack the Supreme Court with partisan allies and, overconfidently judging the economy recovered, retreated from the New Deal by instituting spending cuts that prompted a fresh economic tailspin.
Some answers, please. We can handle the truth.