classical economics
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Goldman Sachs Scandal
By Wayne Jett © July 30, 2009

    On Saturday, July 4, the nation’s Independence Day, the U. S. District Court in Manhattan convened for a bail hearing in a criminal case before a magistrate judge. During the hearing, an Assistant U. S. Attorney divulged information to the magistrate which, in an open society, would produce inch-high headlines screaming scandal. But not in the U. S. A. Three weeks later, mainstream media ignore the incident as no more than business as usual and hardly worth mentioning.
Manipulative Software Codes
    “The incident” was revelation that Goldman Sachs has created and is using computer software secret codes capable of manipulating prices and trading in financial markets worldwide. Goldman has used the secret codes to take gains of hundreds of millions of dollars out of financial markets. Goldman’s computers may actually intercept trading data – real-time buy and sell orders in financial markets – so the secret codes can react in micro-seconds to “front-run” those orders in ways profitable to Goldman.
    Front-running of investor orders is a fraudulent, deceptive and manipulative trading tactic. This is a felony under federal securities laws, if the SEC chooses to investigate and to prosecute it. Information disclosed at the July 4 federal court hearing is highly suggestive of criminal wrong-doing – almost a prima facie case of violation of securities laws – but further investigation is necessary to gather evidence and prove the case, if there is one. But, so far as can be determined, no investigation is occurring and none is contemplated.  Mainstream media ignore the matter, as does Congress.
A Very Private Affair
    High velocity, high frequency, heavy volume computer trading has grown within a period of months to comprise 70% of total trading volume on U. S. exchanges. Goldman Sachs is said to be doing 60% or more of all such trading, although public reporting of data was suspended during the last week in June, perhaps because Goldman doesn’t want the data disclosed.
    Respect for claims of privacy and proprietary rights in trading tactics which appear manipulative, deceptive or fraudulent is surprising to many, but not unusual among U. S. financial regulators. The SEC refuses to identify financial firms which engage in illegal manipulation of share prices by naked short selling and by intentionally failing to deliver shares to buyers. Nor will the SEC disclose the undelivered share positions of such firms, or even the gross number of undelivered shares of a particular target company. The SEC justifies keeping secret the data reflecting illegal manipulation on grounds its disclosure would violate proprietary rights of the criminal manipulators to keep their trading tactics secret.
The Cover-Up
    Front-running of buy and sell transactions, if done by an individual broker or investor in a single transaction, is manipulative, fraudulent and a criminal violation of securities laws. Yet, not a word to that effect has been uttered about Goldman’s conduct by the SEC, the Justice Department or mainstream media. On the contrary, within two weeks after its July 4 embarrassment, Goldman Sachs reasserted its domination of U. S. government and expressed itself through compliant media.
    On July 6, the New York Times reported the Goldman Sachs software incident more thoroughly than the Wall Street Journal would report it the following day. The Times described the software taken as “proprietary, ‘black box’ computer programs that Goldman uses to make lucrative, rapid-fire trades,” and reported that the software generated “many millions of dollars of profits per year.” The Times said the Assistant U. S. Attorney asserted the codes “posed a risk to United States financial markets” and told the court Goldman Sachs had “raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.” (Emphasis added.)
    Having recorded these serious concerns, the Times promptly dropped the subject and reverted to silence. Then the Times proceeded to report Goldman’s stellar earnings, bonuses and savviness, and to rehabilitate the Goldman image.
    So much for the “liberal” organ of Wall Street. What about its compatriot publication which works the “conservative” side for the Street?
    The Wall Street Journal reported on July 7 the arrest of Goldman’s software officer charged with “stealing codes related to a high-speed trading program.” Somehow the Journal missed what the Times had already reported: the codes could be used to manipulate financial markets in the U. S. and abroad, and Goldman was using the codes to make millions.
     On July 15, the Journal explained Goldman’s astonishingly high profits as flowing from “revving up risk” – again no mention of front-running trades, but reiteration of Goldman’s reputation as “one of the savviest on Wall Street.” By July 21, the Journal carried commentary imploring readers they should not hate Goldman Sachs “for making money,” while mentioning only the $3.44 billion in net earnings during the second quarter. The commentary did not mention the “secret codes” which raked in hundreds of millions from trading at the expense of other unsuspecting  investors.
    This journalistic excellence culminated in a lengthy puff-piece in New York Magazine in which the software codes capable of manipulating financial markets, the software producing “millions and millions” in profits for Goldman – indeed, the software capable of front-running every buy and sell order on every financial exchange in the world – warrants a mention only in two paragraphs on page six of eight pages. Prior to that point, Goldman is described as “tenacious” and “misunderstood,” and shortly thereafter Goldman is given opportunity to announce the firm is “painfully conscious … of the importance of being a force for good.”
Wretched Realism
    The “secret codes” episode provides teaching and learning opportunities on the topic of “elite media” in the U. S. The elite media call themselves the mainstream media. They determine what is acceptable as reported news, but they make their determination according to desires of the elite few who dominate them through influence of the great capital pools of Wall Street. The elite media are elitist because they do the bidding of elitists.
    The SEC and CFTC, the Treasury and Federal Reserve, the White House and Congress – all are aligned in the same direction as if sensing powerful magnetic forces. If evidence of wholesale fraud and robbery of middle class capital can be totally submerged without so much as full reporting by press, much less commentary by political or regulatory officials, some would say the U. S. government cannot survive. As that fate is pondered, the truth may surface that elected leadership has already fallen to a coup d’état, so Goldman Sachs and its legions of investment bankers have become, in reality, Masters of the Universe. ~