Get ready for the Greatest Show on Earth. I’m not kidding!
The circus opens today in Washington at the big-top U.S. Court of Federal Claims.
That’s where insurer Starr International is suing the United States for essentially ripping off American International Group Inc. (NYSE: AIG) and its shareholders. Starr is an insurance company controlled by Maurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.
Starr International Co. Inc. v. United States will feature clowns, both the frightening variety and the funny kind… lions and tigers and bears, oh my… death-defying high-wire acts… human cannonballs… and bare-naked ladies.
Here’s what it comes down to. Did the Federal Reserve and the U.S. Department of the Treasury have the right to confiscate 80% of AIG’s common stock during the 2008 bailout, in the process costing AIG shareholders $40 billion?
You heard me right.
Starr is suing for $40 billion. No wonder the circus is coming to town…
Grab Some Popcorn
Everyone knows AIG got an almost $180 billion bailout. But what very few people know is what the Fed and the Treasury actually did to AIG to cause it to need $180 billion.
No doubt the New York-headquartered but London-based AIG Financial Products Group was stupid to sell insurance in the form of credit default swaps to a whole bunch of giant banks, guaranteeing them payment in full if the mortgage-backed securities they were stockpiling ever defaulted.
While they were stupid, they were most likely also duped. But that’s another story.
When the mortgage crisis hit, the credit default swaps AIG wrote came back to haunt them.
Here is not the place to get into the particulars, though I know them intimately. Why not here? Because if we’re lucky – and we may get lucky this time – the truth about the particulars will come out at the trial.
If you know some of what really happened, you’ll be following the trial to find out why Goldman Sachs Group Inc. (NYSE: GS) did what it did to AIG in the first place and why AIG had to pay Goldman $14 billion when at the time it owed it $8 billion, at most.
Why did other banks, including several giant foreign banks, get paid 100 cents on the dollar on claims they made against AIG when they were only entitled to market-value amounts of what was owed to them? And that’s assuming they even had a right to collect in the first place, which was in dispute at the time.
Why did the Fed charge AIG 14% on the money it lent it and 8.5% on the money it was going to lend to it but it didn’t need, when it was charging big banks between 2.5% and 5%?
Why did the government take almost 80% of AIG’s equity and controlling voting shares when it didn’t take any voting shares from any other bailout customers it coddled?
There are a lot more questions to be answered.
Some of the clowns who were deposed privately (on videotape) will also testify in open court. They include then-Federal Reserve Bank of New York President Timothy Geithner; then-Treasury Secretary Henry Paulson (another Hank), formerly the head of Goldman Sachs; then-Fed Chairman Ben (aka “Benny” the jet helicopter pilot) Bernanke; and lot of other movers and shakers who bobbed and weaved behind the scenes to extract money from AIG to send to faltering favored sons to save them.
This really is going to be the Greatest Show on Earth because it’s going to expose the criminality of the system that bailed out some of the biggest crooks in the world, who then leveraged taxpayers and economies to make ungodly sums of money with the de facto understanding that the Fed and the Treasury had their backs.
Hurry, hurry, hurry – step right up!
I’ll be here twice a week to let you know how it’s all unfolding. I’m going to slice and dice this theatrical spectacular for you, one julienne fry at a time.
Defense stocks have had a good run so far this year. Shah appeared on Fox Business yesterday afternoon advocating taking profits on three of the biggest firms that have reached all-time highs recently.
With the rise of lower cost energy alternatives like natural gas, major coal producers – including Alpha Natural Resources and Peabody Energy – have seen a massive decline over the past 5 years. Is it time to sell or buy more at these extremely low levels? Shah tells us what to do.
He also gives his best natural gas pick that’s poised to be a $140 billion enterprise company. “And the prospect for dividends is tremendous,” says Shah. The dividend yield will more than likely start around 5% but he expects it to go a lot higher.
And Shah calls Alibaba “a go-to stock for the next decade or two.” Find out what his buy-in price is by watching the video below.
You as an individual are at risk. Your bank account is at risk. Your credit is at risk. You’re at risk in ways you never thought about.
Merchants are at risk, maybe to the tune of tens of billions of dollars.
Banks are at risk. In fact, the whole financial system could be at risk.
And we hate to think about it, but the entire country is at risk.
And then there’s the security implications of breaches of critical U.S. infrastructure imply. And the global geopolitical implications of cyberwar.
We know that’s all out there, but today I’m going to put a single data breach under a microscope.
So, put on your lab coats and let’s get started…
The E-Castle Walls Are Coming Down
Today, I’m focusing on basic credit and debit transactions.
They’re not basic anymore.
The electronic world we’ve constructed isn’t impenetrable. In fact, it’s pretty porous.
Almost every day businesses are attacked by hackers, by malware, by criminals intent on stealing proprietary information, trade secrets and customer information. They’re going after our payment card numbers, passwords, addresses – anything they need in order to steal or make money.
Corporate and government data breaches are so common now that there’s a website dedicated to what’s happening: www.DataBreachToday.com.
The data breaches that have garnered the most media attention recently are the Target Corp. (NYSE: TGT) and the Home Depot Inc. (NYSE: HD) thefts.
The more recent Home Depot breach dwarfs the one last year at Target. So let’s zero in on what happened at the hardware giant and what’s going to happen in the future.
Home Depot’s more than 2,000 North American stores were all affected. Some 56 million Home Depot customers’ payment cards were exposed – about 40 million Target customers’ cards were breached.
Needless to say, the lawsuits are starting to fly.
One lawsuit, which is seeking class-action status, was filed on behalf of Home Depot customers even before the retailer admitted its systems had been breached. That suit anticipated the eventual admission and points to the fact that Home Depot knew about the breaches and didn’t come clean, which would have helped customers who were subsequently affected protect themselves in some way.
Now banks are getting on the sue-Home Depot bandwagon. Two credit unions are suing and seeking class-action status, claiming unspecified losses related to refunding fraudulent charges, reissuing cards, opening and closing accounts, stopping or blocking payments, notifying customers, increasing fraud monitoring and lost revenues from a drop-off in accounts.
Whether banks can sue merchants for losses related to data breaches is about to be ruled on by a judge in a Target lawsuit. In that suit, Target is trying to derail a consolidated class action by a group of banks claiming the retailer is responsible for their losses. One estimate of Target’s liability to the banks suing it is a cool $18 billion.
If the banks prevail, merchants’ liability in the future will be staggering.
Between banks and customers suing, merchants are going to face charges of breach of confidence, privacy, fiduciary duty, negligent misrepresentation and outright negligence. In short, the plaintiffs are accusing the merchants of failing to meet their legal obligation to protect customers and customers’ banks.
Sometimes, as may be the case with Home Depot, there may be obvious (at least in my mind) culpability. And it may be clear that obligations were not met where they could be reasonably expected.
Apparently, Home Depot knew about the breaches at least five months before going public about it. An outside data security firm warned the retailer about “using out-of-date malware detection” systems. And a former Home Depot information securities manager has said he warned the company about its out-of-date antivirus software on its point-of-sales systems.
It was the point-of-sales systems that were compromised at both Target and Home Depot.
In fact, the U.S. Department of Homeland Security, based on U.S. Secret Service findings, warned Home Depot about Mozart (the name of the malware that infected the retailer’s systems) infiltrating its checkouts.
Data security experts think Mozart to be a customized malware designed to attack Home Depot’s point-of-sale systems. In other words, whoever designed Mozart understood, or knew how to get around, Home Depot’s safety systems. Mozart was “customized” to the retailer’s technology. And it was running for at least five months before anyone detected it.
In a nutshell, the malware used a “RAM scraper” to capture a customer’s card and related information between the time – just milliseconds – it was swiped and the time it took Home Depot’s systems to encrypt the customer’s information.
Home Depot encrypted its customers’ information – but Mozart stole the data before encryption occurred.
What will the eventual costs to Home Depot be? What will merchants be responsible for in the future? What was the Secret Service doing looking into Home Depot’s systems? What’s out there in cyberland that we have yet to face, defend ourselves against and combat?
All I know is that technology is a double-edged sword.
The divide between haves and have-nots is widening every day.
There are fewer and fewer good jobs and careers to be had.
And maybe worst of all, according a survey by the non-profit Employee Benefit Research Institute and Greenwald and Associates, about 36% of workers have less than $1,000 in savings and investments that could be used for retirement (not counting their primary residence or defined benefit plans and traditional pensions), and 60% of workers have less than $25,000.
What the heck happened?
The Federal Reserve System is killing America. It has destroyed the economy. It has undermined savers and retirees. It is even responsible for the corruption in Congress.
We have to kill the Federal Reserve before it kills America for good.
There’s nothing in the Constitution about a central bank. There’s nothing “free-market” about a central bank. There’s no reason for a central bank – with omnipotent power over the creation of money and credit, over employment (which is an absolute joke), over the entire economy, and over Congress – to exist. No reason.
Okay, there is one reason…
The Only Reason the Fed Exists
The Federal Reserve, America’s central bank, exists to serve big banks and Wall Street.
There is no other reason for the existence of the Fed. None.
Central banks exist to backstop banks. They were all created by bankers to serve them.
When banks get into financial trouble (for any number of reasons, all of them having to do with their bad management and greed), if there is no backstopping angel with unlimited (completely made up out of thin air) resources to bail them out, they would shut down.
And they should shut down. Sure, there would be losses. Equity owners would lose, creditors would lose, and some depositors would lose money, too, if they aren’t covered by FDIC insurance.
But if banks were allowed to fail, if they were each on their own insignificant enough to the financial system, to the whole economy, that they could fail without doing economic damage, they should be allowed to fail. Small banks are still allowed to fail based on this exact principle.
But clever bankers, the masters of the biggest banks in any system (in the U.S. it was a group of the most powerful banks in the U.S. and allied banking interests in Europe in 1913) figured out that if they got so big that any one of their failures would result in contagion and undermine the financial system and the economy, then they could convince governments to create central banks to safeguard systems and economies.
The Federal Reserve was legislated into existence in 1913 precisely to backstop America’s biggest banks. The history of exactly how the Fed came about and who was involved in the secret meetings at JPMorgan’s private island to design the “System” (they didn’t use the term bank because they wanted to imply a safety “system” and not raise the ire of the public, who were fearful and skeptical of the big banks that were already running the country) is one of America’s greatest cloak-and-dagger stories.
The true tale is laid bare in an extraordinarily well researched and documented book “The Creature from Jekyll Island” by G. Edward Griffin. Read it.
Without getting into the weeds on how they mechanically do it, it’s instructive enough to know what the Federal Reserve does. In a nutshell, all their “regulatory” duties aside, the Fed prints money and gives it to banks.
That’s right, the Fed – not the U.S. Treasury – creates dollars. The Treasury actually prints dollars and mints coins, but they only do enough of that to keep a certain amount of currency in circulation. The creation of money comes from the Federal Reserve System.
Look at your dollars, any bills in your wallet. They don’t technically belong to the Treasury. They say right up top: “Federal Reserve Note.” It’s Federal Reserve money. But the Fed doesn’t have to have the Treasury print money to give it to banks. They just credit banks electronically. And, like magic, banks have money when they need it.
Here’s How the Fed is Killing America
They backstop banks, all the too-big-to-fail banks, not littler, less important banks that are allowed to fail because they’re not politically important, all the big banks. And they backstop Wall Street speculation.
Banks are speculators, and they are part of what we call “Wall Street.” Wall Street makes money by shuffling paper, by playing in and manipulating what are supposed to be free-market capital markets. When they over-leverage and their paper juggling, hot-potato money-making schemes implode, they would fail (Bear Stearns and Lehman Brothers did, and so did Merrill Lynch and Goldman Sachs and Morgan Stanley and Citigroup, all of them imploded, to one degree or another, in 2008) and be wiped out.
But the Federal Reserve can save any of them, or which they want to save, and it did just that in 2008. They saves their own and let a few institutions be absorbed by bigger institutions so they could become more systemically important. And in doing that the Fed saved the financial system.
Good for them. And good for us, right?
No. The Fed plays god with the financial system. It plays god with the economy. And it rules over Congress and is responsible for our massive debt.
By backstopping banks and Wall Street speculation, the Fed has increased the “financialization” of the American economy. Our economy is more about moving paper assets around to create wealth than it is about producing and manufacturing real goods and services.
That’s why the divide between the haves and have-nots is getting wider. If you have financial assets, you’ve benefited by the Fed’s zero interest rate policies (or ZIRP). That’s because speculators know the Fed won’t let Wall Street down, they won’t let markets drop. That’s great if you’re a financial paper punter.
But, while the Fed has lowered interest rates to zero for banks and speculators to borrow cheaply to leverage up their paper financial assets (in rigged capital markets), those low rates have destroyed savers pocketbooks. Savers aren’t punters. They park their money in fixed-income investments to earn a yield.
Savers have been destroyed by the Fed.
And the deficit? That’s the Fed’s fault. Congress doesn’t have to tax the public to keep spending. The Treasury issues all the bills, notes, and bonds it wants to raise money, and the banks buy most of their paper obligations. Then the Fed buys those bills, notes, and bonds from the banks with the money they “print” electronically. That’s why there’s no accountability in Congress.
Far worse, the bankers, with their fat profits, lavish money on Congress to get what they want. There’s no one in Congress, no one, who doesn’t take campaign money one way or another from some financial system player. Wall Street owns Congress and they get their money to buy their puppets from the Fed’s backstopping.
There’s no need for a Federal Reserve if the TBTF banks are split up into hundreds of regional banks. If no single bank failing would cause contagion, or harm the economy, they should be allowed to fail.
If we want to take back America from the bankers and the Wall Street machinery that soaks up economic capital for their paper-pyramiding wealth-minting factories, and disadvantages savers, producers and workers, then we have to kill the Federal Reserve Bank.
Whether it’s photos of nude celebrities hacked from the iCloud, hacked credit cards at Home Depot, hacking attacks on JPMorgan Chase, or the National Security Agency’s hacking all of us, the truth is that we’re all hackable – because we’re all on servers somewhere.
Servers – whether in our own PCs, in our workplace’s IT “closets” or in the “cloud” – provide essential services and hold huge amounts of our important information.
And it doesn’t matter where your server is. If you’re on a server – and you are – you can be hacked…
Apple’s Bad Week
There are many ways we can be hacked, and lots of ways companies and server farms and clouds can be hacked.
According to Apple, the nude celebrity photos stolen from the iCloud didn’t result from a breach of the iCloud (though it did). According to Apple, they were stolen (through the iCloud) from the individual accounts of the celebrities.
Apparently, “brute force” was used to run thousands of possible passwords before coming up with winning entries that yielded access to the stacks of stored photos.
If you’re wondering how the public felt about the breach… well, some of you probably enjoyed the photos. However, a lot of you sold Apple stock yesterday.
The big drop in the stock, traceable to the iCloud hack, comes at nearly the precise moment Apple is likely to introduce its new “mobile wallet” along with the launch of the new iPhone 6.
Talk about bad timing.
Just when we’re supposed to lock ourselves further into the Apple ecosystem and consider giving up our plastic cards for a “secure” mobile wallet, the same iCloud where our digital money and credit will be shepherded… it gets sheared.
Then there’s the Home Depot hack. Though the hack occurred back in April or May, we don’t know much yet, because the DIY retailer isn’t saying much. But it looks like 2,200 stores were affected, which means millions of customers’ data was probably spilled.
Clean up on aisles 7, 8, 9 and 10 – and on the servers.
How big could the HD hack be? Bigger than the Target hack that affected 40 million credit card numbers and compromised 70 million addresses and phone numbers and other personal information.
Even scarier is the recent hack of JPMorgan Chase, only the largest bank in the United States. Who did what? No one is saying, because it’s a bank and there are national implications.
National implications? Yep.
Here’s what the retired four-star Army General Keith B. Alexander, formerly director of the NSA and head of U.S. Cyber Command, had to say. In an interview with Bloomberg yesterday, Alexander said the JPMorgan Chase hack may have been orchestrated by Russia as a warning to the United States over its Ukraine-related sanctions.
Vladimir Putin‘s message: “If you mess with us, we will undermine your financial system.”
We know the math whizzes at the NSA, courtesy of hero/traitor Edward Snowden‘s revelations, are hacking everyone here at home. Yeah, that means you and me.
And they’re hacking into our friends’ and allies’ “secure” communications networks. And they’re spying on them in their offices and in their bedrooms – and they’re probably looking at their nude photos, too.
We know it, and now our pissed-off friends know it, too.
There’s hacking going on in “them thar hills,” and big national governments – ours and Russia’s – are behind a lot of it.
All those hills are alive with the sound of hackable humming servers. So, are we all headed over some technology cliff that’s going to land us in some open field where we’re all nude and vulnerable to being terrorized?
It could be.
Storm Clouds Gathering
And just when we thought the cloud was going to be the next big thing, Timothy D. Naegele is speaking up.
In an online comment posted to American Banker‘s Tuesday story about the iCloud breaches, the highly respected financial attorney and former counsel to the Senate Banking Committee wrote, “The cloud is a mistake. No one’s data is safe. It is vulnerable to hackers, terrorists and others. Anyone who tells you differently is mistaken.”
Take this as a warning.
If you can activate or turn on multifactor authentication requirements on your stuff stored on servers, do it. If you have your passwords and/or log-on information stored in any cloud anywhere or on a server at home, take them offline and store them in an old-fashioned paper (remember paper?) notebook.
If you have apps that access and store stuff in the cloud, what’s in that cloud can be traced back to your computer, tablet or cellphone – which may not be such a “smart” phone, after all.
Whatever you can do to make your digital footprint scarce, do it. Get off grid before your own nude photos go online… because I really don’t want to see them.
I can’t further corroborate it, but I trust the source.
My friends know I like to target shoot. I don’t hunt, because I can’t kill anything living, but I like guns. Maybe it has something to do with wanting to be James Bond when I was a kid… OK, I still want to be 007.
As other target shooters know, it’s gotten harder and harder to get ammunition.
Fo a few years now, all kinds of stuff have been going around on the Internet about why ammunition is hard to get. I’ve read a bunch of things, and friends send me links to articles all the time.
But a friend I trust just shared some news that shocked me. I want you to hear this news, too.
Not too long ago, I came across some articles about how various federal agencies were stockpiling massive amounts of ammunition. One of the agencies was the IRS, the Internal Revenue Service.
I didn’t think of IRS agents as gun-toting G-Men anymore, so that idea struck me as odd. What’s even odder, however, is that the ammo was supposedly hollow-point rounds.
Hollow-point rounds are deadly. They go into flesh and tissue the size of the bullet but spread out on impact. They’re not for target shooting. Not even police officers are allowed to use hollow points.
Here’s where this all comes together.
My friend asks me yesterday what I think about the U.S. dollar, our currency. I gave him my opinion. Then he asked me if I thought the dollar was going to collapse, as in totally collapse. I answered that I didn’t think there was any reason it would just collapse.
It could lose its reserve status eventually, maybe, possibly – but not immediately, I said.
Then he blew me away. He asked if I’d heard about the government stockpiling hollow-point ammo. I said, as a matter of fact I had heard that. He said, “It’s true.”
He said his “friend,” who is one of the top guys at the Department ofHomeland Security, told him why.
Federal government bigwigs are planning for the collapse of the U.S. dollar, he said. They even have a date. They expect the dollar to implode in 2016.
That’s less than two years away.
He explained that there are foreign forces working to undermine the dollar. And it’s working. It’s happening slowly, but it’s going to mushroom, and the net result will be a global panic and massive dollar selling – to the point that it will collapse.
Because we rely on the dollar without questioning its purchasing power, its “store of value” or its government backing, a sudden collapse of the dollar would undermine society.
How’s that? That’s because, my friend told me, the divide between the haves and have-nots in the United States is so wide now that the government expects there to be riots and looting and total chaos all across the country.
It will be about having things or not having things, he said. It won’t be about having dollars, because they won’t be worth anything.
That’s why the feds are stockpiling ammo. That’s why it’s harder for the rest of us to get ammo.
I am not the kind of person who takes rumors and rubbish and extrapolates them into conspiracy theories. But when someone I know, someone I trust implicitly, someone who is very well connected, tells me something like this, I think long and hard about it.
What Comes Next?
But don’t worry. There are ways we can prepare for this.
Indeed, this doesn’t mean there won’t be chances to make money… lots of money.
In fact, that’s what I’m doing now. I’m considering how we will best be able to protect ourselves and, better still, how we can profit hugely from the demise of the dollar.
I’m scanning the globe to determine how we’ll not only get through, but also take advantage of this worldwide crisis. I’m finding the best investments, deciding where we’ll put our money for safekeeping and figuring out which areas will be hardest hit.
No matter what happens, I’m going to be right here.
Questions about when it’s coming, or how big it will be, or how complicated the deal is don’t matter. They can be answered, and I will answer them here.
The real question is: Should you buy the stock? The answer to that is… keep reading…
Hitting the Road
At this point, it looks like the IPO roadshow featuring Alibaba founder Jack Ma will begin on Sept. 3. The company’s seven investment banks and five outside law firms expect the song-and-dance routine for institutional investors to start in Asia, then head to Europe, and end up playing to packed investor houses all across United States.
Then, the company should debut on the New York Stock Exchange in mid-September.
Market followers have suggested numerous date changes for the initial public offering based on superstition, lucky numbers, religious holidays, summer vacations and persnickety regulatory requirements.
But, no matter – it’s coming.
The initial offering is expected to raise $20 billion for the company, which would make it the largest IPO in history. The IPO for Visa Inc. (NYSE: V) currently holds the record, having raised $19.65 billion in 2008. Facebook Inc. (Nasdaq: FB) raised $16 billion in 2012.
Depending on the first-day closing price of the new stock, Alibaba could be worth anything from $130 billion to $200 billion, which is a wide moat to wade into. But cutting itself a wide swath is what Alibaba is all about – and why this is a complicated deal.
The Long Story
Alibaba is the largest e-commerce company in China – at least that’s the short story. It’s really an eBay, Amazon, PayPal, cloud computing company, venture capital shop and a whole lot more, all rolled into a labyrinth-like company with an increasingly global reach.
Adding to it s complexity, Alibaba is domiciled in the Cayman Islands, does the grand majority of its business in China, and is listing itself on the NYSE. That means it will face regulatory scrutiny in multiple international jurisdictions.
Making its home in the Cayman Islands affords Alibaba an unprecedented amount of freedom and privacy, some of which it will have to give up in the IPO, and some of which will make it less transparent than U.S. regulators and investors are comfortable with.
One big problem comes along with being a Cayman Islands entity. Because it’s domiciled there, Alibaba cannot be included in major benchmarks like the S&P 500 or any of the MSCI indexes.
The S&P 500 only contains U.S.-domiciled companies and has more than $5.1 trillion in assets tracking it, one way or another. Not being eligible for many of the indexes that big institutions track and trade means those mammoth investors won’t be falling over themselves to buy shares.
And because the shares aren’t listed in its home country, Chinese participation will be limited.
The company’s governance structure is another issue for regulators and investors. It empowers insider partners with the right to nominate a majority of the board of directors.
Even though Alibaba is a Cayman Islands company, it has to abide by Chinese rules. And because of China’s strict limits on foreign ownership of Chinese companies, for Alibaba to list its shares on a foreign exchange, the company had to structure its “assets” into separately held vehicles owned by outside companies.
That’s not very transparent.
So, a lot of investors, both institutional and retail, are asking whether they should buy shares when the company debuts.
The short answer to that question is “no and yes,” or “yes and no” – depending on how you look at it.
I wouldn’t buy shares on the first day of trading for many reasons. A big one is the Facebook phenomenon. A deal this big and this global could have trading issues along the lines of what happened with Facebook’s IPO.
The deal is so huge that the company’s investment bankers are saying they need to line up enough investor interest, about four times what will be raised, to help support the share price after the initial IPO frenzy subsides and shares face the “free market.”
Down the Line
As far as buying shares of Alibaba, I’m going to wait and see how they trade on the opening day and for a few weeks after that.
In a perfect world, I’d look to buy Alibaba if there are any early hiccups and after the IPO shares fall. (I missed that “perfect world” with Facebook because I got greedy and thought I’d get in lower as the price was falling – it was down enough – but missed it on the way up.)
Is Alibaba a “buy” in the long run? You bet it is.
There’s so much to this company that I could write about what they’re doing in the open and under the radar and fill up a dozen of these columns.
Here’s what I’ll say for now: Alibaba is going to be one of the greatest global companies of our time.
As retail investors, most of you won’t be able to buy into the Alibaba IPO right away – whether you want to or not. However, there’s another way to play it.
My colleague Bill Patalon, editorial director of Money Map Press, beat me to sharing this “backdoor” investment – and he’s come up with an impressive strategy to follow before the initial offering. Click here for his full report.
The Financial Times reported yesterday that high-frequency traders are leaving investment banks for hedge funds, prop trading houses and their own startups.
Oh, you didn’t realize that investment banks – in other words, too-big-to-fail banks – had high-frequency trading (HFT) desks?
Surprise, surprise, surprise. HFT isn’t the exclusive purview of specialized trading shops.
HFT is a proven money-raking machine, and today I’m going to tell you that’s why it’s part of most so-called investment banks’ trading operations…
Get Into the Game
HFT is a complicated game – um, I mean, business model.
Super-smart computer scientists design mega-fast machines that intercept trading orders from the airwaves or cable conduits. Their machines read these orders – the orders you send to your discount broker, the orders institutions send to dark pools… everybody’s orders.
And before all those orders can be brought together and matched up so a trade gets executed, HFT boys pick off the orders they want.
They also send out their own orders, billions of them every day. They don’t want these orders executed, but want other machines to see their orders and move after them, which are canceled before they can be acted on. It’s about faking out other traders’ machines to set them up to be picked off.
What’s the endgame? Insider trading. Legalized insider trading.
These aren’t tips from an insider. It’s trading on inside data flows that aren’t protected, but sold to HFT desks to be traded against, with an advantage that only the HFT players have.
The HTF rats are leaving the TBTF banks because of the Volcker rule.
The Volcker rule, which has to be implemented by July 2015, puts an end to certain “proprietary” trading. Proprietary, or “prop,” trading is that done for the house and not on behalf of any clients.
Yes, banks trade for clients. And yes, banks are liars about trading for clients by taking the other side of their clients’ trades and not calling that what it is… prop trading.
Anyway, prop trading is going to get a closer look as we get to July 2015. European banks are looking at maybe two years before they get their own Volcker-type rules.
So, the rats are leaving their listing ships (they’re listing because their trading revenue streams are going to dry up) for swamps where they can run wild and get paid what they’re worth.
Good News, Bad News
Anything that reduces the risk TBTF banks take with depositors’ and taxpayers’ money is a good thing.
The bad news is that these same banks will just buy big brokerage operations in order to sell their order flow to the HFT players. And those players will pay them handsomely to pick off their brokerage customers. In fact, they’ll be able to pay even more to peek under skirts everywhere, because not being “banks” means they won’t be subject to having their own skirts looked up and will pay their traders whatever they’re worth.
The TBTF banks are already selling out their brokerage customers. They’re selling raw order data to HFT desks and giving their own HFT desks access to their clients’ dark pool orders. Barclays is under investigation for abusing its dark pool clients, and inquiries have been sent to Goldman Sachs, UBS, Deutsche Bank and Credit Suisse about how they operate their dark pools.
What does this all mean? Nothing. It’s just moving around deck chairs.
Until HFT is brought to heel, it will remain a legalized, institutionalized pick-off-the-suckers game. All the exchanges will make their profit, and so will all the trading desks.
It’s business as usual.
“The strong seem to get more, while the weak ones slave. Empty pockets don’t ever make the grade. Momma may have and Poppa may have, but God bless the child that’s got his own.”