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The USA Morality play

9:14 am in Uncategorized by davidpetraitis

A good friend of mine recently became Swiss. He is looking to let go of his American passport to escape the madness of the American Empire as much as possible on this planet. He asked me in a recent email:

The USA has become a very weird place in many ways – or maybe I have over the now 25 years I have been away. You were also away for a long time, what is your perspective on the country?

I answered him in a longish email:

A stylized US flag

USA: Land of Opportunity for the 1%

On the USA, my perspective is that there is a certain branch of the wealthy oligarchy is controlling the discourse and the large companies. Its control is by buying the hearts and minds of the people who are business oriented to buy into a mental set, a zeitgeist which is tinged with a particular morality. The mental set of leaders of this sect have perpetuated the idea that people who work in monopolistic positions in say finance or media (Murdock and his ilk) or any of the big corporations (GE) are virtuous. The workers, whether here or in low wage countries are of a different sort of people and deserve to be, or at least as a practical matter can be, treated with contempt. There is a leitmotif going on of stories of the immoral poor who feed at the trough of government largesse and are undeserving. One commentator has called the whole narrative the “Stern Father” narrative.

The middle class has been (and is in the process of being) made into the masses, without rights, without decent access to education unless they get loans from the finance elite (and become life long debt slaves), without access to healthcare, without access jobs, to housing sometimes now. The American middle class as a motor of the economy is being hollowed out. Note that 70% of GDP is historically domestic consumption. When the 99% no longer can consume at a growing pace due to the boom bust cycle then the economy of the 1% falters as well. And the difference between rich and poor is getting starker by the year.

The drive of the rich to keep their entitlements and to rob the rest of any entitlements that they may have takes on the weirdness we see in the media. The morality plays of anti-gay, anti-women, anti-ethnic minorities,anti-labor narratives are in fact obfuscations, the equivalent of a very smart marketing of a certain part of the elite media to get people who are in the middle class to vote for candidates who will fleece them by cutting their social security, Medicare and public education.

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Legacy Entity Sleight of Hand at Bank of America

8:30 am in Uncategorized by davidpetraitis

photo: Leo Reynolds via Flickr

Dr. Philip Neches has an analysis at the Huffington Post of the Bank of America (BAC) announcement that they will separate 1.3 million of their mortgages into a new “legacy asset” entity. This is a “good bank / bad bank” strategy. He notes that the announcement was exceedingly low key.

Bank of America (NYSE: BAC) announced last Friday that they were creating a new subsidiary, Legacy Asset Servicing, to handle their 1.3 million troubled mortgages. They hoped that their announcement would get buried under the snow — and news about Egypt and the Super Bowl. Their wish seems to have come true.

Neches also points out that the TARP process was like a bankruptcy court process, but with an inherent weakness:

The TARP process was the equivalent of Chapter 11, with the Federal Reserve and the Treasury acting as both the “debtor in possession” lender and the bankruptcy judge. When put that way, the flaw in the idea becomes immediately obvious: the roles of lender and supervisor are inherently in conflict with each other. The lender, seeking to minimize its risks, pushes for strict controls over the operation of the bankrupt party; the supervisor has to balance the demands of all parties, including other creditors, employees, customers, and public.

TARP clearly succeeded at one of the three goals of Chapter 11: stabilize operations. It did not, however, achieve the other two goals: fix the problems and reposition for the future.

Bank of America will now try to resolve the loans that it places in the bad bank at low impact on its own balance sheet. I wonder how it is going to do this. Currently since during the crisis the Treasury and Federal Reserve Bank convinced the Accounting Standards board to end ‘mark-to-market’ requirements on bank assets most of these bad loans are on the books of the bank at their pre-crash highs. As long as they are NOT resolved the bank looks to have more assets than it really does. The shadow hanging over the banking sectors is: What are these assets really worth? Bank of America may seek some hedge fund to take equity in the unit to minimize the effect of the balance sheet hit. Neches says:

This means that they are preparing to separate the Legacy Asset Servicing business from the BAC holding company at some future date. The bet is that some investor or group of investors will buy the “bad bank”, even if it’s just for $1. The benefit for the remaining “good bank” is obvious: it now has clearly positive net worth and is better positioned for the future.

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High Frequency Trading Hacking

10:35 am in Uncategorized by davidpetraitis

I read an article in Infoworld by Bill Snyder Hackers find new way to cheat on Wall Street — to everyone’s peril which reports on some work done at MIT. The gist of the hack is that by packet insertion in your competitor’s transaction stream you can slow down their trades by a few microseconds. In the HFT world this may mean that there is a theoretical ability to front run. (To truly front run you need to know which trade the competitor is making.) The fact that the exploit is possible does not mean that it is being used yet, but probably means that it will be. A packet injection exploit could also just destablize HFT.

The Infoworld report on the MIT paper noted that the speed of light is now a significant factor in trading strategies. But I did not note in it or a persual of the original MIT paper (pdf)  the potential hack postulated by Bill Snyder.

While today’s fiber optics-based networks can shuttle data around the world at the speed of light — momentarily slowed only by routing and switching — the vast geographic distances data has to travel can be a factor of delay, especially when the information itself is generated so quickly by computers and is useful only within a very short time period. At least one industry, finance, is starting to chafe at this limit.

“For high-frequency trading, light propagation delays are in many cases are the single largest limiting factor to taking advantage of arbitrage opportunities quickly,” said study co-author Alexander Wissner-Gross, who a research affiliate of the MIT Media Laboratory and the founder of the Enernetics research consultancy.

As a result, the researchers recommend high frequency trading firms, as well as any organization that deals in complicated time-sensitive global interactions, take a hard look at where they locate their data centers. In other words, location really does matter.

On the colocation of trading platforms the New York Times ran an article The New Speed of Money, Reshaping Markets that profiled some of the new HFT trading platforms:

A substantial  part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.

Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.

Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States.

The fact that trade latency is now measured in microseconds, and the co-location of the of the trading platforms does make it look like the side-channel exploit is feasible. We have no direct sign yet however that the sky is falling. Washington’s blog contends that high frequency traders might be manipulating not just stocks, but futures options, bond, currencies and commodities. I note that he said “might be” and not that they are, however that is a rhetorical tactic. Snyder mentions the flash crash of May 2009. Masaccio on FDL reported on it August 15, and the twice on October 6, here and here.

Fundamental questions about HFT still abound. Is there potential for more flash crash events? (my take is yes.) Are the ‘safeguards’ put in place by the regulators sufficient to control these events? (I would guess not fully, since future events will be different and unexpected, perforce). Are there potentials for front running, side-channel exploits in HFT? (I would guess yes). Are markets now being manipulated unfairly by HFT? (Hmm… I’ll just stay silent on that one.)

Cross posted on www.petraitis.us

Wall Street Gets What It Wants

3:06 pm in Uncategorized by davidpetraitis

If you thought that the financial plutocrats have been tamed, and that a new boom and bust cycle will be mitigated by future government intervention and regulation; Bloomberg lays it all out in astonishingly clear rhetoric in an article by Christine Harper Out of Lehman’s Ashes Wall Street Gets Most of What It Wants. I covered it in detail on my blog.