BUBBLE #1
THE GREAT DEPRESSION
GOLDMAN WASN'T ALWAYS A TOO-BIG-TO-FAIL Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids - just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.
You can probably guess the basic plotline of Goldman's first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes loads of money. In that ancient history there's really only one episode that bears scrutiny now, in light of more recent events: Goldman's disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.
This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an "investment trust." Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn't hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.
In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market's historic crash; in today's dollars, the losses the bank suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in an ascot. "If there must be madness, something may be said for having it on a heroic scale."
Originally posted by utherpendragonThe article may have included the words
Sorry.Go here for the rest of the bubbles and article.I keep getting blocked from posting the rest of it for some reason.
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in which case the post is automatically blocked, not by generalissimo's communist moderators, but by software.
Originally posted by FMFI know it did.Words acceptable for Rolling Stone to print but not here which is a good thing i guess.You ought to take 5 mins. and read the article and tell me what you think,its quite interesting
The article may have included the words
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in which case the post is automatically blocked, not by generalissimo's communist moderators, but by software.
http://news.yahoo.com/s/ap/20090718/ap_on_bi_ge/[WORD TOO LONG]
Bank profits not as impressive as they seem
By STEPHEN BERNARD and IEVA M. AUGSTUMS, AP Business Writers Stephen Bernard And Ieva M. Augstums, Ap Business Writers – Fri Jul 17, 11:15 pm ET
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That the banks managed to turn a profit at all is remarkable. Just 10 months ago, many of them looked to be on the verge of collapse. The stock market staged a huge rally this week, driven by the signs of health in banking.
But Bank of America CEO Ken Lewis had some sobering words during a conference call with Wall Street analysts after his company's results were released Friday: "Profitability in the second half of the year will be much tougher than the first half."
Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading — not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage.
Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do.
Bank of America, JPMorgan Chase and Citigroup Inc. all reported they lost more money on loans during the second quarter. Bank of America alone set aside $13.4 billion to cover loan losses. But the banks also saw signs that loan delinquencies were starting to stabilize.
Celent analyst Isabel Schauerte said Bank of America's earnings tell the story of the financial industry.
"B of A's results are the bellwether of where Main Street is headed. Measured by credit losses, a moderation of default rates is not in sight," Schauerte said. "For the investment banking business of B of A, in contrast, the worst days seem to have passed."
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http://www.nytimes.com/2009/07/24/business/24trading.html?_r=2
"It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage."
Admittedly, I don't know that much about how this works, but it seems to me that it IS an unfair advantage for certain firms to have access to trading information before anyone else does.
Have so many people forgotten the time during the financial crisis when the investment banks became banks in name and qualified for federal aid?
Investment banks have been able to make money during down stock markets for decades and decades now, this is not news.
Many of them bought or merged with banks that needed to be saved.
To compare:
Of course if Toyota were to buy Ford, the economic performance of the new company would be better than Ford's used to be, as would its finances and managerial styles. The new company would continue taking market share from others during a down economy. That would not be news either.