erik lundegaard

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Saturday April 19, 2014

The Only Goldman Sachs Employee Arrested by the FBI in the Aftermath of the Global Financial Meltdown

Most of Michael Lewis' book, “Flash Boys: A Wall Street Revolt,” focuses on Brad Katsuyama, his team, and the revelation of how the game is fixed, the Wall Street, high-frequency trading game, and what Brad and his team try to do to fix it. But there's a chapter in the middle of the book about Sergey Aleynikov, a Russian programmer for Goldman Sachs, that is maybe even more depressing than the knowledge that we're all getting screwed.

Initially I thought Serge would wind up on Brad's team. That's how Lewis handles most of these chapters. He'll introduce someone new, give us their background—talents, smarts, disillusionments—and wind the story around to where they hook up with Brad.

Serge's story is different. He's a sought-after programmer that winds up at Goldman Sachs in the mid-2000s.

What does his story reveal? The kind of awful person who thrives in our current, chest-beating society:

The programmer types were different from the trader types. The trader types were far more alive to the bigger picture, to their context. They knew their worth in the marketplace down to the last penny. They understood the connection between what they did and how much money was made, and they were good at exaggerating the importance of the link. Serge wasn’t like that. He was a little-picture person, a narrow problem solver. “I think he didn’t know his own value,” says the recruiter.

What else? How little companies and corporations look to the long-term; how all the goals are this year, this quarter, this month, this week, today:

After a few months working on the forty-second floor at One New York Plaza, Serge came to the conclusion that the best thing they could do with Goldman’s high-frequency trading platform was to scrap it and build a new one from scratch. His bosses weren’t interested. “The business model of Goldman Sachs was, if there is an opportunity to make money right away, let’s do that,” he says. “But if there was something long-term, they weren’t that interested.“

A few weeks ago at a nonprofit fundraiser, I heard a speech from a grassroots organizer in which he encouraged everyone in the audience to not think of the world as a zero-sum game. You don't have to fall if I rise; we can both rise. I nodded. But then I thought, ”Except there are people out there who will think of it as a zero-sum game. And you can't change them. And they will always have the advantage because of it."

Here's an example from Lewis' book. Open source coding is a great, utopian concept. You take, you improve, you return. We all rise. But some people just take advantage of it:

For their patching material he and the other Goldman programmers resorted, every day, to open source software—software developed by collectives of programmers and made freely available on the Internet. The tools and components they used were not specifically designed for financial markets, but they could be adapted to repair Goldman’s plumbing. He discovered, to his surprise, that Goldman had a one-way relationship with open source. They took huge amounts of free software off the Web, but they did not return it after he had modified it, even when his modifications were very slight and of general, rather than financial, use. “Once I took some open source components, repackaged them to come up with a component that was not even used at Goldman Sachs,” he says. “It was basically a way to make two computers look like one, so if one went down the other could jump in and perform the task.” He’d created a neat way for one computer to behave as the stand-in for another. He described the pleasure of his innovation this way: “It created something out of chaos. When you create something out of chaos, essentially, you reduce the entropy in the world.” He went to his boss, a fellow named Adam Schlesinger, and asked if he could release it back into open source, as was his inclination. “He said it was now Goldman’s property,” recalls Serge. “He was quite tense.”

Ther's a horror in this chapter. Serge gets tired of working at Goldman Sachs, of repairing old code rather than starting from scratch. So when he has the chance to start anew, with another compamy, building the code for their high-frequency trading from the ground up, he takes it. The pay is less but he still takes it. He also emails to himself some of the open source coding he improved upon at Goldman Sachs. This code would be useless in his new job, which was using a completely different programming language, but he wanted it anyway. Just in case.

You see what's coming, don't you? Just before he leaves he's arrested by the FBI for stealing Goldman Sachs' proprietary information. He's charged and put on trial. And convicted. And sentenced to eight years in federal prison.

All of this is bad enough. But Lewis saves the coup de grace, the final outrage, for near the end of the chapter:

Thus the only Goldman Sachs employee arrested by the FBI in the aftermath of a financial crisis Goldman had done so much to fuel was the employee Goldman asked the FBI to arrest. 

But at least there's an appeals process, and, a year later, on the day his lawyer argues before the Second Circuit Court of Appeals, Serge is released. Only to be—believe it or not—re-arrested for the same crime. Just different code. So no double jeopardy. But that arrest didn't stand long. 

I don't know if this story can take more irony but here it is. By the end of the book? As Brad and his team work to create a more equitable Wall Street? Goldman Sachs is one of the good guys. 

Wall Street bull

More bull. 

Posted at 11:12 AM on Apr 19, 2014 in category Books
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Sunday April 06, 2014

Flash Boys: Which of the Wall Street Banks Rushed to Engage in Shitty Practices?

Wall Street bull

Wall Street bull.

So I'm reading Michael Lewis' book, “Flash Boys: A Wall Street Revolt,” about high-frequency trading on Wall Street and what it means. Much recommend, by the way.

Lewis is good at this kind of thing. Not just describing the complexities of Wall Street to financial doofuses like me; he good at telling the stories of people who figure out what the system is doing and/or missing, its market inefficiences, and what these people then do as a result. So Billy Beane exploited the truer, Jamesian numbers of Major League Baseball that other, old school GMs discounted. So Steve Eisman saw the disaster securitized subprime mortgages would become for Wall Street, and shorted them. So here, Brad Katsuyama, the most Canadian of Canadians, the polite, Royal Bank of Canada rep on Wall Street, figured out, with a crack team he assembled like in the best Hollywood heist movies (or in the first season of “The Wire”), how Wall Street, around 2007, became rigged because of high frequency trading. 

Essentially Wall Street firms are using computers and fiber optic cable to do what would be illegal if human beings did it. They front-run trades. It would be as if you wanted to buy something, X, and, as you were buying it, someone came between you and X, bought it, and then immediately sold it to you at a higher price. When you got your credit card receipt back, the price had jumped, and you didn't know why, and you never saw who came between you and the thing you wanted.

It should be illegal. It's not. But it's definitely shitty.

And which of the Wall Street banks rushed to engage in shitty behavior?

To Spread this seemed an obvious restriction: The [fiber-optic cable] line was more valuable the fewer people that had access to it. The whole point of the line was to create inside the public markets a private space, accessible only to those willing to pay the tens of millions of dollars in entry fees.

“Credit Suisse was outraged,” says a Spread employee who negotiated with the big Wall Street banks. “They said, ‘You’re enabling people to screw their customers.'" The employee tried to argue that this was not true—that it was more complicated than that—but in the end Credit Suisse refused to sign the contract. Morgan Stanley, on the other hand, came back to Spread and said, We need you to change the language. “We say, ‘But you’re okay with the restrictions?’ And they say, ‘Absolutely, this is totally about optics.’ We had to wordsmith it so they had plausible deniability.” Morgan Stanley wanted to be able to trade for itself in a way it could not trade for its customers; it just didn’t want to seem as if it wanted to.

Of all the big Wall Street banks, Goldman Sachs was the easiest to deal with. “Goldman had no problem signing it,” the Spread employee said.

Wall Street and financial folks are howling about the book, apparently. Here, Lewis answers back.

More soon.

Posted at 08:01 AM on Apr 06, 2014 in category Books
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Monday March 24, 2014

Carson Karin Gets No Respect

I already mentioned the typo on Amazon's Kindle that changes Hollywood legend Garson Kanin to Garson Karin.

This is from the New York Times site: a review of the book I'm reading:

Garson Kanin Gets No Respect

I recommend the book, by the way, Kanin's memoir, “Hollywood,” because it's informative and damn, damn fun, even if (caveat) it should be a little tighter and better organized. But if you like stories, this one's got 'em. Basically, it's a love letter to the golden age of Hollywood in general and Samuel Goldwyn in particular. It's the best kind of love letter: the kind that sees the faults.

Posted at 04:36 AM on Mar 24, 2014 in category Books
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Sunday March 23, 2014

Sophia Loren: The Wrong Kind of Sexy

Another great story from Garson Kanin's memoir, “Hollywood.”

Apparently in the late 1950s, Spencer Tracy approached Kanin, who wrote some of the great movies of the late '40s and early '50s (“Adam's Rib,” “Born Yesterday”), to write something for him and Sophia Loren, who, as Kanin writes, “had recently come upon the scene, bringing with her a sultry, volcanic, sexual quality that had long been missing from the screen.” Kanin did. Problem? No one wanted it. Because? None of them, Tracy, Kanin or Loren, had been successful at the box office in recent years. Tracy agreed to less money, Loren, too. Kanin agreed to waive his director fee. Nada.

But Kanin's agent, the wonderfully named Abe Lastfogel, insisted Kanin pitch to Lou Schreiber at 20th Century Fox. He did. Smartly. He told him the story first so Schreiber was interested. Then he kept describing the main characters so Schreiber would suggest the actors Kanin already had in mind. Schreiber bit:

“It sounds like Spencer Tracy to me. Could you get him?”
“We sure in hell could try,” I said. “Great idea, Lou. I have the feeling he might go for this.”

Then he did the same for the female lead. Nada. Schreiber had no one in mind. So Kanin made the leap to Sophia Loren himself. Schreiber was less than excited.

“Sophia Loren!” Schreiber repeated incredulously. We could not have done worse had we suggested Tokyo Rose.
“What's the matter with Sophia Loren?” I said. “She's beautiful, she's young, she's a tremendous screen presence ...”

But it was the box office. Loren had made a string of bad movies for Hollywood that had done nothing. Kanin insisted it wasn't her fault.

“How come you guys always blame someone else? She didn't pick the subjecdt and she didn't write the picture. She didn't direct it or cut it or release it. So how come it's her fault?”
You know why,” said Schreiber. “It’s because that’s the kind of personality she is. Women don’t like her. She makes them nervous. She’s too sexy.”
“What’s wrong with that?”
“Too sexy in the wrong way.”
“I didn’t know there was a wrong way.”

Then Schreiber gets nasty about it. The picture's never made and everyone goes onto other things. Fifteen months later, Schreiber called Lastfogel to see if he still represented Loren and if she was available. Yes and yes. So he sent over an offer: $1 million guaranteed to appear in “The Story of Ruth.” Kanin: “It was a lesson I never forgot.” 

Sophia Loren

Sophia Loren: the wrong kind of sexy.

Posted at 12:51 PM on Mar 23, 2014 in category Books
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Friday March 07, 2014

Help Me Copy Curmudgeon, You Are My Only Hope

I'm reading “Hollywood” by Garson Kanin on my Kindle and came across this spelling error from amazon.com. It's on the Kindle, too, but not in the book. ATTN: Copy Curmudgeon. Not to mention Mr. B:

Garson Karin, Hollywood, amazon.com

“Hollywood” is a lot of fun, by the way. Great stories so far on Samuel Goldwyn. He's a major asshole but he's got personality, and, as we've learned, personality goes a long way.

Posted at 07:45 AM on Mar 07, 2014 in category Books
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