Will blockchain fulfil its democratic promise or will it become a tool of big tech?

Engineers are focused on reducing its carbon footprint, ignoring the governance issues raised by the technology writes John Naughton in The Guardian

Illuminated rigs at the Minto cryptocurrency mining centre in Nadvoitsy, Russia. Photograph: Andrey Rudakov/Getty Images



When the cryptocurrency bitcoin first made its appearance in 2009, an interesting divergence of opinions about it rapidly emerged. Journalists tended to regard it as some kind of incomprehensible money-laundering scam, while computer scientists, who were largely agnostic about bitcoin’s prospects, nevertheless thought that the distributed-ledger technology (the so-called blockchain) that underpinned the currency was a Big Idea that could have far-reaching consequences.

In this conviction they were joined by legions of techno-libertarians who viewed the technology as a way of enabling economic life without the oppressive oversight of central banks and other regulatory institutions. Blockchain technology had the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables. It combined, burbled that well-known revolutionary body Goldman Sachs, “the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key information and establish trust”. Verily, cryptography would set us free.

At its core, a blockchain is just a ledger – a record of time-stamped transactions. These transactions can be any movement of money, goods or secure data – a purchase at a store, for example, the title to a piece of property, the assignment of an NHS number or a vaccination status, you name it. In the offline world, transactions are verified by some central third party – a government agency, a bank or Visa, say. But a blockchain is a distributed (ie, decentralised) ledger where verification (and therefore trustworthiness) comes not from a central authority but from a consensus of many users of the blockchain that a particular transaction is valid. Verified transactions are gathered into “blocks”, which are then “chained” together using heavy-duty cryptography so that, in principle, any attempt retrospectively to alter the details of a transaction would be visible. And oppressive, rent-seeking authorities such as Visa and Mastercard (or, for that matter, Stripe) are nowhere in the chain.
 
Given all that, it’s easy to see why the blockchain idea evokes utopian hopes: at last, technology is sticking it to the Man. In that sense, the excitement surrounding it reminds me of the early days of the internet, when we really believed that our contemporaries had invented a technology that was democratising and liberating and beyond the reach of established power structures. And indeed the network had – and still possesses – those desirable affordances. But we’re not using them to achieve their great potential. Instead, we’ve got YouTube and Netflix. What we underestimated, in our naivety, were the power of sovereign states, the ruthlessness and capacity of corporations and the passivity of consumers, a combination of which eventually led to corporate capture of the internet and the centralisation of digital power in the hands of a few giant corporations and national governments. In other words, the same entrapment as happened to the breakthrough communications technologies – telephone, broadcast radio and TV, and movies – in the 20th century, memorably chronicled by Tim Wu in his book The Master Switch.

Will this happen to blockchain technology? Hopefully not, but the enthusiastic endorsement of it by outfits such as Goldman Sachs is not exactly reassuring. The problem with digital technology is that, for engineers, it is both intrinsically fascinating and seductively challenging, which means that they acquire a kind of tunnel vision: they are so focused on finding solutions to the technical problems that they are blinded to the wider context. At the moment, for example, the consensus-establishing processes for verifying blockchain transactions requires intensive computation, with a correspondingly heavy carbon footprint. Reducing that poses intriguing technical challenges, but focusing on them means that the engineering community isn’t thinking about the governance issues raised by the technology. There may not be any central authority in a blockchain but, as Vili Lehdonvirta pointed out years ago, there are rules for what constitutes a consensus and, therefore, a question about who exactly sets those rules. The engineers? The owners of the biggest supercomputers on the chain? Goldman Sachs? These are ultimately political questions, not technical ones.

Blockchain engineers also don’t seem to be much interested in the needs of the humans who might ultimately be users of the technology. That, at any rate, is the conclusion that cryptographer Moxie Marlinspike came to in a fascinating examination of the technology. “When people talk about blockchains,” he writes, “they talk about distributed trust, leaderless consensus and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.”

And we’re nowhere near that point yet.

Instead of draining the swamp, Trump has become Wall Street’s best buddy

Will Hutton in The Guardian


President Trump was an accident waiting to happen. The US had entered a zone of fragility: there were too many inequalities, grievances and accompanying disillusion in a system felt not to work .

A chief reason for that economic and social fragility was the behaviour of the American financial system. It is still astounding how close to disaster high finance brought the US and global economy in 2008. It provoked a vast bailout, and the recovery that followed has been one of the most anaemic sort, during which the wages of average Americans have scarcely grown.

The hangover of debt and legacy of banks trying to rebuild their shattered balance sheets has held the economy back. Meanwhile, some of the weak links in the system, like the sheer scale and opacity of the derivative markets, plus business models riddled with conflicts of interest, have remained unaddressed. Fortunes are still being made and very few have paid the price for cataclysmic mistakes.

On the campaign trail, Trump unfailingly tarred Clinton as compromised by, and enmeshed with, Wall Street and its mega banks. Goldman Sachs had “total control” of her; she was in thrall to a “global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities”.

Trump would drain the swamp, he claimed, and reinstate a “21st-century” version of the law separating main street banking from Wall Street – Roosevelt’s Glass-Steagall Act – which was scrapped by President Bill Clinton, in one of his worst decisions. Trump would throw the money men out of the temple, he said. He would reshape finance for the “little guy”. His audiences roared him on.

But, in office, Trump has proved to be a great deal friendlier to the titans of Wall Street and their interests than he suggested he would be as a candidate, although a close reading of his speeches foretells some of what is now happening. Far from draining the swamp, he is opening the sluicegates; the money men are not so much being hurled out as in full occupation of the economic citadel.

Goldman Sachs’ number two, Gary Cohn, is to be Trump’s chief economic adviser; his Treasury secretary, Steve Mnuchin, was 20 years at Goldman Sachs before running OneWest Bank, which made a fortune by improperly foreclosing on mortgages in ethnic minority communities after the financial crisis. These are not men on the side of the little guy: Cohn has promised to attack “all aspects of Dodd-Frank”, the partially effective regulatory framework that Obama laboriously passed into law in 2010, in the teeth of Republican and Wall Street opposition.

What we know from the financial crisis is that the banking system has become a highly interdependent network in which contagion spreads in hours – it is only as strong as its weakest link. Yet Trump, in thrall to some of the most demonic figures in American finance, last week demanded a 120-day review of all the US’s financial regulations to tame their alleged excesses.

His intent is clear. He has Dodd-Frank in his sights, a “disaster” on which he aims to do “a big number”. There is only one end: to regulate the links in the financial network so they have even less oversight than they do now. And, if things go wrong, Trump will have no hesitation in writing whatever cheques that have to be written to bail out the banks again, just as he backed the bailouts in 2008/9. It is careless, don’t-give-a-damn insouciance on an epic scale.

It seems that a 21st-century version of Glass-Steagall, the core building block in the wholesale reconstruction of the US financial system in the wake of the Depression, was code for doing the exact opposite. Dodd-Frank certainly has weaknesses – in many respects, it does not go far enough and many of its recommendations are yet to be enacted – but it has made US banking immeasurably safer.

Former Goldman Sachs banker Gary Cohn, left, now Trump’s senior economic adviser, flanks the president during a meeting with business leaders in the White House. Photograph: Chip Somodevilla/Getty Images

The banks now hold a third more capital than they did 10 years ago. They are forbidden from trading in securities on their own account. Thirty-four of them, described as “systemically important financial institutions”, are kept under especially close watch, as key elements in the network. The newly established Consumer Financial Protection Bureau tries to ensure customers are dealt with honestly.

You might think after the extraordinary fraud at Wells Fargo last autumn – bank employees opening millions of phantom accounts and credit cards in customers’ names – that a president on the side of the little guy would at the very least not want to weaken American financial regulation. Rather, Trump is in sympathy with the bankers, horrified at the scale of fines they are now paying – Wells Fargo paid a cool $185m. He is also scandalised that holding so much buffer capital and not being able to trade in securities is damaging the bankers’ personal remuneration.

Dodd-Frank has been under fire since its inception, but then Republicans hated the New Deal too. Roosevelt, like Obama, was a hate figure whose every work had to be undone. Both men represented challenges to an idea of America as offering limitless freedom, not least to billionaires. The accompanying social distress is a price worth paying for such freedom – or so the thinking goes.

Billionaire Trump was right in one respect: Hillary Clinton was profoundly compromised by her relationship with Goldman Sachs, pocketing $675,000 for a mere three private speeches, in which she did voice sympathetic concerns about Dodd-Frank for allegedly making banks more cautious in their lending. She was, and is, indisputably a member of a global elite that cannot escape responsibility for the emergence of so many blighted lives.

But, beyond that, Trump is a phony. His economic programme is no more than Reaganomics on speed run by a group of opportunists and self-interested chancers. In the short run, there will be a Trump upswing triggered by the prospect of careless deregulation, unaffordable cuts in corporate tax and lots of infrastructure spending.

How long it will last, and whether it will be a trade war or a financial crisis that will bring it to an end, is anybody’s guess. But we have now had a glimpse of a darker Trump, the hypocrite for whom the little guy is but a pawn to serve his own delusional ambitions. Pity the US. And pity Brexit Britain, forced to bend the knee to such a man and such a president.

Fifty biggest US companies stashing $1.3trn offshore

Coca-Cola, Walt Disney, Alphabet (Google) and Goldman Sachs all implicated in Oxfam report.

Hazel Sheffield in The Independent


Coca-Cola is among the companies named by Oxfam


The 50 biggest US companies have more money stashed offshore than the entire GDP of Spain, Mexico or Australia, collectively keeping about $1.3trn (£0.91trn) in territories where the money does not count towards US tax, according to a new report by Oxfam.

The revelations come after the European Commission announced plans to make big companies more transparent about where they pay tax. The charity said the Commission's proposals are “almost useless” for identifying where tax avoidance may be happening. It urged the UK Government to push for stronger rules to ensure that companies pay tax in all countries where they do business.

Robbie Silverman, Senior Tax Advisor at Oxfam, said that tax avoidance in the US will have a knock-on effect in countries around the world.

“The same tricks and tools used by multinational companies to dodge tax in the US are being used to cheat countries across the world out of their fair share of tax revenues, with devastating consequences,” he said.

“Poor countries are particularly hard hit, losing an estimated $100bn a year to corporate tax dodgers. This is enough to provide safe water and sanitation to more than 2.2 billion people,” he added.

In its investigation into the US tax system, Oxfam revealed some of the offshore accounting practices of the biggest companies in the US. Fifty companies including Coca-Cola, Walt Disney, Alphabet (Google) and Goldman Sachs keep a total of about $1.3trn in subsidiary companies registered all over the world, Oxfam says.

The Independent has contacted the companies named above for comment. Goldman Sachs declined to comment, the others did not respond.

The 50 companies are believed to have earned $4trn in profits globally from 2008-2014, but paid only 26.5 per cent of this in tax in the US, below the country’s statutory tax rate of 35 per cent. They rely on an opaque and secretive network of more than 1,600 disclosed subsidiaries in tax havens to stash about $1.3trn offshore, Oxfam said. It added that other offshore subsidiaries may be in use but under the radar of the Securities and Exchange Commission, because of weak reporting requirements.

These same 50 companies collectively received $27 in federal aid-like loans, loan guarantees and bailouts for every $1 they paid in federal taxes, amounting to a total of $11.2 trillion, Oxfam said.

Charities including Oxfam and Christian Aid have dismissed European Commission proposals to crack down on tax dodging as “close to pointless”. Christian Aid said new rules would allow “dodgy business as usual”.

Under EC proposals, companies would have to report profits and pay taxes in the EU and certain so-far undisclosed tax havens.While campaigners have lobbied for country-by-country reporting of taxes and profits, the proposed versions is so limited that it would not do the job, charities say.

“Unless companies have to report on their activities in all the countries where they operate, they could continue to dodge tax on a massive scale, using the places still hidden from view,” said Toby Quantrill, Chrisian Aid’s tax justice expert.

An protest by Oxfam outside the European Commission headquarters in Brussels earlier this week (Getty)

Campaigners have long asked for country-by-country reporting of tax affairs but the latest EC proposals are only a limited version of the rule. A previous tax haven blacklist put together by the European Commission in 2015 was withdrawn after it failed to include key countries like Luxembourg.

The latest European Commission proposals come in the wake of a huge data leak from a law firm in Panama that provided evidence of the true scale of offshore banking by the world’s super rich, including many current and former world leaders. Oxfam described the exploitation of tax loopholes as an “integral component” of the profit-making strategies of many multinational corporations.

Tax avoidance comes in many forms. Companies have reported up to $2 trillion of profits as “permanently reinvested” abroad, meaning it is not accountable for tax in the US. Some of the companies The Independent spoke to said that they still pay high taxes in the countries where the subsidiaries are registered. This practice can help them reduce their US tax bill because companies receive a dollar-for-dollar credit for any amount of tax they pay to other countries.

Oxfam, Christian Aid and Action Aid have said that in order to create a fairer tax system, companies must publically report revenues and taxes, publically declare any subsidiaries in tax havens and publically reveal how much money they spend on lobbying politicians.

The art of profitable giving - PhilanthroCapitalism

G Sampath in The Hindu




Not too long ago, public opinion was against philanthropy. A new book explains how attitudes have changed, and why we must scrutinise them.




Once upon a time there was charity. The haves gave some to the have-nots, and that was that. Sometimes the giving impulse was religious, sometimes guilt-induced. But charity was more about the soul of the giver than the welfare or rights or dignity of the receiver. This is why there can be no charity between equals. Or between friends. For all these reasons, charity had for long remained an activity rooted in the personal-private, quasi-religious sphere.

Then came philanthropy. Jeremy Beer, in his The Philanthropic Revolution: An Alternative History of American Charity, argues that the displacement of charity by philanthropy was “the result of a reconceptualisation of voluntary giving as primarily a tool for social change.” It also marks, according to Beer, a shift from a theological to a secular framework for giving, bringing with it all the baggage that secularisation entails – blind faith in the technological mastery of the social world, centralisation, and the bureaucratization of personal relations.”

And today we have ‘philanthrocapitalism’. The term gained currency after The Economist carried a report in 2006 on ‘The birth of philanthrocapitalism’. Noting that “the need for philanthropy to become more like the for-profit capital markets is a common theme among the new philanthropists,” the article explains why philanthropists “need to behave more like investors.”

Two years later came the book that today’s biggest philanthropists swear by: Philanthrocapitalism: How the Rich can Save the World by Matthew Bishop (a senior business editor from The Economist) and Michael Green. The title is not intended to be ironic. It is an earnest argument: in a world of rich men and poor states, who better to save the poor than the rich themselves?

The advent of philanthrocapitalism may have finally brought to the fore what is tacitly understood but rarely made explicit -- the symbiotic relationship between capitalist excess and philanthropic redress.



When philanthropy was shunned



It is no accident that the first great philanthropists were also the greatest capitalists of their age. Nor is it a coincidence that many of these men, remembered today by their philanthropic legacies – John D Rockefeller, Andrew Carnegie, Andrew Mellon, Leland Stanford, James Buchanan Duke – also figure in Wikipedia’s list of “businessmen who were labelled robber barons”.

If one is to make sense of the recent surge in the quantum of philanthropic funds sloshing around looking for worthy causes – the Bain & Co. Indian Philanthropy Report 2015 notes that foreign philanthropic funding in India more than doubled from 2004 to 2009, jumping from $0.8 billion in FY‘04 to $1.9 billion in FY’09 – then one needs to go beyond the numbers and look at the economic underpinnings of corporate philanthropic initiatives. This is precisely what sociologist Linsey McGoey sets out to do in No Such Thing as a Free Gift: The Gates Foundation and the Price of Philanthropy, which released last month.

No Such Thing… kicks off with a quick reminder of the shady origins of philanthropy. How many of us know, for instance, that not too long ago public opinion (and government opinion) was against philanthropy in general, and corporate philanthropy in particular?

In the early 20th century, philanthropic foundations were “viewed as mere outposts of profit-seeking empires, only cosmetically different from the corporations that had spawned them, a convenient way for business magnates to extend their reach over domestic and foreign populaces.” McGoey quotes US Attorney General George Wickersham, who had observed that they were “a scheme for perpetuating vast wealth” and “entirely inconsistent with the public interest.”

Yet what was common sense in 1910 would sound blasphemous in 2015. While no self-respecting economist today can deny the obscene economic inequality that characterises our age, not many would willingly acknowledge the connection between concentration of wealth and philanthropy. That is to say, an equitable society would suffer neither a club of the super-rich that seeks self-expression through philanthropy, nor a class of the super-poor that is dependant on philanthropic charity for survival. McGoey makes this point simply with a quote from the economic historian RH Tawney: “What thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice the problem of riches.”

If philanthropy is thriving in this age of extreme inequality, it is because it serves a dual purpose: one, to make inequality more acceptable ideologically and morally; and two, to define poverty as a problem of scarcity rather than of inequality. Hence the ultimate argument in favour of philanthropy, deployed when all else fails, is the one based on scarcity: ‘something (from a foundation) is better than nothing (from the government)’.

Philanthropy is the palliative that makes the pain of capitalism bearable for those fated to endure it. Philanthrocapitalism, on the other hand, is about transcending this palliative function to represent capitalism itself as a philanthropic enterprise.

In Bishop and Green’s formulation, such a philanthropic capitalism – also known as ‘venture philanthropy’, ‘social entrepreneurship’, ‘impact investing’ – would drive innovation in a way that “tends to benefit everyone, sooner or later, through new products, higher quality and lower prices.”

As McGoey reveals in her book (and Bishop and Green attest in theirs), no one does philanthrocapitalism better, or bigger, than Bill Gates, who helms the world’s largest philanthropic foundation, the Bill and Melinda Gates Foundation (henceforth Gates Foundation), with an endowment of $42.3 billion. For this very reason, the Gates Foundation is an ideal case study for understanding the social impact of philanthropic foundations.



Problems with philanthrocapitalism



McGoey enumerates three obvious problems with philanthrocapitalism, illustrating each with reference to the Gates Foundation.

First is the lack of accountability and transparency. McGoey points out that the Gates Foundation is the single largest donor to the World Health Organisation (WHO), donating more than even the US government. While the WHO is accountable to the member governments, the Gates Foundation is accountable only to its three trustees – Bill, Melinda, and Warren Buffet. It is not unreasonable to wonder if the WHO’s independence would not be compromised when 10% of its funding comes from a single private entity “with the power to stipulate exactly where and how the UN institution spends its money.”

Secondly, “philanthropy, by channelling private funds towards public services, erodes support for governmental spending on health and education.” With governments everywhere slashing their budgets for public goods such as education and healthcare, the resultant funding gap is sought to be filled by philanthropic money channelled through NGOs. But with one crucial difference: while the citizen has a rights-based claim on government-funded social security, she can do nothing if a philanthropic donor decides to stop funding a given welfare project – as has happened time and again in many parts of the world.

At the same time, even as it facilitates government withdrawal from provision of social goods, philanthropy paves the way for entry of private players into the same space. McGoey details how the Gates Foundation orchestrated this brilliantly in the American education sector, where it helped create a whole new market for private investment: secondary and primary schools run on a for-profit basis.

Third, the same businessmen who made their money through unhealthy practices that worsened economic inequalities are now, in their philanthropic avatar, purporting to remedy the very inequalities they helped create. In the case of the Gates Foundation, Microsoft’s illegal business practices are well documented in the US Department of Justice anti-trust case against the company. As McGoey puts it, the fortune now being administered through the Gates Foundation “was accumulated in some measure through ill-gotten means.”

Of course, none of this should detract from the undeniably good work that philanthropic bodies have done. The Gates Foundation has saved countless lives, especially in Africa, through its funding of immunisation programmes and outreach projects. Its several achievements, therefore, have been deservedly celebrated. Nonetheless, critical scrutiny lags far behind the lavish accolades.

Even the three issues discussed above barely scratch the surface. McGoey goes on to raise several more.

She asks, for instance, asks how the Gates Foundation’s interventions in global health tally with Bill Gates’ violent opposition to any dilution of the patent regime. The Gates Foundation was the largest private donor to the Global Fund to Fight AIDS, Tuberculosis and Malaria. At the same time, it “has continually lobbied against price reductions of HIV drugs and other medicines”, infuriating activists who “want a more equitable global patent regime” and “do not want charity handouts.”

She examines the Gates Foundation’s partnerships with Coca-Cola, not exactly popular among those who value public health. In the context of the Foundation’s work to help combat global hunger, she reveals how its financial ties with Monsanto and investments in Goldman Sachs “may be compounding food insecurity rather than mitigating it”.

She interrogates its skewed research portfolio. Of the 659 grants made by the Gates Foundation in the field of global health, 560 went to organisations in high-income countries, even though the problems being targeted were in low-income countries. How does excluding local scientists and programme managers who are best placed to understand the problems help the cause, asks McGoey.

While it is generally taken for granted that a philanthropic foundation would make grants only to non-profits, McGoey draws attention to the Gates Foundation’s non-repayable grant of $4.8 million to Vodacom, a subsidiary of Vodafone. In 2014, the Gates Foundation also announced a grant of $11 million to Mastercard for a “financial inclusion” project in Nairobi. Interesting how philanthropy has evolved to such an extent that in a world wracked by hunger, disease, war, and malnutrition, two entities found to be most in need include a multinational credit card network and a multinational mobile service provider.
Finally, not to be forgotten are the tax breaks that philanthropic foundations enjoy. Critics have pointed out that nearly half of the billions of dollars in funds that philanthropic foundations hold actually belong to the public, as it is money foregone by the state through tax exemptions. History has shown that progressive taxation is the most efficacious route to redistribution. But a strong case for philanthropy is another way of making a strong case for lower taxation of the rich – after all, it’ll leave them with more money to spend on uplifting the poor. Small wonder then that philanthropy’s biggest enthusiasts are political conservatives.

The Economist report on philanthrocapitalism cited above also quotes a young Indian philanthropist, Uday Khemka, who predicts that “philanthropy will increasingly come to resemble the capitalist economy.” That was in 2006. Nine years later, the publication of McGoey’s No Such Thing As a Free Gift marks the first systematic attempt to document this phenomenon.







sampath.g@thehindu.co.in

Dying at 22 is too steep a price for being ‘the best’

Shobhaa De in The Times of India

My heart broke while reading the tragic account written by a devastated father on hearing about his 22-year-old son’s sudden death in a San Francisco parking lot some weeks ago. Sarvshreshth Gupta had done all the ‘right things’ ambitious Indian parents expect from their children. He was supposed to be living the Great American Dream, after graduating from the University of Pennsylvania, interning with Credit Suisse and Deutsche Bank, before landing a job as a financial analyst with Goldman Sachs in San Francisco. His young life followed the golden script written for — and sometimes by — aspiring desi students. Those who toil hard to get into the best business schools in the US, achieve great grades, repay huge loans, make their folks proud, bag high-paying jobs, work harder still… and then collapse! Like young Sarvshreshth did. The unreasonable pressure of a system that expects young people to sweat blood so as to make other people rich, finally got to the analyst — perhaps, had he listened to his father and walked out of his job a few hours earlier, he would have been alive. Fired, perhaps. But alive.

Sarvshreshth’s exchanges with his sensitive, understanding father tell their own story. And it’s a pretty common one. He writes of being severely sleep deprived, working for 20 hours a day, spending nights in an empty office, completing presentations while prepping for a client meeting early the next morning… all the while putting up with the tyranny of a senior VP breathing down his neck — pushing, pushing, pushing. Whenever his father advised him to take it easy and look after his health, Sarvshreshth would bravely reply, “Come on, Papa. I am young and strong. Investment banking is hard work.” As it turns out, the young man was not as strong as he imagined. And yes, the hard work as an investment banker is precisely what killed him.

When I came across the grieving father’s poignant online essay, ‘A Son Never Dies’, I thought about several parents and their children in similar situations. I thought about my own children and their friends… what a scary world they occupy. Look around and you will find many other Sarvshreshths — young men who are literally killing themselves in jobs that pay big bucks, but extract a gigantic price. Yes, Indians today can lay claim to being the best-educated, highest paid ethnic group in America. But, at what cost?

Right now, hundreds of over-wrought parents are undertaking pricey campus tours of various universities abroad. They believe this is their ‘duty’ since they want their kids to ‘get the best’. Is this what they mean by ‘the best’ ? We have equally good universities in India. What sort of absurd pressure is this that forces parents and students to go overseas in the hope of ‘bettering prospects’? Why not have confidence in your child’s ability to shine in India, without going through the sort of trauma Sarvshreshth suffered? Yes, we have ragging in our colleges, and no, some of our academic laurels are not as prestigious in global job markets as Ivy League degrees. So what? If you’ve got it, you will make it. Anywhere!

Just a short while before Sarvshreshth’s body was found (cause of death not officially declared so far), his father had told him to take 15 days’ leave and come home. The fatigued son’s forlorn response was, “They will not allow”. Hours later, he was dead. This sad story should act as a wake-up call for both over-ambitious parents and over-achieving children. Not everybody can take the almost inhuman pressure of the rat race. This young man was missing home-cooked food, the comfort of family and an emotionally reassuring environment. If only he’d had the courage to say, ‘To hell with it…’ and come home, his devastated father would not be writing that pathos-filled essay today.

It’s time we took a fresh look at our craze for ‘foreign degrees’ and ‘foreign jobs’. Today there are over 100,000 Indian students on US campuses. Most will think of this time as the best years of their lives. Some will stay on and be successful there. Others will return and pursue successful careers back home. But a few will crack, crumble and succumb under pressure. The system sees all kinds. But this is not about the survivors. This is about the vulnerable. Every parent wants a child to succeed. But not at the cost of their life.

I wish Sarvshreshth’s father Sunil Gupta would take this important message to many more parents still debating about their child’s future. Earning a degree and bagging a great job are fine goals. But living a wholesome life with people who love and respect you is infinitely more rewarding in the long run.

Irony. This was the worst thing to happen to a young man whose name means ‘The Best’.

Emerging markets (BRICs) mania was a costly mistake: Goldman strategist

 

 

Goldman Sachs executive Mossavar-Rahmani argues that the net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years.

Reuters | Jul 4, 2013, 09.17PM IST

LONDON: Investors who wrongly called time on US economic supremacy during the financial crisis are set to pay a hefty price for betting too much on the developing world, according to a top Goldman Sachs strategist. 

The US investment bank helped inspire a twenty-fold surge in financial investment in China, India, Russia and Brazil over the past decade, its chief economist popularizing the term BRICs in a 2001 research paper. 

Sharmin Mossavar-Rahmani, in charge of shaping the portfolios of the bank's rich private clients, has been arguing against that trend for four years, however, trying to persuade investors and colleagues they were safer sticking with the developed world. 

The past six months has substantially vindicated that view. China's boom is finally wobbling under the weight of economic imbalances including an undervalued currency, and emergingstock markets are down 13 per cent compared to an 11 per cent rise in the US S&P 500 index over the same period. 

"Many investors and market commentators have been too euphoric about China over the last decade and this euphoria is finally abating. Many just followed the herd into emerging markets and over-allocated to many of the key countries," she says. 

"It is easier to be part of the herd even if one is wrong, than stay apart from the herd and be right in the long run." 

The net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years, Mossavar-Rahmani argues. 

Structural advantages like abundant mineral wealth, positive demographics and, most importantly, inclusive, well-run political and economic institutions make the United States the best bet going forward, she says. 

"(Emerging market) investors are taking on so many risks compared with the US where the risk is largely cyclical rather than structural," she says. 

Many of the cyclical issues affecting the US such as high levels of debt, are also on their way to being resolved. 

"One thing that normally puts investors off from increasing their US holdings is the long term debt profile, but we think the magnitude of the work done to address this has been underappreciated by investors," she says. 

West is best 

The idea that authoritarian countries are less effective than open economies like the US at incentivising entrepreneurship and innovation is long accepted in academia. 

Daron Acemoglu and James Robinson laid out the case for doubting the emerging power of China and others in a book 'Why Nations Fail' last year, arguing poor institutions that entrench inequality will hamper a country's path to prosperity. 

But this view was largely put aside by professional investors who allowed themselves to be swept up in a "mania" about the rewards up for grabs in emerging markets, especially China. 

The widely held position, enhanced by the crisis of 2007-8, was that the developed world was entering a long decline and the best prospects for investors would be found in emerging markets, particularly in Asia. 

That prompted a boom in emerging market themed equity funds, which in Europe multiplied from 13 in 2002 to 67 in 2012 according to Lipper, a Thomson Reuters company that tracks the funds industry. 

Lipper data also shows the balance of money flowing into emerging market themed equity funds globally, including those focused on the BRICs, soared from 2.42 billion euros in 2008 to 51.23 billion euros in 2012. 

In contrast, equity funds overall lost 21.5 billion euros in 2012. 

Unrest 

China's efforts to rebalance its economy from an export dependent to consumer-led model is likely to bring slower growth, more market volatility and greater potential for social unrest - a worrying trinity of red flags for foreign investors who have poured cash into China in recent years. 

Meanwhile, mass protests are causing political crisis in Brazil and investors are fretting about ponderous, economically stifling bureaucracy in India. South Africa, sometimes called a fifth BRIC, is also struggling with a tide of labour unrest and infrastructure and social problems. 

Data from fund tracker EPFR Global shows investors pulled out a record $10 billion from emerging markets debt and equity funds in the week to June 28. 

Mossavar-Rahmani argues investors should not base decisions so heavily on which countries post the most impressive economic growth numbers, a temptation to which she says many succumbed when overallocating money to China. 

Even when countries enjoy rapid economic growth, the increases in GDP do not equate to similar jumps in investment returns, she says, citing a study published in 2005 by the London Business School. 

"If you rank the world's economies from fastest to slowest in terms of growth, the fastest-growing quintile actually generate the lowest investment return while the slowest third deliver the highest," she said.

Bullying Interns the Goldman Sachs way

Back on 12 June 2000, as the dot-com bubble was deflating, young Greg Smith was all puffed up, clutching his "extra-large coffee" and looking up "at the formidable tower that housed Goldman Sach's equities trading headquarters" in New York. "Holy shit," he thought, as he arrived for the first day of his summer internship at the Wall Street bank.

More than a decade later, on 14 March 2012, not long after a different financial bubble had burst, the remark may well have risen in a hush over the Goldman dealing room as wide-eyed traders poured over an opinion piece in The New York Times. Title? "Why I'm Leaving Goldman Sachs". Author? Greg Smith. "Today is my last day at Goldman Sachs," Mr Smith proclaimed. Over 12 years, he said, he had understood what made the bank tick. "And I can honestly say that the environment is now as toxic and destructive as I have ever seen it."

Now, Mr Smith, who had risen to become a Goldman executive director and head of the firm's US equity derivatives business in Europe, the Middle East and Africa before quitting, is preparing tell us the full story. According to reports, his biting commentary on Goldman won him a book deal and a cool $1.5m (£930,000) advance, with the product of his labours, imaginatively titled Why I Left Goldman Sachs, set to hit the shelves on 22 October. The night before, he is reported to be planning to break his self-imposed hiatus from the public square with a US television interview. Ahead of the launch, Goldman yesterday said it had conducted a detailed review of Mr Smith's claims and found no evidence to support them.

But as we near the release date, it seems the firm's President Gary Cohn, who along with chief executive Lloyd Blankfein merited special mention in Mr Smith's op-ed for losing "hold of the firm's culture on their watch", is likely to be among those waiting in line for a copy of the tome. "I probably will read it," he said during an interview on Bloomberg television earlier this month. If Mr Cohn wants an early look, the first chapter was released on the Apple iBookstore this week. Titled "I Don't Know, But I'll Find Out", it offers a glimpse of Mr Smith's first days in the belly of the "great vampire squid", as the bank was memorably dubbed by Rolling Stone.

Back then Mr Smith was a dedicated convert to the Goldman cause. That summer's day, the 21-year-old had no premonition of what – in his view – Goldman would become, and how he would go on to feel. Young Mr Smith, then on a scholarship at Stanford, was, to his mind, justifiably proud. "The selection process for any type of job at Goldman Sachs is extremely rigorous. On average, only one in 45 people... who apply for a summer internship, or a full-time job, get an offer," he says. To get ahead, he'd prepped hard for the interview. "I'd read The Culture of Success, a history of the firm by Lisa Endlich, a former Goldman VP," he reveals. Who doesn't, right?

With a toe in the door, Mr Smith was issued with a folding stool and a "big orange ID badge" on a "bright orange lanyard" – status markers to remind an intern that he or she was mere "plebe, a newbie, a punk-kid". "It was innately demeaning," he says, recounting how interns had to carry around the stools "at all times because there were no extra chairs at the trading desks".

The internship itself was demanding. "You came to work at 5:45 or 6:00 or 6:30 in the morning," Mr Smith recalls. Goldman interns were put through two "Open Meetings" a week, where "a partner would stand at the front of the room with a list of names and call on people at will with questions on the firm's storied culture, its history, on the stock market".

"Depending on the personal style of the people in charge, the meetings could be brutal. They were always intense," Mr Smith says, recalling how, on one occasion, an intern was rebuked by a VP for not knowing enough about Goldman's stance on Microsoft shares. "What is our price target? What are the catalysts coming up? How has the stock been trading? Come on," said VP barks, according to the account. The hapless intern "starts to tear up and runs out of the room".

Smith also recalls the treatment handed out to an intern after a managing director ordered a cheddar cheese sandwich and was presented with a cheddar cheese salad. The boss "opened the container, looked at the salad, looked up at the kid, closed the container and threw it in the trash". "It was a bit harsh, but it was also a teaching moment," Mr Smith writes.

The anecdotes chime with the caricature of Wall Street as a laddish jungle where ritual hazing is just part of doing business. But at this early stage there is none of the greed that Mr Smith spoke of in his op-ed – he claimed, for instance, that people in the firm "callously talk about ripping their clients off". Instead, the gruelling intern routine is presented as a way of training new initiates to be "truthful, resourceful, collaborative".

Tantalisingly, though, Chapter 5 is titled "Welcome to the Casino".

Beyond Goldman Sachs: the nasty culture

Greg Smith's portrait of Goldman Sachs is shocking, but investment banks treat their clients as poorly as they do their staff

• 
• • Joris Luyendijk
  • guardian.co.uk, Wednesday 14 March 2012 14.32 GMT

In his resignation letter, Greg Smith described the environment at Goldman Sachs as 'toxic and destructive'. Photograph: Bloomberg via Getty Images

 

The resignation letter on the New York Times opinion page today by Goldman Sachs executive director Greg Smith is shocking. But dozens of interviews with people working in finance in London over the past months for the banking blog suggest that it's not only Goldman Sachs where clients are treated like "muppets" getting their "eyeballs" ripped out. And it's not only clients that are exploited. Investment banks treat their own employees exactly the same way.

Investment banking breaks roughly into two main areas: the financial markets that Smith was working in, and deal-making such as mergers and acquisitions. This is how a young banker in M&A at a major bank described his experiences:

"There's this idea of bankers, especially in a prestigious sector like M&A, as very sophisticated and civil. But you do hear things like 'We're gonna suck this client dry.' … When we'd discuss a pitch or potential project with the team, nine out of 10 times the first question would be: 'Where's the "fee event"? How can we make money from this?' I mean, I understand banks need to make money, but you can't think of yourself as 'trusted adviser' – the big term in M&A – while at the same time putting your own fee first?"

Or listen to this risk and compliance officer at another major bank:

"I remember in my first few weeks I sat down with one of the structured products guys. He was selling so-called PFI deals, where local authorities buy a complicated financial instrument to pay for, say, a hospital. I asked him: where's the benefit for the local authorities in this? He was aghast. "What are you, a socialist?""

Smith's letter is ultimately about loyalty between a bank and its clients, and the alleged lack thereof at Goldman Sachs. This word "loyalty" comes up in many interviews, but mostly when people describe their relation to their own bank. Here's a head of marketing at a bank in the City: "Anyone here can lose their job at any time. One moment you're working on a project, the next you're hugging and saying, 'Well, bye' because the other has just been made redundant and is being led out of the building by security."

That's right. In most financial firms you can be marched out of the building by security at five minutes' notice. Your email is blocked, as well as your phone and your security pass, and there you are, literally on the pavement as you wait for someone else to collect your personal stuff from your desk. An IT consultant with another bank said: "People just disappear. They're called in, fired and led out. And you don't get info on who has been made redundant."

I could give many more quotes like these. In fact, almost everyone in finance has a redundancy horror story to tell. This banker recently got "the call". Looking back, she said:

"I may have been overly loyal to my dysfunctional family – the bank I worked in. I was making £80,000 a year, not including bonuses – though bonuses were negligible in the last few years. I could have made more, probably, had I done what many do: change jobs every 18 months to two years. Come in, make an impact, and move on … This summer I turned down a pretty awesome job, as I was dedicated to my bank. I am not sure if this is a female thing, to be overly loyal, but it's definitely a mistake I'll never make again."

There is no reason to feel sorry for people in investment banks, and I've met very few, if any, who want our pity. They enter the sector of their own free will, they earn well (though rarely the "telephone number bonuses" you read about) and nobody forces them to stay. But people working in banks are on their own and their employer has zero loyalty to them. One wonders: how realistic is it to expect investment bankers to treat clients any better than they are treated themselves?

Warren Buffet - a Jaded Sage?

The jaded sage
By Chan Akya in Asia Times Online

Warren Buffett, besides being the Sage of Omaha and one of the wealthiest men to ever walk this planet, is also an American hero. A man who popularized the notion of investing your savings prudently, taking a knife to Wall Street excesses and more recently, the architect of an effective minimum tax for rich Americans. All in all, your regular billionaire next door.

Of course I can also recount all the reasons why anyone who bothered to print this article and read the first paragraph got disgusted, crumpled the paper into a little ball and threw it into the nearest waste bin.

You know, stuff like his holdings in major American scams like Moody's which he purchased due to the massive profits they were making from selling fake triple-A ratings all around. Or his rescue of such amazing firms as Goldman Sachs in the midst of the financial crisis, in effect protecting them not so much from aggressive market speculators but perhaps the major regulatory bodies as well (Mr Buffett is a known supporter of and donor to President Barack Obama).

Even that supposed act of folksy good humor ("my secretary pays a higher tax rate than I do") hides an ugly word: "legacy". Mr Buffett is old and if he had wanted to pay higher taxes, well he had the last 60 years in which to do it.

But I don't care about any of Mr Buffett's flaws any more than I lose sleep over that stupid woman who unfailingly puts mayonnaise on my sandwich despite being told not to every day. My getting upset doesn't change a thing, and just ends up spoiling my day: it's easier for me to just buy my sandwiches somewhere else. That's where I left Mr Buffett - that is, until his latest investment letter hit the web and through acts of generosity by my friends, made it into my inbox. Ten times over.

Cold on gold
I don't know why so many of them did that - but it may have something to do with his statements about irrational choices that investor make about assets. He writes:

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth - for a while.

Okay, so if I understand this right, Mr Buffett objects to the fact that gold cannot be manipulated, conjured up out of thin air and that it draws a bunch of people weary of Keynesian money printing into its fold. I am not going to suggest that Mr Buffett is thick or something, but isn't all of the above the very point about owning a store of value in the first place?

I don't know about you, but if I could travel through the centuries I would sure as hell like to have in my pocket something that would still be worth something in purchasing power that approaches its current value.

Imagine the following scenario: your grandfather leaves us some wealth but you only get it 50 years later. Now, what would you have liked that "wealth" to have been: cash in US dollars or gold coins? Of course other assets would have worked better - "shares in Apple" for example. Then again, if your grandfather had given you shares in Apple and you got them in 1998, your general feelings of gratitude towards him would have been a somewhat dimmer.

Then Mr Buffett goes on with his diatribe:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce - gold's price as I write this - its value would be $9.6 trillion. Call this cube pile A. Let's now create a pile B costing an equal amount. For that, we could buy all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

... A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Yup, valid points there. Then, again Mr Buffett, I wonder how those farmers would pay for the oil to use in their harvesters and how those oil workers would pay for all the grains they would need to eat. Would they own shares in each other and pay the other party dividends in kind? Or would they transact with a common currency, like gold?

And all the analysis misses the point about corporate fraud, that uniquely American preoccupation that has seen many a top firm go completely bust because of financial and accounting shenanigans. If Mr Buffett had mentioned BP instead of Exxon (and written this article two years ago rather than now) he would have had egg on his face. (See also "BP, Bhopal and Karma", Asia Times Online, June 19, 2010, one of my past articles on the subject of corporate responsibility.

Mr Buffett misses the point entirely about what gold is and what it is supposed to do. In a world where investors have ample reason to lose faith in governments and the financial system, the position of a common store of value that is recognizable and usable across all humanity and is itself beyond religion and politics in terms of being manipulated around (besides being no mean feat by itself) is made stronger, not weaker.

That is not to say that I am recommending you folks to buy gold and nothing else; my view has always been that a building up a little hedge for your financial assets with physical gold is no bad thing. I don't speculate in gold nor do I believe you should.

Of course, he clarifies similar points later on his spiel as follows:

My own preference - and you knew this was coming - is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See's Candy meet that double-barreled test. Certain other companies - think of our regulated utilities, for example - fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets. Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the US population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Really? The best that Mr Buffett can conjure up as stores of "productive" assets are those that generate software consulting services, sugared water with noxious chemicals and over-sweet artificially flavored foodstuffs? Is it possible that all of these companies will even exist 200 years from now, or will a bunch of lawsuits or corporate fraud take one or more of them down as they have many an American corporation?

This is neither about questioning his investment choices nor indeed to taunt a proud American on that country's potential failings. The investor letter though is emblematic of the core ill plaguing the West now; namely a failure to question the current logic of organization underpinning the economy.

On the other end of the scale, it is not immediately apparent that a deleveraging America would need as many cans of sugared water with noxious chemicals as it does now; nor indeed that the current system of savings through stocks could survive a Japan-style lost decade when the locus of the economy shifts from consumption to production.

In a different way of thinking, it is a good thing that Mr Buffett writes his letters the way he does now. Two decades from now, economists and students of finance may ponder the madness of our times that made a man like him the foremost investing genius in the world.

Moron capitalism

tr
By Julian Delasantellis

Former top gun Fidelity Investments stock picker Peter Lynch used to advise investors to "invest in what you know" as the key to picking potentially profitable equities. Thus, instead of analyzing endless investment arcana such as price/earnings ratios or momentum oscillators, he said that the amateur stock picker could do just as well by finding good products, be they laundry detergents or instant coffee, and just buy the stocks of these companies.

One of Lynch's best picks, that of Reebok far before it got hot, was not the result of diligent, MBA-level financial analysis; it came into mind when he saw all the teenagers at what he had been told were the cool local hangouts wearing Reeboks.

But what if it were the other way around? What if, instead of providing a nice snug fit, a person who put on a new pair of Reeboks had their foot lacerated by ground glass purposely sewn into the innersole, and still the stock rose? What if a hot new instant coffee seeing its stock rally every day had on its jar a warning to "consult your physician before using if overly sensitive to arsenic?"

What if the proprietor of Monty Python's famed Whizzo Chocolate Company saw his company's shares skyrocketing, even though prominent among the firm's product line were confections such as "ram's bladder cup", "garnished with lark's vomit", "cockroach cluster", "anthrax ripple", "crunchy frog", made with "only the finest baby frogs, dew picked and flown from Iraq, cleansed in finest quality spring water, lightly killed, and then sealed in a succulent Swiss quintuple smooth treble cream milk chocolate envelope and lovingly frosted with glucose ," and "Spring Surprise", the surprise in that treat being that it features, after you put in your mouth, "steel bolts spring out and plunge straight through both cheeks".

If you think that investors would never reward corporate performance such as this, you haven't seen what's been going on in the share prices of some big US banks and financial institutions lately.

A common moniker used to describe government infrastructure spending projects ready to be funded is that the projects are affirmed to be "shovel ready", but no project is more ready and eagerly awaited than to have the world's stockmarkets dig and climb out of the deep ditches they threw themselves into last September.

Much has been accomplished since most world markets bottomed out in early March; the Dow Jones Industrial Average is up by more than 3,000 points, or over 50%, but for most of August the rescuers seem to have taken a break, with the benchmark index only rising 4% up to August 28, as opposed to an over 8.5% rise in July. The rescuers probably needed a break; there's just so much more further to go.

But like all the serious denizens of Bacchus know, that there's always a party going on somewhere, so it was with stocks in August. That revelry was quite surprising, for it happened to be located at what many informed observers quite correctly assume to be American finance's most fulsome foundation of feculence, the stocks of its major financial institutions.

Yes, you would have done a lot better than the general averages in August with the BIX, the nationwide banking stock index that purposely excludes the shares of the big New York "money center" banks - it was up about 20% for the month. The banking index that dares to take a bite of the big apple, and its big stocks, the KBW, struggled by with only about a 3% rise in share value.

So was that the moneymaking secret for August, banks and financial stocks, just not very big ones? Was the market still punishing the big money-center banks for their wanton and callous profligacy in tranching, bundling and selling all those worthless mortgage-backed collateralized debt obligations? In pushing capital towards smaller, even small town, American finance, was the market finally offering up a belated mea culpa for being so disastrously wrong in following the siren songs of those glittering metropolis lotharios into worldwide catastrophe?

Not on your life. In the same way that St Augustine once pleaded to the Lord to "make me good, but not just yet", American capital, reaching again for the brass ring, is apparently out for another spin with Mr Danger.

Almost all August US stock averages, especially the ones that deal in finance, are grossly distorted by the performance of just five singular names, Citigroup, which was up almost 65% for the month to August 28, Bank of America, up 21.5%, Fannie Mae, up 251%, Freddie Mac, up 287%.

In much the same way that the Yiddish word chutzpah is defined as a man who kills his parents and then begs the court for leniency because he is an orphan, investors in the stock of American International Group, the company whose over-enthusiastic embrace of credit default swaps torpedoed the economy of the entire planet when the company failed, actually had the chutzpah to enjoy its now ward-of-the-state's 282% rise in August. (For an account of credit default swaps see Jaws close in on Bernanke, Asia Times Online, July 16, 2008.)

For the sake of comparison, Goldman Sachs, a bank now making so much money that no one really knows or understands how, had to settle for a paltry, puny August rise in its stock of under 1%.

Not only are these five delinquents August's best show in town, it's almost that they were the only show in town. According to Matt Phillips in the Wall Street Journal, for most of the month, trading in just these five stocks alone has represented just under a third of the total volume on the New York Stock Exchange. Last Monday, August 24, it was over 43% of total; NYSE volume being accounted for by just these stocks.

Phillips has rounded up a now usual suspect for the extraordinary price and volume moves - the "high frequency" flash trading I discussed last month in relation to Goldman Sachs. (See Goldman Sachs - the lords of time, Asia Times Online, August 5, 2009.)

I have my doubts as to whether these rallies result from flash/high-frequency trading; for one thing, most of the exchanges banned flash trading following its existence becoming public knowledge. I'm not sure that Goldman, or anyone for that matter, would want to be rubbing the regulators' noses in the dirt so soon after essentially promising to be forever more on their best behavior.

Also, high-frequency trading does not usually influence the trend, or direction, of stock prices in the manner that something is doing with these shares - unless Goldman Sachs is pulling a new rabbit through a very new hat, high-frequency trading seems to be a stretch here.

Finally, if it is high-frequency/flash trading, it's not rewarding, as judged by the becalmed stock price of the acknowledged sensei in the practice, Goldman Sachs. There's not much fun in being a master of the universe like Goldman if little peons can blow your ears off while leaving you behind the dust.

On CNBC, Charles Gasparino suggests that this is all just small-time shorts finally throwing in the towel with purchases to close out their positions; if enough do that in a short period of time, it can have dramatic effects on a company's stock price. Still, since most of these stocks had already bottomed in the spring, the Gasparino hypothesis seems to imply that the shorts had held onto these positions long after they had reached their maximum profitability and were content to sit there and lose money with them from March until August.

So what was it that lit the fires under, in an American universe of about 6,000 traded stocks, these particular five stocks? What lit the new guns of August?

In the files that police agencies keep on criminals are detailed listings of who or what are the other criminals or gangs the socially undesirables hang out with; an analysis of the associations of the five here goes a long way to crack the case.

Fannie Mae, Freddie Mac, American International Group, Citigroup and Bank of America - these were all Paulson's Plunderers, the trigger men for the caper that brought the world economy down to its knees starting in the summer of 2008, when Henry Paulson was still Treasury secretary.

After Bear Stearns fell in March last year, there were a few brief months of peace that allowed laissez faire sycophants the opportunity to bleat on that the entire financial crisis was a lion with more roar than bite. Now we know that the actual economy had by then already entered the worst economic pullback since the Great Depression, even as promises were made that the skies were to be forever bright as long as the upper incomes were further fattened with tax cuts from out of re-elected conservative administrations.

Then, in July, Fannie Mae and Freddie Mac began to stumble under the crushing weight of the collapsing US housing market. At first, Paulson's US Treasury thought that all these two government-sponsored enterprises needed was just making the implicit guarantees of the pair a little bit more explicit, but this tourniquet did very little to staunch the bleeding. On September 7, it was announced that the two were being placed under "receivership", defined in this circumstance as what professed free-market conservatives call nationalizing a company when their ideology prevents them from admitting that they're nationalizing it.

Lehman fell early on the following Monday, AIG the following day. By October, the barbarians were well past the gate and were assaulting the throne, causing an electronic "run" at Citigroup, then the world's largest private financial institution. Citigroup necessitated a few successive US government rescue packages before the stock stabilized early this year. Bank of America, this August's stock-price laggard among the fabulous five, never seems to have been in much of the imminent danger of collapse that the other four went through, but it still walked away with US$45 billion of US government financial system support/TARP money.

Adding that to the estimated $400 billion both the US government and Federal Reserve spent to refloat the GSEs, the $150 billion bailout of AIG, Citigroup's pocketing of $45 billion in TARP as well as its receipt of a government guarantee of up to $272 billion of its potentially diciest mortgage derivative debt, and you come to the conclusion that, in under one year, the US government has either pledged or proffered about $900 billion just to these five companies alone - roughly the low end of the range for the 10-year total cost of President Barack Obama's health plan.

All these emergency system rescues and developments were the bastardized orphans of the braying hounds of crisis; nobody, least of all former Goldman Sachs Golden God Paulson, would have in calmer times adopted a plan to react to a financial crisis in these peripatetic fashions. Indeed, just prior to the Lehman catastrophe, there was speculation that Paulson was going to turn away the next supplicant pleading for more government porridge, and, in doing so, reaffirm to the markets that, indeed, no one was too big to fail.

Late last August, three weeks before the failure of Lehman and AIG, I expounded on some of this thinking in that last, glorious summer of faux prosperity. (See, Tough love's fatal attraction, Asia Times Online, August 27, 2008).
The question then becomes, have all these factors, particularly the diverse, sometimes inchoate opposition to the manner in which the government financial elite has recruited from the private sector is reaching back to save their buddies (and their future jobs) in the private sector sufficient to stop any further rescues of the financial sector? Is the next supplicant, maybe Lehman Brothers, maybe once again Fannie and Freddie, to knock on the door of Paulson, [Federal Reserve chairman Ben] Bernanke and [Securities and Exchange Commission chairman Christopher] Cox saying that they're too big to fail going to be told that, in actuality, they're not?

It's not hard to imagine the consequences of such a denial. However soothing such a stand on free-market principle would undoubtedly sound to those seduced down the Pied Piper's road by ideology, for the rest of us the results would be catastrophic.
Then Lehman and AIG fell, then the deluge - it was catastrophic. In the three weeks following, the Dow Jones Industrial Average lost 3,700 points, about a third of its value.

Paulson's sentiments changed very quickly, as I described they would in that August 27 article. As in John Lennon's 1969 song of the misery of drug withdrawal, Cold Turkey, Paulson desperately wanted to once again start feeding the financial system's addiction to the government needle - "Oh, I'll be a good boy, please, make me well. I promise you anything, get me out of this hell."

How Paulson, followed by Obama Treasury Secretary Timothy Geithner, got out of his hell was to affirm, in statement and in very expensive deed, that most major American financial institutions were, indeed, too big too fail. The establishment of what blogger Barry Ritholtz calls "Bailout Nation" has sent the US federal budget deficit and debt numbers spinning to record highs like Las Vegas slot machines, and provided the seed for the gaseous inchoate populism of the teabag movement currently savaging Democratic solons at their town halls - but, as of yet, it has kept the US and much of the rest of the world's financial system intact, something that was thought to be not at all that certain back on Lehman weekend last year.

And a year later, on the stock market, the first are last and the last first. Why?

For the answer to that, you can look to your own behavior. What prevents you from doing really, really stupid things? If your $5,000 mortgage payment is due, what prevents you from using that money to instead cover the two hectares of the town's football pitch with 50 centimeters of cotton candy? What prevents you, should you see your surgeon in the cafeteria prior to your scheduled surgery, from slipping him some Scotch in his coffee when he's not looking? If you're on an airplane that you see is passing over your neighborhood, what stops you from opening the door, jumping out, and thus bypassing the terrible luggage carrel lines?

The answer is that there would be substantial negative costs, in terms of your health and wealth, to all that behavior. You would lose your home with the candy stunt, an internal organ or worse with your surgeon's mickey, probably your life leaving the airplane.

But what if this was not true, what if you were protected from the consequences of your worst decisions? You blow $5,000, but someone is there to give you another big check; you've got another surgeon to operate on you, or a parachute to put on as you leave the plane.

In other words, if you were continually bailed out of your worst, most risky decisions, wouldn't you do a lot more of them?

What is "too big to fail" but a government promise to bail out the banks come what may? As investors come to realize the influence and motivations of this now huge new market-influencing player, relationships and previously established market practices are changing, and that's what we are seeing in the outsized performances of Paulson's plunderers this month.

If "too big to fail" is no longer seen as a policy result to be avoided, but as a free ticket for a bank or other financial institution to receive nearly lifetime government protection, then it's not all that surprising that banks that now see themselves as too skinny to receive the government protection are trying to fatten up a bit.

Just in 2008, Wells Fargo's combined assets grew by 43% after swallowing up Wachovia; JP Morgan Chase's increased by 53%, after it assumed control of Bear Stearns and Washington Mutual. The Washington Post recently reported an unintended consequence of the rush from the huge to the gargantuan; the bigger banks, operating under the presumed guarantee of the government, are borrowing cheaper than smaller banks in the money markets - lenders apparently, with very good reason, feel that their loans to institutions that the government will be forced to stand behind are a safer bet than loans to smaller banks and financial institutions that the government might let fail.

As a result, local competition for customers among banks in America's small towns and communities is becoming a thing of the past; America's vaunted small-bank centered financial system, significant in the dynamism of the country's small-business-based economy, may soon, in a manner reminiscent of local retailers being put out of business and replaced by such national competitors as Wal-Mart and Target, be signified by, from sea to shining sea, just having a Chase or JP Morgan on one corner, and a Bank of America or Wells Fargo on the opposite.

If both the banks and their investors feel that the negative consequences of excessive risk, loan default and insolvency, are being handled by the government, it can't be all that surprising that both the banks and their investors are hungry to whet their palette with more of it. Some reports have it that the big banks are wading back into the market for highly leveraged mortgage-backed securities, the same type of instrument that sunk them the first time.

But at that time they didn't have the implied government guarantee. That frees the banks to make relatively risk-free decisions to take on more risk, and it frees the bank investors to engage in the mad bidding for big bank shares we are now seeing.

Mind you, this is in no way a prediction for endlessly sunny skies in the financial sector as a whole; on the other side of the banks being protected by the government camp's barbed-wire fence things are pretty lousy. Twenty percent of US banks lost money in the first quarter, and these days not a Friday goes by without the Federal Deposit Insurance Corporation's commissioner, Sheila Barr's bank closure team being dispatched into the heartland to put more financial institutions out of their misery - last week three banks, in California, Maryland and Minnesota, met their fate as their doors closed for the last time.

Already, 84 US banks have been seized by the FDIC this year, and its list of "problem banks" has swollen to 416. Since it is highly doubtful to more likely absolutely impossible that Obama will be sending out Geithner's cavalry to save this bunch, as one wag put it recently in the Huffington Post, perhaps the best operating investment philosophy for these curious times might be to "sell the FDIC [small banks] and buy the TARP" (big banks).

It's not as if the Obama administration does not see the inherent dangers of allowing the big financial institutions to plunder the countryside with too big to fail, but, during the current moment, Obama can ill-afford the poll-busting consequences of another Lehman shock, just as George W Bush and Paulson couldn't.

The Obama financial reform plan, released in June, did not call on the big banks to be broken or split up into more of a regulation-friendly size (the now trademark Obama/Geithner caution in dealing with the financial system was once again on obvious display there), but it did call for extra auditing, extra "stress tests" for the biggies, presumably to steer them in the right direction before they sail right off over another precipice.

Still, the entire financial reform effort has degenerated into one big semi-public sniping match between Geithner and Barr; besides, one wonders just how many more fights Obama will have the stomach for once he emerges bloodied, battered and bruised - whether he wins or loses - with healthcare.

All these things are undoubtedly seen by the players bidding up the big banks' stocks. Why not? This is probably as close to a sure thing as you're ever going to get in investing. Heads, the extra risk pays off, tails it doesn't, but you still get bailed out by the government.

As for Peter Lynch's dictum to "invest in what you know", well I know that this system, one that rewards the corpulent incompetents of the banking system over those who display innovation and entrepreneurialism, is just about the most dysfunctional thing I've ever seen; it's a virtual plea for foreign scavengers to come in and buy up the system's assets on the cheap.

Perhaps a future economics teacher, after lecturing on the previous historical epochs of agricultural capitalism, feudal capitalism, industrial capitalism and finance capitalism, will look down into his textbook to see the chapter heading that covers our current era - "moron capitalism".

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.