Jamie Dimon: JPMorgan Employs 30,000 Programmers

By Pam Martens: April 22, 2014

There is now overwhelming evidence that Wall Street firms have entered a race to the bottom in high-tech trading wars. To grab the best programming talent, Wall Street firms are paying top dollar for the best and brightest coders and developers and potentially sapping the ability of other U.S. industries – those that make real products – to compete.

Just this month, Jamie Dimon, CEO of JPMorgan, told the firm’s shareholders in his annual letter that JPMorgan employs “nearly 30,000 programmers, application developers and information technology employees who keep our 7,200 applications, 32 data centers, 58,000 servers, 300,000 desk-tops and global network operating smoothly for all our clients.”

According to Anish Bhimani, Chief Information Risk Officer at JPMorgan Chase, in an interview published at the Information Networking Institute (INI) at Carnegie Mellon, JPMorgan has “more software developers than Google, and more technologists than Microsoft…we get to build things at scale that have never been done before.”

Obviously, not all of those tech guys are engaged in creating ever more rapid trading strategies; but to stay competitive with the technology arms race on Wall Street, new algorithms, programs deploying artificial intelligence, and high-speed routing techniques are being created at break-neck speed across the industry.

Industry insiders say that Wall Street is a potent force in campus recruiting, seeking out the computer whiz kids with large pay deals months before their graduation and before non-financial firms have had a chance to even schedule an interview.

An online advertisement at efinancialcareers says that “The market for intelligent and sophisticated programmers within finance is still booming, and not just for those with existing finance experience. The world’s top financial institutions are continuing to search for the most talented technologists from an array of backgrounds…” Salaries are listed at $150,000 to $400,000 for programmers skilled in C, C++, Core Java, Low Latency, Multithreading, FX [Foreign Exchange], Equities, Futures, Perl, Python, TCP/IP, High Frequency, Bank, C#, Operations, Python, Unix, Linux.

As all of this has been accelerating over the past two years, the Securities and Exchange Commission has assumed the role of the absent-minded professor, studying academic papers on the subject and, when they get around to it, publishing their findings as to what other people are saying. A recent paper published in March at the SEC said “The staff’s hope is that this literature review will help promote a dynamic exchange with and among the public, including investors, academics, securities industry participants, and others on the topic of HFT [High Frequency Trading].”

Under the Securities Exchange Act of 1934, the SEC is handed the mandate to regulate the Nation’s stock exchanges and safeguard them from manipulators and market rigging. Its statutory role is that of watchdog and enforcer. But when it comes to high frequency trading, it has shown little bark and no bite.

Congressional hearings on the matter have been equally missing in action. It’s now been three weeks since bestselling author, Michael Lewis, dropped his public bombshell on 60 Minutes, explaining in terms the lay person can understand how woefully rigged the U.S. stock markets have become, and yet a quick check this morning at the hearing schedules for the U.S. Senate and House committees that would be most likely to conduct these investigations show no such scheduled hearings.

If Congress does finally get around to the hearings before another Flash Crash, one witness the public will want to hear from is the expert coder, Sergey Aleynikov. Aleynikov was working for Goldman Sachs when he received an offer to move to a hedge fund and build a system from scratch with compensation topping a cool $1 million. Aleynikov accepted the offer but agreed to stay at Goldman for six weeks training his colleagues. Certainly a show of good faith.

That was 2009. For the past four years, Aleynikov has been arrested and jailed by the Feds, had his conviction overturned by the Second Circuit Appeals Court, rearrested by the Manhattan District Attorney Cyrus Vance, and now faces more prosecution over the same set of facts: namely, that he took computer code that belonged to Goldman Sachs. This relentless prosecution of Aleynikov, who is said to be among the best coders in the industry, has more than a few Wall Street watchers questioning if this is Wall Street’s latest innovation in non-compete agreements: keep the lad tied up with courts and lawyers until technology innovation passes him by.

When the Second Circuit Appeals Court handed down its opinion of the case in December 2010, it found that Aleynikov had neither taken a tangible good from Goldman nor had he stolen a product involved in interstate commerce – noting that at oral argument the government “was unable to identify a single product that affects interstate commerce.”

That’s pretty much what a lot of financiers and economists are thinking these days: that there is no economic benefit to the country from high frequency trading other than to those doing the looting.

According to Goldman’s web site, it currently allows “clients to access a range of displayed and non-displayed liquidity sources, use our various smart router order types, and/or choose one of our many algorithmic strategies. In determining where or when to place an electronic order, best execution is paramount. We continuously strive to improve our order routing logic through ongoing research of execution performance and market structure, and regularly modify the smart router and algorithms in response to the continuously changing market micro structure.”

When a firm like Goldman Sachs feels confident to brag openly about its lit and non-lit (dark pool) markets and exotic order types (Scott Patterson detailed these exotic order types in his 2012 book, “Dark Pools,” as a form of market rigging) we know that Congress, the SEC and the U.S. financial markets have, once again, lost their way.

Former SEC Attorney, James Kidney, Proposes a Stock Exchange That Puts the Nation’s Interest First

By Pam Martens: April 21, 2014 

Since the launch of the new Michael Lewis book, “Flash Boys,” at the end of March with wall to wall media coverage, including his pronouncement on 60 Minutes that the stock market is rigged against average investors, there has been a whirlwind of damage control.

The FBI announced that an investigation was already in the works, the New York State Attorney General is issuing subpoenas and a civil war (frequently not so civil) has broken out among industry titans staking out their media turf on whether the market is or is not rigged by high frequency traders. Not in dispute is the fact that these high frequency traders have armed themselves with superfast computers, algorithms and artificial intelligence programs, all of which the New York Stock Exchange and NASDAQ have obligingly allowed – for annual fees running into tens of thousands of dollars – to co-locate next to the exchange’s own computers so the high speed traders can jump in front of the less tech savvy traders and steal pennies from millions of trades each and every day – a loss of billions of dollars to pensions and ordinary investors each year.

Proposals for leveling the playing field for institutional investors and large traders have been publicized, but what about the small investor? What would it take to convince the average American investor that they can safely buy 20 shares, or 50 shares or 100 shares in a solid American company on a U.S.-based stock exchange without getting fleeced?

James Kidney, the former SEC attorney who caused a stir this month when it was revealed that he had criticized management at the SEC for policing “the broken windows on the street level” while ignoring the “penthouse floors” in a speech at his retirement party after more than two decades at the Federal agency, has a thought-provoking idea presented below. 

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Asking Capitalism to Cure Capitalist Woes:

The US Exchange, a Market for the Rest of Us 

By James A. Kidney

James A. Kidney, Former SEC Trial Attorney

High-speed trading, synthetic credit derivatives and other risky Wall Street products are described as refinements of our capitalist system — or lamented as the inevitable product of emerging technology.  But the system benefits traders more than real capitalists  –  those  who seek investors on the basis of the merit of their products and services to customers.  The response to the many problems posed by these new technologies, products and delivery systems is predictable:  New statutes and rules, inevitably chewed into mush by politicians and lobbyists, and long delays in implementation by regulators.  By the time these new rules are in place, Wall Street has found ways to circumvent them, requiring a new cycle of debate, lobbying and minimally effective rule-making in response to the next resulting crisis.

One possible solution seems to have been overlooked:  Bringing capitalism to the capital markets.  It is not that the trading markets have lacked opportunistic capitalists.  Entire new trading platforms have been created to supplement or replace the traditional New York Stock Exchange, the NASDAQ and the old American Stock Exchange.  Certainly, many new trading products have been invented.  But few of these developments address any real need except trading itself.  Let me post an example, simple  and naïve as it may be, of how capitalism genuinely could improve the market beyond meeting the needs of traders themselves. The notion can at least be the start of something. But first, some background.

One of the more amazing and not particularly useful products of the digital age is “program trading” on the New York Stock Exchange and other exchanges which usually relies on “flash trading.” This usually means trading dictated by algorithms applying predetermined buy/sell formulas through computers, resulting in buying and selling securities in microseconds.  Sometimes, the computerized trading merely sends buy or sell signals testing the market, not executing any trades at all.  In any given week, the NYSE reports that program trades account for about 30 percent of all trading volume on the NYSE. Some other exchanges, including some you may never have heard of, such as BATS, rely even more heavily on program trading.

Program trading also has been a factor in the popularity among large banks, brokers and hedge funds for trading platforms known as “dark pools.” These platforms rely on secrecy to place orders for large blocs of stocks without disclosing the transactions to the larger market until they are fully executed.  According to broker Rosenblatt Securities, these “off-line” platforms account for close to 40 percent of all trading on some days.  An article last year in The New York Times (“As Market Heats Up, Trading Slips Into Shadows,” March 31, 2013), stated that one reason for the growth of dark pools is to avoid volatility caused by high speed trading.  A large buy or sell order, even if executed over a full market day or days, could trigger flash trading algorithms, dramatically moving the stock price before a large order could be fully executed.  Dark pools are intended to avoid this result by maximizing secrecy – hiding true supply and demand from the investing public.

Michael Lewis recently wrote a book about flash trading; this article was first written a year ago and offered unsuccessfully for publication.  It has been updated slightly, but does not account for any information in Lewis’s book.

Speeds you are accustomed to on the internet, even when you use the office computer, are miserably slow for computerized trading purposes.  A collection of exchanges in the United States and Europe have spent at least $2 billion in the last five or six years upgrading their systems so that literally thousands of trades can be conducted in the blink of an eye. The results have sometimes been disastrous, such as the troubled initial public offering of Facebook in May 2012 and the wild market swing caused by a software foul-up at Knight Capital in August 2012. High speed trading also encourages – and perhaps proves – the notion that the equity markets are no place for small investors like you and me to trade individual stocks.

Like Sisyphus repeatedly rolling his stone up hill only to have it roll back down, regulators struggle to address each new trick by Wall Street to make money off of trading that doesn’t add much or anything to the value of the economy, except the Wall Street economy.  Here is Bloomberg News on efforts initiated last year to limit the damage from high speed trading:  “Regulators have been fine-tuning systems for pausing trading since the so-called flash crash of May 2010 briefly erased $862 billion from equity markets. Two initiatives for curtailing volatility to be implemented April 8 [2013] for one-year pilots: a program known as limit-up/limit-down for individual shares and a refurbished system for halting all exchange-listed equity trading in U.S. securities and futures markets during periods of extreme volatility.”  (“NYSE Plans to End LRP Curbs as New Circuit Breakers Enacted,” by Nina Mehta, Bloomberg News, April 2, 2013).

The same Bloomberg article quotes former SEC Chairman Mary Schapiro saying that “the initiatives we approved are the product of a significant effort to devise a sophisticated, yet workable and effective, way to protect our markets from excessive volatility.  In today’s complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast.”  In other words, high speed trading is a market threat.  But who would risk the ire of Wall Street (and politicians yelling about curbs on capitalism) by doing something simple, such as eliminating it?  No.  Instead, Rube Goldberg contraptions are invented in the name of regulation to be circumvented by Wall Street as soon as possible, requiring more contraptions – and more taxpayer money to create and enforce them.

High speed trading clearly has contributed risk to the market without much, if any, relationship to the quality of securities traded or any commensurate benefit to capital creation.  High speed trading, like synthetic credit derivatives and many other risky trading products, are instruments to make money on trading per se, not through investments in companies that manufacture products or sell services.  (Synthetic CDOs don’t invest in anything – they are just betting instruments). Lost in the greed of Wall Street institutions — from banks to hedge funds to old fashioned risk arbitrageurs — is the essential fact that trading is not itself capitalism.  It is only a means by which capitalism is able to function.  Trading is intended to allocate the assessments of investors about the caliber of companies whose stocks are traded, not the caliber of algorithms based on movements of a penny or less per share.  When trading injects additional risk and uncertainty to the capital markets without any commensurate benefit other than to the trading itself, it loses its utility to capitalism and to the economic well-being of the nation.

One trolls the internet in vain for reasons why high speed trading is a benefit to anyone except traders — who make small amounts rapidly multiplied for each trade that amount to billions of dollars over the course of a year — and large hedge funds and banks acting on their own accounts, who have the funds to drive stock prices up or down in small increments, presumably for their own profit based on proprietary algorithms entered into a computer by highly paid “quants” and thereafter untouched by human brains.  The usual defense to this madness is that the markets require liquidity, but there are few answers to why liquidity is required in milliseconds, or even minutes, or how such trading contributes to a reliable and stable marketplace for the trillions of dollars worth of equities traded each year and which, along with the credit markets, underpins the world’s economy.  In fact, the argument is usually circular:  High speed trading causes great market volatility which requires high speed trading to liquidate quickly in the face of volatility.

High speed trading was beyond the imagination of the stock brokers gathered under a buttonwood tree on Wall Street in 1792 who founded what later became the NYSE.  It was even beyond the imagination of Wall Street traders in the 1960s, when brokerage firms were still processing trades by hand.  The NYSE had to close down each Wednesday for several weeks to catch up with volume and to begin applying modern electronics to nineteenth century processes.  Similarly, the crash of 1987 caused such heavy trading volume that the NYSE had to end trading at 2 p.m. for a week thereafter to allow extra hours to process the orders.  In such “olden days,” settlement of buy and sell orders required five trading days, later shortened to three.  How times have changed!  For high frequency traders, a few seconds is far too long to execute a trade because it allows another trader’s algorithm to intervene and upset the economic logic leading to a small decimal of profit per share.

The nation’s chief securities regulator, the SEC, is attempting to deal with high speed trading in its usual way – monitoring and regulation.   The former acting chairman, Elisse Walter, stated that “rather than just trying to reduce the impact of these disruptions, we’re trying to eliminate the causes by focusing on systems compliance and integrity.” Although Walter presumably did not mean to say so, a fair conclusion from her comment is that the SEC will be fighting the last war, not the next one.

Let us remind ourselves what trading of equity securities (i.e., stocks of companies) is supposed to be about.  Companies, both new companies that don’t have much more than a great idea, and more mature companies that need to grow and expand their product line, need capital.  One way of getting capital is to borrow it, which is one reason why we have credit markets.  But another is to issue stock which, in effect, gives the public a chance to “own” a piece of the company.  Although only the initial price of the stock goes directly to the company, the company has a strong interest in the secondary market for its securities.  A strong secondary market stock price has many virtues for the issuer.  It permits it to qualify for a more favorable interest rate when it borrows money.  It allows the company to issue fewer stocks at a higher price when it returns to the equity market.  A high stock price has significant reputational value and, since the 1980s, the price of company stock has been a significant factor in executive compensation.  For these reasons and many more, a company has a strong continuing interest in the secondary market for its securities.

Any company, but particularly those perceived by the market as successful, has an interest in a safe, secure marketplace in which companies are assessed – and their stock purchased – based on fair evaluations of their products, their market share, their finances and their management.  Investors have a congruent interest in an open, fair marketplace.  The essential benefit of a functioning market is the allocation of capital based on investor perceptions of quality and risk fairly disclosed.

High frequency trading meets few or none of these goals of a capitalist market.  Specific developments of companies are either ignored, or are reflected only by the penny movements of stocks in nanoseconds.  The same trader may buy and sell the same stock many times during the course of a day or even in the course of a few hours.  High frequency trading time is totally unrelated to the time constraints imposed on humans and on the companies they work for.  Companies make major decisions over the space of days, weeks or even months.  The results of those decisions are not reflected in earnings statements for many more months.  New products require lots of real time to find markets and old products require at least as much time for the market to reject them in favor of a new flavor.

Judging corporate performance requires a much more leisurely market in which a real human has an opportunity to digest the latest corporate news or make a considered decision among several companies or industries, even in the absence of big news, before investing.  The market for such considered judgments has been stolen.

Capitalism itself should provide a better way of making the market work for its intended purpose – distribution of capital to businesses offering products and services intended to create new wealth, and not just trading profits – rather than impose more regulation on the existing stock market.  For example, capitalism could create an alternative type of stock market specifically for the careful investors who want to make money by owning a piece of a good company. It would require a new kind of security, one different from current common stocks in only one significant way. We could call these types of stocks the US Security – for both the United States and “us,” the folks who don’t make millions on Wall Street but wish to participate in the capital markets without being pawns of the large traders. They would be bought and sold only on the US Exchange, or USE, because the market will be specifically focused on the benefit to the country, not just of Wall Street.

The US Security would be based on a simple requirement: It could not be traded until some reasonable period after it was purchased.  If I bought 100 shares of IBM US Securities, I could not sell before expiration of a minimal holding period, perhaps three trading days or five, recalling the old trade settlement periods. Thereafter, I could sell the security whenever I wished, but only to someone else who would have to hold it three or five trading days before selling it again.  Specialist traders, whose job it is to maintain an orderly flow of trading, like the old floor brokers on the NYSE, could be exempted from the trading rule as long as it was for the purpose of maintaining order flow.  An investor might avoid ruinous risk from sudden unexpected news about a security by being able to place a limit order at a fairly high delta, such as 5 percent below purchase price.  But other than reasonable exceptions such as these, a US Security would have to be held for some human scale period before it could be sold.  To enforce and safeguard these requirements, a US Security could be bought and sold only on the US Exchange.

Trading in street name might complicate matters slightly.  But trades could be electronically tagged to forbid sale before a certain date three or five business days hence or if the price drops a specified percent below execution prices.  The same technology geniuses that write software for algorithms and flash trading surely can find a way to apply these rules without other inadvertent disruption of trade practices.

Two requirements must be met if the US Security is to have any chance of gaining at least a foothold in the securities markets.  First, major corporations would have to be willing to issue US Securities. This need not be difficult or expensive.  The SEC could agree that existing registration statements need only be amended to include US Securities and corporations could rely on their existing prospectuses, quarterly and annual reports and other filings.  Issuers should see that the US Security has many advantages, not least of which is reducing market volatility and uncertainty, and begin issuing such securities quickly.  They might even offer investors the opportunity to exchange their existing stock for the new stock, probably a distasteful bargain for large traders and banks, but attractive to smaller investors who feel otherwise locked out of the market.

The second requirement is the entirely new stock exchange mentioned earlier, the US Exchange.  Without it, Wall Street would make sure the US Security was short lived.  The capital required for such a new stock exchange would not be great.  Seats could be purchased by brokers who cater to smaller investors, such as E-Trade, AmeriTrade and Charles Schwab, as well as the large Wall Street banks.  Although we are talking about creating a bit of a throwback to restore sanity in markets damaged by unwise high speed digitization, the emphasis is on unwise.  There is no need to return to floor brokers and large granite buildings, the heritage of the NYSE.  All trading at the USE would be online, through broker-dealers such as the aforementioned, and any other broker-dealer willing to abide by the exchange rules.  Companies would be listed if they offered US Securities and qualified under the new exchange’s rules.

This proposal seems elegant in its simplicity.  It would cure most of the volatility ills and risk of glitches in high speed trading, at little damage to the true needs of a liquid market in equities.  Smaller investors could return to the market in individual stocks and not feel completely at the mercy of mysterious program trading taking place far from their view.  Issuers could embrace the new USE and its propensity to restore thoughtful buying and selling of securities in human time rather than digital time.  Eventually, the pricing of US Securities might vary significantly for the better from the more volatile securities now traded on the NYSE and other exchanges.  It is difficult to see how the US Security and a slower market would damage the economy, except the economy of Big Wall Street, but Wall Street could join in the new issue’s success as long as it played politely.  Very few new SEC rules would be required in regulating the market.

Of course the whole US Securities plan could fail even if it got started.  A sufficient number of companies might not issue US Securities, possibly out of fear of offending Wall Street banks.  Those banks and other big investors would discourage issuers from participation and take other steps to crush the US market before it could even begin.  Some capital would have to be attracted to create the exchange, even with the built-in advantage of an existing internet structure.  One can imagine myriad obstacles.  But the US Security is only one possible answer to satisfy a need based on capitalism.  The point is for entrepreneurs, corporations and large investors to begin thinking of alternatives to the existing market system which will return capitalism to its true purpose – to create new wealth, not just move around existing wealth – and to do so by attracting smaller investors to markets which are safe, sane, reliable and benefit the country.  Responding successfully with new markets and products will have hits and misses, risks and rewards. That’s capitalism.  Let’s try it.

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James A. Kidney was a trial attorney in the SEC Division of Enforcement in Washington, D.C. for 25 years. He retired in March. His job did not involve writing rules and proposing regulations.  The opinions expressed are his own, and do not represent any views of the SEC.

NYS Attorney General Issues Subpoenas to Least Lawyered-Up High Frequency Traders

By Pam Martens: April 17, 2014

Eric Schneiderman, New York State Attorney General

Bloomberg News is reporting that New York State Attorney General, Eric Schneiderman, has issued subpoenas to six high-frequency trading firms. The article, however, names only three firms, none of which are household names.

According to the article, Schneiderman is asking the firms, which include Chopper Trading LLC, Jump Trading LLC and Tower Research Capital LLC about the “special arrangements they have with exchanges and dark pools as well as their trading strategies.”

This is a curious approach. Why not ask the three big stock exchanges, the New York Stock Exchange, Nasdaq and BATS to hand over the names of all high frequency traders to whom they have sold expensive perks that have the effect of rigging the stock market against the average investor.

On March 18 of this year, Schneiderman gave an address at New York Law School indicating his intimate knowledge of the unfair and potentially manipulative practices taking place at the stock exchanges and, somewhat demurely, calling out Securities and Exchange Commission Chair, Mary Jo White, for not doing enough to stop these abuses.

On the subject of co-location, where the high frequency traders are allowed for a high fee to locate their own computers inside the exchange’s data centers to be close to the exchange’s main computers and shave fractions of a second off their trading speed, Schneiderman said: “In that tiny sliver of time, these firms get a first look at the direct-data feeds provided by the exchanges.  They see pricing, volume, trade and order information and use it with their sophisticated technology, and algorithms that make the systems automatic, to trade on it before others can possibly react.”

Schneiderman said this co-location also allows the high frequency traders to “continuously monitor all the exchanges for large incoming orders.  And if they spot a large order from an institutional investor, like a pension fund, high-frequency traders can instantaneously get on the other side of the trade — driving up the prices artificially.”

The exchanges are also supplying “extra bandwidth, special high-speed switches and ultra-fast connection cables to high-frequency traders, so they can get, and receive, information at the exchanges’ data centers even faster,” said Schneiderman, which is giving them a “leg up on the rest of the market.”

While not actually stating that he believes these practices are a fraud on the market, Schneiderman made it clear that he believes they are happening “at the expense of the rest of the investing public.”

Sounding a bit like President Obama on the campaign trail, Schneiderman said:

“Building tremendously lucrative advantages into markets for high-frequency traders at the expense of the investing public is wrong. The idea of the United States, and this permeates all 30 bureaus in my office, is that no one’s supposed to have a special advantage. We’re supposed to be a little more equal than the rest of the world. That’s why we didn’t have kings or aristocrats, and the idea was to have something close to a level playing field…”

One of the most serious rigging mechanisms being deployed between the stock exchanges and high frequency traders was not addressed in any detail by Schneiderman in his speech on March 18 – the exotic order types that effectively allow high frequency traders to prey on the uninformed and effectively repeal price-time priority rules that over a half million stockbrokers trading for moms and pops across America thought were still in place on the stock exchanges to provide a fair trading venue. (Not only is there a technology gap hurting the average investor but these stealth order practices have created a knowledge-gap as well.)

Just how effective these new tricks of the trade are for high frequency traders was on display in a fascinating prospectus filed by Virtu Financial Inc. on March 27. The filing said that “As a result of our real-time risk management strategy and technology, we had only one losing trading day during the period depicted, a total of 1,278 trading days.”

Anyone who thinks that level of trading success is achievable within a level playing field has clearly never worked for any period of time as a trader on Wall Street.

Virtu Financial Inc. postponed its Initial Public Offering (IPO), ostensibly as a result of the public outcry flowing from the 60 Minutes episode on March 30 where bestselling author, Michael Lewis, previewed his new book, “Flash Boys” and charged that the stock market is rigged by these high frequency traders.

Virtu acknowledges in its IPO prospectus that there’s a high-tech arms race on Wall Street, writing: “We believe that our success in the past has largely been attributable to our technology, which has taken many years to develop. If technology equivalent to ours becomes more widely available for any reason, our operating results may be negatively impacted. Additionally, adoption or development of similar or more advanced technologies by our competitors may require that we devote substantial resources to the development of more advanced technology to remain competitive.”

In his talk at New York Law School last month, Schneiderman endorsed a plan to slow down the technology arms race, indicating that there is a proposal by academics at the University of Chicago Business School, which he endorses, which would “put a speed bump in place. Orders would be processed in batches after short intervals – potentially a second or less than a second in length – but that would ensure that the price would be the deciding factor in who obtains a trade, not who has the fastest supercomputer and early access to market-moving information.”

George Melloan’s Love-Hate Relationship With Nomi Prins’ New Book

By Pam Martens: April 16, 2014

As far as we can tell from his online bio, George Melloan has never worked a day inside a Wall Street firm – at least not in the past half century since that time has been spent writing or editing for the Wall Street Journal. But that small detail does not in any way inhibit Melloan from telling those of us who had long careers inside the belly of the beast how we should revise our thinking about what we saw and heard with our own eyes and ears.

Michael Lewis, Yves Smith, Frank Partnoy, Gretchen Morgenson, Greg Smith, Nomi Prins (all with a strong foundational basis for their writings from having worked on Wall Street) apparently need to be set straight by Melloan’s outsider views.

Nomi Prins has just come under the sharp pen of Melloan in a  Wall Street Journal review of her new book, “All the Presidents’ Bankers: The Hidden Alliances that Drive American Power.” As we have previously written, this book is so timely and important to the national discourse that even Melloan has a tough time hating it, writing that Prins “spins an enormous amount of research into a coherent, readable narrative. Even her frequent kvetches about the lifestyles of rich and famous bankers are entertaining.”

But then there’s that word “spins” in the above sentence. That’s what Melloan has been forced to convince himself of — that we Wall Street expats are spinning our facts and distorting his outsider’s narrative.

Melloan, who characterizes everyone who does not see things his way as a “populist,” says that Prins adheres to “populist tradition” and treats history “as a long-running conspiracy of powerful money lenders against ordinary folks like herself.”

Prins, like any ethical reporter, goes where her facts lead (and she backs up those facts with 69 pages of footnotes). If Prins found “a long-running conspiracy of powerful money lenders” it’s because every serious Senate or House investigation in the past century has found a Wall Street conspiracy.

Transcripts of the Congressional hearings of 1912 and 1913, when Arsene Pujo of the House Banking and Currency Committee investigated the “money trust,” found that a small group of Wall Street bankers had conspired to control many U.S. industries through interlocking directorates and other devious means.

The Pecora Senate hearings from 1932 to 1934, where counsel Ferdinand Pecora documented so many Wall Street conspiracies against the public interest that it outraged the entire nation, led to the critically important passage of the Glass-Steagall Act, separating insured depository banks from the speculative casinos on Wall Street. The repeal of that legislation in 1999, in the minds of many scholars who have carefully studied the issue, led to the financial collapse in 2008.

Today, there is overwhelming proof that Wall Street banks have been colluding with foreign global banks to rig everything from the Libor interest rate to physical commodity prices to foreign currency exchange. Call it a cartel or collusion or a conspiracy – the public is still the loser.

Melloan tries to breathe some life into that old failed notion that it was government-sponsored enterprises that caused the 2008 crash, not the heroic souls in the corner offices of Wall Street engaged in doing God’s work. He writes: “Mysteriously, Ms. Prins has almost nothing to say about Fannie and Freddie, even though they were the most political of banks and played the central role in creating the toxic securities that caused the 2008 market crash.” (The word “mysteriously” now combines with “spins” to subliminally shift the conspiracy to the doorstep of author Prins and away from the doorstep of Wall Street.)

It is well documented fact that Fannie and Freddie did not play “the central role” in the crash of 2008. The seminal work on the crash, the 662-page report from the Financial Crisis Inquiry Commission explained:

“The Commission also probed the performance of the loans purchased or guaranteed by Fannie and Freddie. While they generated substantial losses, delinquency rates for GSE [government-sponsored enterprise] loans were substantially lower than loans securitized by other financial firms. For example, data compiled by the Commission for a subset of borrowers with similar credit scores—scores below 660—show that by the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%.”

The report further notes that “By 2005 and 2006, Wall Street was securitizing one-third more loans than Fannie and Freddie. In just two years, private-label mortgage-backed securities had grown more than 30%, reaching $1.15 trillion in 2006; 71% were subprime or Alt-A.” By 2006, Fannie Mae and Freddie Mac’s market share had shrank to 37 percent.

And up pops yet another well documented conspiracy from a man on the inside. According to the report, Richard Bowen was a veteran banker in the consumer lending group at Citigroup – the Wall Street bank that received the largest bailout assistance from the government. According to the report, Bowen “would go on to oversee loan quality for over $90 billion a year of mortgages underwritten and purchased by CitiFinancial. These mortgages were sold to Fannie Mae, Freddie Mac, and others. In June 2006, Bowen discovered that as much as 60 % of the loans that Citi was buying were defective. They did not meet Citigroup’s loan guidelines and thus endangered the company… Bowen told the Commission that he tried to alert top managers at the firm by ‘email, weekly reports, committee presentations, and discussions’; but though they expressed concern, it ‘never translated into any action.’ ”

Back in August, Melloan was tilting at windmills again with a rant in the Wall Street Journal about overly zealous regulators who are  “encouraged by the Obama administration” to blame the nation’s economic ills “on the rich, Wall Street, moneybags bankers, deal makers like Mitt Romney or almost anyone else who still wears a suit to work.”

Melloan wrote:

“Have bankers all gone rogue? Populists would have you think so, and apparently a sizable majority of Americans hold that view as well, judging from opinion polls. But this is not plausible. Bankers are more likely to exercise extreme discretion in an era when they are being constantly reviled by leftist politicians, writers and placard-carriers in the streets.”

“Extreme discretion”? Does Melloan never read the investigative reporting in the very newspaper in which he writes his opinion pieces? Just two years ago JPMorgan was caught red-handed gambling with hundreds of billions of bank deposits in exotic derivatives in London and losing at least $6.2 billion of those deposits on soured bets. For the first time in history, a major Wall Street bank (JPMorgan again) has been charged with two felony counts for aiding and abetting the Madoff fraud and received a deferred prosecution agreement.

Money laundering charges are swirling again – for the umpteenth time – around Citigroup. Criminal investigations are underway for a bank cartel rigging foreign exchange rates. And Michael Lewis has just published an insider’s account in his book, “Flash Boys,” featured on 60 Minutes two weeks ago, documenting how today’s stock market is outrageously rigged against the little guy.

There’s really only one conspiracy that Wall Street didn’t adequately perfect. It let some of us depart the corrupted corridors of power without signing non-disparagement contracts. But rest assured, it is rapidly trying to plug the hole in that dike.

Jamie Dimon’s Top Women and Their Missing Licenses

By Pam Martens: April 15, 2014

Ina Drew, Former Head of the Chief Investment Office at JPMorgan, Testifying at the March 15, 2013 Senate Hearing on the London Whale Trading Losses

In the past two years, two of the most senior, long-tenured and talented women at JPMorgan, Ina Drew and Blythe Masters, have bid adieu to the bank and its CEO, Jamie Dimon, under less than ideal circumstances. Questions are now emerging as to whether Dimon required that these senior supervisors hold proper industry licenses for the work they performed for the bank.

Ina Drew, the former head of the Chief Investment Office, who supervised the traders responsible for losing $6.2 billion of the bank’s deposits in exotic derivatives trading in London, resigned from the firm over that firestorm on May 14, 2012. Drew had been with JPMorgan and its predecessor banks for 30 years.

In Drew’s testimony before the U.S. Senate’s Permanent Subcommittee on Investigations on March 15, 2013, Drew told the hearing panel that beginning in 1999, she “oversaw the management of the Company’s core investment securities portfolio, the foreign-exchange hedging portfolio, the mortgage servicing rights (MSR) hedging book, and a series of other investment and hedging portfolios based in London, Hong Kong and other foreign cities.”

Drew told the Senate Committee that the investment securities portfolio exceeded $500 billion during 2008 and 2009 and as of the first quarter of 2012 was $350 billion. But during the 13 years that Drew supervised massive amounts of securities trading, she had neither a securities license nor a principal’s license to supervise others who were trading securities.

We asked numerous Wall Street regulators to explain how this is possible at today’s too-big-to-fail banks. One regulator who spoke on background only told us that Drew could not hold a securities license because she worked for the bank not its broker-dealer. Only employees of broker-dealers are allowed to hold securities licenses. But apparently, not having a securities license does not stop one from supervising a $500 billion portfolio of securities that are, most assuredly, traded by someone.

It is an uncontested reality on Wall Street that if you are going to supervise persons holding a securities license, you must also hold the appropriate securities licenses yourself. Drew, sans license, was supervising traders in London who were registered with the Financial Services Authority (now Financial Conduct Authority). Included among those traders was the now infamous, Bruno Michel Iksil, the so-called London Whale.

Blythe Masters, Head of Global Commodities at JPMorgan

The situation with Blythe Masters is even more puzzling. Masters, who has worked at the bank for 27 years and announced her resignation this month, was named to the post of head of Global Commodities in 2007 and has held that post ever since. Masters has never held a Series 3 license to trade commodities nor a Series 30 to supervise commodity traders according to industry records.

Even more puzzling, according to Financial Industry Regulatory Authority records, Masters is employed at JPMorgan Securities, LLC, a broker dealer – not the bank — and holds a full roster of securities licenses – but no commodity licenses.

According to the firm’s web site: “Blythe Masters is J.P. Morgan’s head of Global Commodities, responsible for the global team that provides integrated physical and financial commodity solutions products for clients. The business provides market-making, structuring, risk management, financing and warehousing capabilities across a full spectrum of commodity asset classes.”

Despite the reference to a “full spectrum” of commodity asset classes, the National Futures Association shows that Masters was approved only as a principal for JPMorgan Ventures Energy Corporation on February 20, 2013. Commodities trading encompasses far more than just energy, e.g., metals, agricultural products, etc.

Last July, the Federal Energy Regulatory Commission fined JPMorgan $410 million for manipulating power markets in California and the midwest. Masters oversaw the division that was charged with the manipulation.

Today, the Wall Street Journal has a front page article revealing its findings that Wall Street employees who repeatedly failed the required exam to sell securities “have on average worse disciplinary records.”

What about those who never take the licensing exams at all?