Revenge of the Money Launderers

The “FinCen files” story reveals: getting caught doesn’t stop banks from taking dirty money. It may even encourage them

On December 11, 2012, U.S. Justice Department officials called a press conference in Brooklyn. The key players were once and future bank lawyer Lanny Breuer (disguised at the time as Barack Obama’s Assistant Attorney General in charge of the DOJ’s Criminal Division), and Loretta Lynch, the U.S. Attorney for the Eastern District of New York, and future Attorney General. The duo revealed that HSBC, the largest bank in Europe, had agreed to a $1.9 billion settlement for years of money-laundering offenses.

An alphabet soup of regulatory agencies was represented that day, from the Justice Department, to Immigration and Customs Enforcement (ICE), the U.S. Treasury, the New York County District Attorney, and the Office of the Comptroller of the Currency, among others.

The regulators outlined a slew of admissions, with HSBC’s headline offense being the laundering of $881 million for Central and South American drug outfits, including the infamous Sinaloa cartel.

The laundering was so brazen, regulators said, the bank’s Mexican subsidiary had developed “specially shaped boxes” for cartels to pack with cash and slide through teller windows. The seemingly massive fine reflected serious offenses, including violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).

The next years would follow up with a flurry of similar settlements extracting sizable-sounding fees from other transnational banks for laundering money on behalf of terrorists, sanctioned businesses, mobsters, drug dealers, and other malefactors. Firms like JP Morgan Chase ($1.7 billion), Standard Chartered ($300 million), and Deutsche Bank ($258 million) were soon announcing settlements either for laundering, sanctions violations, or both.

Even seasoned financial reporters accustomed to seeing soft-touch settlements scratched their heads at some of the deals. In the case of HSBC, the stiffest penalty doled out to any individual for the biggest drug-money-laundering case in history — during which time HSBC had become the “preferred financial institution” of drug traffickers, according to the Justice Department — involved an agreement to “partially defer bonus compensation for its most senior executives.” If bankers can’t get time for washing money for people who put torture videos on the internet, what can they get time for?

When I did a story on the case in early 2013, I found the HSBC settlement was the latest step in a dizzying, decade-plus cycle of offenses and ignored reprimands, involving multiple regulatory bodies. The number of times HSBC had blown off compliance orders seemed too absurd to be real. In one stretch between 2005 and 2006, the bank received (and, apparently, ignored) 30 formal warnings just from the Office of the Comptroller of the Currency.

Prosecutors insisted the deferred prosecution settlements slapped on companies like HSBC, Standard Chartered, and JP Morgan Chase were tougher than jail terms. The deals would place banks in a permanent state of quasi-arrest, with regulators granted enormous supervisory power and serious charges pre-filed and hanging over the firms going forward.

As one federal investigator put it to me back then, “This way, we have them by the short ones.”

Fast-forward eight years. On September 20th, a combination of Buzzfeed and the International Consortium of Investigative Journalists (ICIJ) published the details of a major document leak highlighting a decade of money-laundering incidents, involving hundreds of billions of dollars and a number of the world’s biggest banks. The leak centered on a cache of over two thousand “suspicious activity reports,” or SARs, filed by those banks to the Financial Crimes Enforcement Network, a regulatory arm of the U.S. Treasury.

Though the ICIJ was also behind the release of the Panama Papers, investigative editor Michael Hudson told me he believes the FinCen leak is “the most important” project they’ve worked on. Instead of being about one group of actors, or one jurisdiction, these revelations span the banking sector as a whole.

“It shows the widest set of problems,” he says.

The story has been covered around the world, but some press accounts particularly here in the States seem to have missed the punchline, i.e. that the banks figuring most prominently in the FinCen leak are exactly the same institutions paraded before the public as subjects of “message-sending” punishments back in 2012-2014.

HSBC, for instance, continued to take in questionable money through 2012 and beyond, including $30 million from Hong Kong accounts related to a Ponzi scheme called World Capital Market. WCM was suspected of bilking “investors” — most of them ordinary people scraping together five or ten thousand dollars and throwing them at false promises of guaranteed returns — of nearly $80 million.

The leaked records show HSBC flagged the account as suspicious as early as 2013, but continued to take the money from this and a wide variety of other dicey accounts. Although regulators saw all of this information, the Department of Justice not only didn’t take action, it announced in 2017 that HSBC had “lived up to all of its commitments” and agreed to file a motion to lift the deferred prosecution deal.

A similar pattern held with JP Morgan Chase, which in 2013 was hit with a cease and desist order over “systemic deficiencies” in its money-laundering controls, yet continued to do business with rogue accounts, including some infamous and obvious ones. To give some sense of the sums involved, JPM made roughly a half-billion dollars just servicing the accounts for con artist Bernie Madoff.

As far back as 2006, JP Morgan Chase knew enough to pull its own money out of investments in hedge funds tied to Madoff, but never told investors, and continued to manage his accounts for years. The bank ultimately settled with the government over the Madoff episode in 2014, after the 2013 “cease and desist” order, while continuing to manage money for other malodorous accounts — including, according to the ICIJ, more than $1 billion for Jho Low, the fugitive financier behind Malaysia’s infamous 1MDB fund.

In a detail that should infuriate the #Resistance crowd, Jamie Dimon’s bank also continued to do business in huge sums for former Trump campaign manager Paul Manafort even after Manafort stepped down in scandal, and even after the bank flagged Manafort’s accounts. From the ICIJ report:

JPMorgan also processed more than $50 million in payments over a decade, the records show, for Paul Manafort, the former campaign manager for President Donald Trump. The bank shuttled at least $6.9 million in Manafort transactions in the 14 months after he resigned from the campaign amid a swirl of money laundering and corruption allegations spawning from his work with a pro-Russian political party in Ukraine.

“If you look at the cases where they tried to punish and deter the big banks, the headline-making efforts just haven’t worked,” says Hudson. “In the aftermath of these supposed crackdowns, the banks continued to move money in staggering amounts, for powerful and dangerous characters.”

“The big takeaway is, the system just doesn’t work,” adds former federal prosecutor Paul Pelletier. “I think these SARs represent about $2 trillion in suspicious transactions, and nearly all of it went through. And this is just a small fraction of the overall amount of money.”

According to Hudson, the FinCen files represent about two-tenths of one percent of the suspicious activity reports filed between 2011 and 2017.

In the aftermath of the HSBC deal in 2012, money laundering cases began to attract a fair amount of press attention. HSBC’s case even became one of the subjects for Oscar-winning documentarian Alex Gibney’s “Dirty Money” series:

At the time, there was an expectation that these stories could be told in the past tense, because firms like HSBC had been busted. The FinCen leaks show the opposite. The settlements may actually have been an accelerant, allowing for the appearance of regulation, while alerting banks to broader weaknesses that encouraged more brazen behavior going forward. We may have to change the way we think about “dirty money,” from being an outside contaminant, to endemic to the system at its core.


Public legend about movement of ill-gotten cash usually centers on crooks sitting under ceiling fans in tropical locales, receiving mysterious wire transfers in places outside the physical reach of American regulators, like VanuatuPanama, or the British Virgin Islands. The FinCen leaks make clear the real hub of money laundering is in what Hudson calls the “choke point” of New York, where the world’s largest financial institutions have streamlined the process of moving shady money.

SARs don’t always indicate a crime. They’re the regulatory equivalent of a call to police to check something out that doesn’t add up. Bank monitors who compile them might be spotting something in their account rolls like high numbers of cash transactions, large numbers of wire transfers to a country where the customer doesn’t do business, etc.

The requirement to produce these reports creates a cat-and-mouse game for banks. Every time compliance officers discover derogatory information that leads to an account being closed, it’s a direct hit to a bank’s revenues. On the other hand, to keep regulators off their backs, banks have to be seen to be doing all they can to sniff out illegalities. Therefore there’s an incentive for banks to cycle through creative ways of looking like they’re engaging in compliance, without actually doing so.

A bank might create sizable AML departments, but pad them with inexperienced, entry-level employees incapable of spotting problems (see here for the HSBC example I wrote about years ago). A firm may hire a top-of-the-line department head, but not give him or her real resources. Required hiring boxes may be checked, but the company may non-report or under-report problems. Companies may even generate huge numbers of suspicious activity reports while leaving key data like names or addresses missing.

In a different scenario, reports are filed too late for action to be taken. SARs are supposed to be filed within 30 days, for instance, but the FinCen documents were filed to the government an average of 166 days after the initial detection of a potential problem.

In another stalling method, banks informally agree not to close suspicious accounts until a certain number of SARs have accrued. When the Senate Permanent Subcommittee on Investigations looked at HSBC in 2012, for instance, they found internal emails from bank executives suggesting that HSBC’s Mexico operations had settled on a policy of not closing accounts until four SARs had been filed.

When the company’s chief compliance officer found out about its subsidiary HMEX’s standard, he wrote, in a bemused tone, “4 SARs seems awfully indulgent, even by local standards.” HMEX later cut the standard to two SARs, which seems to be the exception rather than the rule. In the FinCen leaks, companies are seen repeatedly filing reports about the same actor, each time implying they’ve dug just enough to write a report, but never quite enough to actually close the account.

Of course, in banking, size matters. “Maybe the bank looks at a wire transfer and says, ‘This smells.’ Do that in a $12,000 transaction, and they’ll kick you out of the bank,” says Pelletier. “Do it at $12 million, and they’ll let it go.”

What’s unique about this leak it shows bad behavior the banks actually reported. As one former investigator put it this week, “This is the stuff they actually have a suspicious activity report for!” That banks keep taking the money is bad, but the fact that regulators keep receiving the reports and letting shady transactions slide makes the dirty-money problem a bizarre symbiosis of private rapaciousness and (at best) governmental apathy.

While credit card companies are able to detect fraud and banks are able to detect suspicious activity thanks to technological advances, the government lacks the same capability, in part perhaps because the reporting system is not automated. Since it’s a crime to leak a “SAR” — you “literally have to steal one” to make one public, as one former investigator puts it — they’ve rarely been seen by the public. The ICIJ has now put them on display:

The government receives millions of these written reports, which often appear to reflect a fair amount of person-hours of research by the bank. However, the government lacks what one investigator described to me as an “AI-type test” for passive review of this material, and lacks the personnel to go through it all individually.

At best, a federal investigator may go through the SAR database to check an individual or company already targeted in another probe. This particular batch of SARs seems to have been gathered as part of a congressional investigation into Russian interference, for instance. The rest of the reports are fated to be memory-holed by overwhelmed regulators.

What do you get in this seeming worst-case scenario, when banks pretend to monitor, and regulators pretend to collect the monitoring? A short list of some of the messes found in the FinCen docs:

— In one ridiculous case, Deutsche Bank’s New York branch processed $2.6 billion and $700 million, respectively, for a pair of companies called Ergoinvest and Chadborg trade. Both companies declared annual incomes of $35,000, and the statements for both firms bear the signature of the same obscure dentist in Belgium, who claims he doesn’t even own a car. Yet the money kept rolling through! The companies earned British registrations through “formation agencies” located in the Baltics, where investigators have found a rat’s nest of problems in recent years. Deutsche Bank, the originator of 62% of the leaked SARs (perhaps reflecting the focus of the Russia investigation that produced the FinCen docs), moved at least $150 billion just from one small Tallinn-based bank, Danske Estonia, for instance.

— Ukrainian Ihor Kolomoisky was the subject of raids by federal investigators earlier this summer, and has been profiled in colorful news reports that read like movie scripts. In one piece, he allegedly dropped crayfish meat by remote control into a tank to be devoured by sharks in the middle of a meeting, as a Dr. Evil-style intimidation tactic.

ICIJ @ICIJorg

Learn about the 22 properties Kolomoisky and his associates purchased between 2006 and 2015 – with this interactive map made by @pirhoo. #FinCENFiles

Michael Sallah @MikeSallah7

The Oligarch Who Ate Cleveland: Untold story of how Deutsche Bank helped Igor Kolomoisky acquire an empire in real estate in America’s heartland — the money siphoned from Ukraine’s largest bank. @TanyaKozyreva and me and team from @ICIJorg https://t.co/2aWlZGtPQt via @ICIJorg

The crux of accusations by prosecutors is that Kolomoisky employed gangland tactics at home (including using “armed goons” to take over an oil company), then funneled the money to places like the States, to be invested in legit vehicles like real estate. This is exactly the kind of person the SAR process is designed to identify and disqualify quickly. Nonetheless, the FinCen files show Deutsche Bank, which had entered into a settlement deal in 2015 for moving over $11 billion in suspicious transactions, moved at least $240 million for a Kolomoisky-connected account at exactly that time, between 2015 and 2016.

— Even as Russian aluminum baron Oleg Deripaska garnered enormous media attention in recent years, including during the Russiagate furor, he continued to move money freely through the American banking system. The FinCen files contain a total of 58 SARs related to Deripaska, issued between 1997 and 2017, covering an amazing $12.41 billion in transactions. The Bank of New York Mellon flagged 16 transactions involving a Deripaska subsidiary company called Mallow Capital, but apparently kept doing business. To quote the ICIJ, “Mellon said Mallow Capital appeared to be a shell company operating in a high-risk area with no known legitimate business purpose. In 2012 and 2013, Mallow sent itself nearly $420 million using different British Virgin Islands addresses and different banks…”

The FinCen leaks highlight two major weaknesses of the regulatory system. One is the longstanding absence of a requirement that anyone opening a U.S. account name a “beneficial owner,” i.e. who is really controlling the account. The other is correspondent banking. Banks in the U.S. are required to “know your customer” in addition to monitoring and reporting domestic accounts. Still, any foreign bank with a license may open “correspondent” accounts in those same regulated Western banks. A lot of the worst instances catalogued in the FinCen leaks involve these correspondent accounts, opened in Asia, Eastern Europe, the Middle East, etc.

In the long run, the regulatory system ends up serving as a de facto partner for banks that all but admit they’re taking in money from Ponzi schemers, mobsters, drug lords, and rogue states.

This is a “feature, not a bug” problem. Going back to the years after the crash, regulators spoke often about the need to carefully construct settlements, so that even repeat offenders might remain viable.

In late 2012, for instance, at a press conference announcing a market manipulation settlement for the Swiss Bank UBS, Breuer told reporters, “Our goal here is not to destroy a major financial institution.”

This is a bank that has broken the law before,” a reporter said that day. “So why not be tougher?”

“I don’t know what tougher means,” Breuer answered.

Some time later, then-Attorney General Eric Holder gave a video message on the theme, “There is no such thing as Too Big to Jail.” While insisting “no one is above the law,” Holder pointed out that some criminal charges carried automatic regulatory penalties that “may even trigger the loss of that institution’s charter.” This, he implied, is not always a good thing.

This issue had come up at the HSBC press conference the previous year, when Breuer said, “had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the US.”

For that reason, Holder insisted, regulators often “must go the extra mile to coordinate closely with the regulators who oversee these institutions’ day-to-day operations.”

Translated, this meant the Justice Department was crafting punishments to make sure banks landed on their feet and remained functional as American businesses, even in the face of public reprimand.

A typical settlement involved a fine that sounded large but was really equal to months or weeks of profit, with penalties in some cases also being deductible, so taxpayers could share in the joys of paying a bank’s debt to society. In other words, settlements were designed not to hurt too much, but just the right amount.

Even a “record” harsh settlement doled out to the French bank BNP-Paribas in 2014 for sanctions violations, which included a rare plea to a real criminal charge in addition to a $9 billion penalty, only incurred a one-year exile from U.S. dollar transactions. Even when throwing the proverbial book at firms, regulators made sure to pave clear roads to redemption.

This was not necessarily a bad thing. There’s no reason why anyone should want systemically-important institutions (who are often major employers) to be wiped off the face of the earth, willy-nilly. The problem is that if you completely remove the threat of a lost charter, it signals to everyone that regulators will tolerate even open repeat violations. In this light, even a “tough” public punishment becomes a license to steal.

Hudson, for instance, notes that announcements of many of the biggest money laundering settlements involving the firms in the FinCen files were accompanied by jumps in the company’s share prices. HSBC’s shares rose in London and Hong Kong after the 2012 settlement, and even BNP’s criminal plea deal prompted a 3.6% jump in share price. Markets see the settlements as seals of approval going forward, and “send the signal that the regulators are looking to do a deal,” Hudson says.

The irony of all this is that the Trump era has seen much gnashing of teeth over America’s withdrawal from global bureaucracies like the Paris Agreement, the “Open Skies” arms control treaty, the Iran deal, and other conventions. Meanwhile, in the one place we want an isolationist-style wall, around the Federal Reserve-connected American banking system, barriers are wearing away. Only in crime, it seems, is America becoming more global in outlook.

The Deep State Hiding in Plain Sight

Mike Lofgren, a congressional staff member for 28 years, joins Bill Moyers to talk about what he calls Washington’s “Deep State,” in which elected and unelected figures collude to protect and serve powerful vested interests. “It is how we had deregulation, financialization of the economy, the Wall Street bust, the erosion or our civil liberties and perpetual war,” Lofgren tells Moyers.

Transcript

this week on Moyers & Company longtime insider Mike Lofgren what he calls the big story of our times the deep state it is I would save the red thread that runs through the history of the last three decades it’s how we had deregulation financialization of the economy The Wall Street bust the erosion of our civil liberties and perpetual war funding is provided by and gumowitz encouraging the renewal of democracy Carnegie Corporation of New York celebrating 100 years of philanthropy and committed to doing real and permanent good in the world the Ford Foundation working with visionaries on the front lines of social change worldwide the Herb Alpert foundation supporting organizations whose mission is to promote compassion and creativity in our society the John D and Catherine T MacArthur Foundation committed to building a more just verdant and peaceful world more information at macfound.org Park foundation dedicated to heightening public awareness of critical issues the Kohlberg foundation barbra jean– Fleischman and by our sole corporate sponsor mutual of America designing customized individual and group retirement products that’s why we’re your retirement company welcome if you’ve read the Espionage novels of john lecarre a you know that no other writer today has so brilliantly evoked the subterranean workings of government perhaps because he himself was once a British spy liquor a has a name for that invisible labyrinth of power he calls it the deep state and now an American you’re about to meet in this broadcast has seized on that concept to describe the forces he says are controlling our government no matter the party in power but Mike Lofgren ZnO intelligence agent although he had a top-secret security clearance he’s a numbers man a congressional staff member for 28 years with the powerful House and Senate budget committees over the years as he crunched those numbers he realized they didn’t add up in said they led him to America’s own deep state where elected and unelected figures collude to protect and serve powerful vested interests Mike Lofgren was so disgusted he not only left Capitol Hill he left the Republican Party and wrote this book the party is over how Republicans went crazy Democrats became useless and the middle class got shafted now at our request and exclusively for billmoyers.com he is written anatomy of the deep state you’ll want to read it as soon as we finish this conversation Mike Lofgren welcome good to be here again but this is a difficult subject to talk about it would be easier if it were a conspiracy you’re describing but that’s not the case is it no I’m not a conspiracy theorist of this is not some cabal that was hatched in the dark of night this is something that hides in plain sight it’s something we know about but we can’t connect the dots or most people don’t connect the dots it’s kind of a natural evolution when so much money and political control is at stake in the most powerful country in the world this has evolved over time and you call it the real power in the country correct it is a hybrid of corporate America and the national security state everyone knows what the military-industrial complex is since Eisenhower talked about it in his farewell address we must guard against the acquisition of unwarranted influence whether sought or unsought by the military-industrial complex the potential for the disastrous rise of misplaced power exists and will persist we must never let the weight of this combination endanger our liberties or democratic processes everyone knows Wall Street and its depredations everyone knows how corporate America acts they’re both about the same thing they’re both about money sucking as much money out of the country as they can and they’re about control corporate control and political control you said this in your judgment is the big story of our time it is the big story of our time it is I would say the red thread that runs through the history of the last three decades it’s how we had deregulation financialization of the economy the Wall Street bust the erosion of our civil liberties and perpetual war you write that the secret and unaccountable deep state floats freely above the gridlock between both ends of Pennsylvania Avenue is the paradox of American government in the 21st century well that’s just the thing the common narrative in the last five years and on a superficial level it’s right is that government is broken it’s dysfunctional its gridlocked well that’s true and that is the visible government the constitutional government we learn about in civics 101 and it is gridlocked but somehow Obama can go into Libya he can assassinate US citizens he can collect all our phone records without a by-your-leave from anyone um he can even bring down a jet carrying a president of a sovereign country without asking anyone’s permission and no one seems to connect the two the failure of our visible constitutional state and this other government that operates according to no constitutional rules or any constraint by the governed you go on to say though that it’s not just the executive branch that is the heart of this that is just one of the several constituencies that make up what you called the deep state well it’s all the national security functions of the government it’s the Pentagon its homeland security it’s the State Department it’s also Treasury because they have a kind of symbiotic relationship with Wall Street but one thing they control the flow of money absolutely and that’s why there’s such a flow not only of money but of personnel between Wall Street and the Treasury Department there’s other aspects of government there’s a portion of the judiciary a small portion of the judiciary the so called Foreign Intelligence Surveillance courts most of Congress doesn’t even know how they operate talk a little bit more about the Nexus the connection between the national security state and Wall Street because this is a theme that runs through your essay do you know that about 30 blocks north of here there is a restaurant that will sell you a truffle for ninety five thousand dollars also in new york christie’s sold at auction a painting by francis bacon for a hundred and forty two million now a parallel situation with the national security state the NSA spent 1.7 billion dollars to build a facility in Utah that will collect one yottabyte of information that’s as much information as has ever been written in the history of the world it costs four hundred dollars by the time the Pentagon finishes paying contractors to haul one gallon of gasoline into Afghanistan that’s a real extravagant amount of money in both cases of the national security state and the corporate state they are sucking money out of the economy as our infrastructure collapses we have a tinkertoy power grid that goes out every time there’s inclement weather tens of millions of people are on food stamps we incarcerate more people than China an authoritarian state with four times our popular elation does anyone see the disparity between this extravagance for the deep state and the penury that is being forced on the rest of the country that isn’t a natural evolution something made it happen we’re having a situation where the deep state is essentially out of control it’s unconstrained since 9/11 we have built the equivalent of three Pentagon’s around the DC metropolitan area holding defense contractors intelligence contractors and government civilians involved in the military-industrial complex there are over 400,000 contractors private citizens who have top-secret security clearances and they are heart and soul of the of the deep state as you describe it absolutely it being privatized which means the power shifts from accountable officials to unaccountable in contractors about 70% of the intelligence budget goes to contracts how new is this I mean back in 2010 the Washington Post published a stunning investigation of what the editors called top secret America I mean we have known about this have we not yes we know about this but the intelligence functions of the government are too important to outsource in the manner we have it’s something where absolute discretion is needed and absolute trust that they are not violating civil liberties and to put this kind of a burden if you will on private contract employees is I think become a great disservice you say that that you came to question this it took you a while it was a gradual enlightenment that took place you were dealing with big numbers and particular details in the budgets that all of these agencies were sending to you when you on Capitol Hill right you were seeing the number solution you what works what was happening to the numbers at the end of 2001 is we appropriated a lot of money and it didn’t seem to be going to Afghanistan the proximate source of the 911 attacks it seemed to be going to the Persian Gulf region and I said what’s going on here Saddam Hussein didn’t bring down the Twin Towers so the little light went on and I began to sort of disenchant myself from the normal group think that tends to take over in any organization group think at some point in your essay you talk about how group think drives the deep state it absolutely does just as it tends to drive any bureaucratic organization what do you mean by groupthink well the psychologist Irving Janis called it groupthink it’s a kind of assimilation of the views of your superiors and your peers it’s becoming a yes-man and in many respects it’s an unconscious thing I remember what Upton Sinclair once said it’s difficult to get a man to understand something when this salary depends on him not understanding it that is certainly a part of it you described Washington as clearly and obviously the headquarters of a deep state but talk about some of some of the others who are in the game Wall Street is perhaps the ultimate backstop to the whole operation because they generates so much money that they can provide second careers for a lot of the government operatives they’re going to make more money than they ever dreamed they would on Wall Street and I think a good example of that is the most celebrated soldier of the last decade David Petraeus what did he do when he retired he went to Kohlberg Kravis Roberts a Wall Street buyout firm with 90 billion in assets under management you described him as a kind of avatar of the deep state he is in a way because he now represents both ends of it we see now our present-day Cincinnatus did not pick up the plow when he lay down the sword Cincinnatus was the roman who left his farm to become a general in the war when the war was over he went back to be a farmer that doesn’t happen today no it doesn’t the vast majority of generals seem to end up on the boards of defense contractors talk a little bit about what you call this strange relationship between Silicon Valley and the government and how it fits into the deep state well the National Security Agency could not do what it does the CIA could not do what it does without Silicon Valley now Silicon Valley unlike the defense contractors mostly sells to private individuals and to companies it’s not a big government vendor however its services are necessary and de facto they have become a part of the NSA’s operations I’m sure the CEOs of some of these companies try to obscure the fact that this has mostly been voluntary for many years Ameena surveillance the surveillance the gathering of information about unknowing citizens absolute or commercial purposes though precisely they’ve done it themselves and they’ve assisted the NSA through a FISA Court order for an intelligence or an Intelligence Surveillance Act so this has been going on for quite a while yet now like inspector Reno they are shocked shocked to find out but I think their main shock is that they’re now starting to lose market share in foreign countries these these moguls as you call them pass themselves off as libertarians who they make a big pretence about being libertarians and believing in the rugged individualism and so forth but they’ve been every bit as intrusive as the NSA has been in terms of collecting your data for commercial purposes rather than so-called national security purposes but they’re in it just as heavily as the NSA is and they somehow managed to get the intellectual property laws rigged so that you are theoretically subject to a fine up to five hundred thousand dollars for jailbreaking your phone to me which means if you don’t like the carrier on your phone that the manufacturer dictates you shall have and you change it without authorization you don’t have the right to something you bought could this symbiotic and actual relationship between Silicon Valley and the government reflecting the deep state explain the indulgence Washington has shown Silicon Valley Oh matters of intellectual property absolutely people no longer necessarily own their property that they buy if they’re buying it from Silicon Valley they simply have a kind of lease on it if as you write the ideologies of the deep state is not democrat or republican not left or right what is it it’s an ideology I just don’t think we’ve named it it’s a kind of corporatism now the actors in this drama tend to steer clear of social issues they pretend to be merrily neutral servants of the state giving the best advice possible on national security or financial matters but they hold it very deep ideology of the Washington Consensus at home which is deregulation outsourcing deindustrialization and financialization and they believe in American exceptionalism abroad which is boots on the ground everywhere it’s our right to meddle everywhere in the world and the result of that is perpetual war you see it is shadowy and more ill-defined more ill-defined than what it’s more ill-defined than simply saying Wall Street or saying the military-industrial complex or saying Silicon Valley or the corporations it’s a symbiosis of all of the above here’s your summing up quote as long as appropriations bills get passed on time promotion lists get confirmed black or secret budgets get rubber-stamped special tax subsidies for certain corporations are approved without controversy as long as too many awkward questions are not asked the gears of the hybrid state will mesh noiselessly is that the ideology that is a government within a government that operates off the visible government and operates off the taxpayers but it doesn’t seem to be constrained in a constitutional sense by the government is there a solution to the way the system works in I think we’re starting to see some discord in the ideology of the factions that make up the deep state we’re seeing Silicon Valley jumps ship they are starting protests against the NSA we’re seeing the Tea Party bailing out against the deep state they may be wrong on many economic issues but I don’t think they’re necessarily wrong on this one so the public could be doing wise I think they are there’s a much more vivid debate going on in the country about surveillance ever since the revelations by Edward Snowden Mike Lofgren thank you very much for being with me thanks to the journalist Lee Fang we have another revelation into how the deep state enterprise works writing for the Republic report a nonpartisan nonprofit that investigates money in politics he takes up that controversial trade deal called the trans-pacific partnership that President Obama is trying to push through Congress with minimum debate and no amendments controversial because some of its provisions reportedly enable corporate power to trump representative government even go around domestic courts and local laws one is said to prevent governments from enacting safeguards against another bank crisis another to empower corporations to sue governments for compensation if save environmental protections or regulations on tobacco and drugs interfered with future profits because of the secrecy we don’t know everything that’s in the draft agreement senator Elizabeth Warren calls it a chance for these banks to get something done quietly out of sight that they could not accomplish in a public place with the cameras rolling and the lights on which brings us to two officials chosen by President Obama to lead those trade negotiations leafing reports that they received multi-million dollar bonuses as they left giant financial firms to join the government Bank of America gave this man Stephan Selig more than nine million dollars in bonus pay as he was nominated to become the Undersecretary of Commerce for international trade and this man Michael Froman got over four million dollars when he left Citigroup to become the current US Trade Representative now both are no doubt honorable men they are all honorable men but when push comes to shove and the financial interest of huge corporations are on the table we can only hope they will act as independent men not faithful servants of the deep state but given the secrecy we may never know according to Lee Fang many large corporations with a strong incentive to influence public policy give executives bonuses and other incentive pay they take jobs within the government among them Goldman Sachs Morgan Stanley JP Morgan Chase the Blackstone Group Fannie Mae Northern Trust Citigroup even provides an executive contract that Awards additional retirement pay upon leaving to take a full-time high-level position with the US government or regulatory body I’m not making this up you get a bigger incentive if you leave Wall Street to go regulate Wall Street so it is the Fox is groomed for the chicken coop and the deep state grows coming up on Moyers & Company a powerful new book breaks the code of dog-whistle politics dog-whistle politics doesn’t come out of animus at all it doesn’t come out of some desire to hurt minorities it comes out of a desire to win votes and in that sense I want to start using the term strategic racism it’s racism as a strategy it’s cold it’s calculating it’s considered it’s the decision to achieve one’s own ends here winning votes by stirring racial animosity and and here’s a hard difficult truth most racists are good people they’re not sick they’re not ruled by anger or raw emotion or hatred they are complicated people reared in complicated societies they’re fully capable of generosity of empathy of real kindness but because of the idea systems in which they are reared they’re also capable of dehumanizing others and occasionally of brutal violence at our website billmoyers.com remember to read the complete text of my Clough goons essay anatomy of the deep state and then tell us what you think I’ll see you don’t wait a week to get more moyers visit billmoyers.com for exclusive blogs funding is provided by and gumowitz encouraging the renewal of democracy Carnegie Corporation of New York celebrating 100 years of philanthropy and committed to doing real and permanent good in the world the Ford Foundation working with visionaries on the front lines of social change worldwide the Herb Alpert foundation supporting organizations whose mission is to promote compassion and creativity in our society the John D and Catherine T MacArthur Foundation committed to building a more just verdant and peaceful world more information at macfound.org Park foundation dedicated to heightening public awareness of critical issues the Kohlberg foundation barbra jean– Fleischman and by our sole corporate sponsor mutual of America designing customized individual and group retirement products that’s why

Michael Lewis: Nobody Understands the Stock Market

April 2 (Bloomberg) — “Flash Boys: A Wall Street Revolt” Author Michael Lewis discusses his book, trading and the stock market on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

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Bloomberg Television offers extensive coverage and analysis of international business news and stories of global importance. It is available in more than 310 million households worldwide and reaches the most affluent and influential viewers in terms of household income, asset value and education levels. With production hubs in London, New York and Hong Kong, the network provides 24-hour continuous coverage of the people, companies and ideas that move the markets.

Quants | The Alchemists of Wall Street | VPRO documentary

yeah nobody I mean these are huge
18:03
numbers to make millions 5 million 10
18:06
million oh that’s a lifetime’s worth of
18:07
money you don’t ever need to work again
18:10
and everybody wanted that you know I
18:12
could quit working this year I made
18:14
enough money in one year I’ll never have
18:15
to work for the rest of my life and that
18:17
was the goal of everyone it appeared to
18:19
me huh this is money okay and Aspen’s
18:27
talking about making money making money
18:29
making money every year you’re making
18:31
money and then one year you blow up now
18:33
the difference between this being your
18:35
money and being a hedge fund is if this
18:38
is your money fantastic you’re making
18:40
money you’re down here you’re bankrupt
18:42
if it is somebody else’s money if it’s a
18:44
hedge fund that does this every year
18:47
they’re taking a percentage they’re
18:50
taking some of that as profit as their
18:52
bonus effectively so they make some of
18:54
that they make some more they make some
18:56
more all of this money they’re putting
18:58
into their own bank account and then
19:01
when they lose money that’s their
19:03
clients money that’s a lot it’s not
19:04
their money so you’ve got you can so you
19:06
can see why it’s very easy for people to
19:08
abuse this kind of thing I think it’s
19:12
fantastic the people who take risk
19:15
should be compensated for taking risk
19:19
but only if they are actually taking
19:22
risk themselves taking risk with other
19:24
people’s money you should not get
19:26
compensated for I’m sorry I did that the
19:29
Donald where that fits into economic
19:32
theory but taking risk with other
19:33
people’s money does not get rewarded
19:34
sadly though it does in this business
19:38
no but now
19:46
there was a moment when I thought when I
19:50
questioned why I was ever involved in
19:53
Wall Street goodbye I need it right now
19:56
on the double
19:57
hi that’s something I thought that
20:01
people would be more judicious and more
20:04
conservative in their lending and I was
20:06
involved in it and I thought well wait a
20:08
second these guys are out of control
20:09
totally the piece of software per se you
20:13
know that’s a sort of inanimate object
20:15
yes people used it but you know if
20:18
people had used it and put good
20:20
mortgages into it who never would have
20:21
caused a problem at all but when you put
20:24
you know mortgages that you have a
20:26
fairly high certainty that people cannot
20:29
repay and then half of all the mortgages
20:32
issued in a given year that type of
20:33
mortgages yes the industry has gotten
20:36
out of control
20:39
trillions of dollars a year basically
20:41
went through that model these bonds
20:46
within two and three years of being
20:47
issued went from triple-a to
20:50
unwrite I mean just catastrophic
20:51
collapse a lot of trading firms that
20:55
kept these the riskier pieces in their
20:58
portfolio saw them drop to next to
21:00
nothing and given the leverages the
21:02
amount of leverage under the amount that
21:03
the banks had borrowed they were
21:05
suddenly in a financial panic
21:14
Saturday after midnight still studying
21:17
I know long hours will not stop when I
21:20
enter a future job as a client
21:27
because I was primarily a technologist I
21:30
did not fully understand what was going
21:32
on I think part of my motivation
21:34
post-crash for becoming a quant is to
21:37
gain that understanding having been
21:39
through the personal experience of
21:41
seeing the destruction of my firm looked
21:45
again at my resume that I put out there
21:48
the same headhunter called again today
21:51
to see if I would like to take a job in
21:53
my former field as a financial
21:55
technologist I declined again of course
22:01
no invitation for a quanzhou Piett
22:13
people that are in the business right
22:15
now probably refuse to talk to the
22:17
public if they were to talk to the press
22:18
they would be fired
22:19
so only limited few people in the
22:22
business have the option of talking to
22:24
the press once you’re in the world right
22:28
I mean your phones are ringing you know
22:31
from the moment I woke up in the morning
22:32
and I remembered you know a lot of these
22:34
guys I do quite well they try to wake me
22:37
up 6 o’clock oh I thought you were
22:39
asleep you know can you be up till 11
22:41
o’clock
22:44
you have to be wired you have to be
22:47
alert every second you have to be
22:49
engaged and and you have to be perfect
22:52
and you have to be right all the time
22:54
the software fails people lose millions
22:57
or billions can’t happen you can’t you
23:00
can’t be wrong you have to be perfect it
23:01
says it’s a lot of stress my wife was in
23:07
the business with me
23:08
we both would wake up in the morning and
23:10
describe similar nightmares phones were
23:13
ringing we couldn’t answer them and then
23:15
we sort of grew out of that and we both
23:18
realized that we didn’t know what day of
23:21
the week was that’s right boy there’s
23:24
always videos person departures Barclays
23:27
dangerously Pleasant read the planet
23:30
record is brought to you by the Deaf
23:31
1.6% it wonder the up 1.2 percent
23:35
so is the CAC in Paris hey Joel boy
23:43
stirs
23:50
banking is completely lost touch with
23:53
its purpose its original purpose and is
23:56
now becoming dangerous
23:57
it used to be that when some of these
23:59
derivatives were first invented they
24:01
were to help your farmer for example
24:03
hedge the value of his crop so he was he
24:06
wasn’t speculating on the price of wheat
24:08
he was busy growing it now there are
24:12
more people trading these these
24:14
commodity derivatives and then are
24:15
actually involved in the production of
24:17
the commodity so which is completely
24:20
bizarre I know a lot and quite a lot of
24:24
people in this business who are feeling
24:27
a bit jaded now people are starting to
24:31
ask questions my nice friends I started
24:35
to ask questions about the role in
24:36
society you may be making lots of money
24:38
but are you is it something to tell your
24:40
grandchildren oh yeah I was a banker I
24:42
was there when I caused the the
24:46
2008-2009 crisis etc what are they
24:50
actually doing with their lives or their
24:52
or just moving this money around this
24:54
isn’t necessary such a business to be
24:56
proud of I think that’s probably
25:03
planning 30 35 pounds responsibility is
25:07
just not a one-way street when it’s
25:09
successful you’re responsible well you
25:10
can’t be unresponsible when the same
25:12
same item is is a failure you have to
25:15
have some type of responsibility and I
25:17
could say I wasn’t but I was involved I
25:21
made a comfortable very comfortable
25:23
living and and I was proud of what I had
25:28
done I never I myself never saw this
25:32
kind of debacle
25:38
pretty big muscle to see a little Wilder
25:43
this is a you know they’re yellow on the
25:46
inside different color a chef and the
25:50
city loves this wild taste I only do it
25:54
for one chef because if I did too many
25:56
there wouldn’t be enough you know the
25:59
model is Hippocratic oath I will
26:02
remember that I didn’t make the world
26:04
and it doesn’t satisfy my equations
26:06
that’s obviously that’s it that’s about
26:09
having a a mature appreciation that
26:13
whatever you do that the models are
26:15
never going to be perfect
26:16
I will never sacrifice reality for
26:18
elegance without explaining why I have
26:21
done so so it’s again it’s a competition
26:24
between the real world and the elegant
26:27
world of mathematics and sometimes the
26:28
real world is just dirty
26:31
nor will I give the people who use my
26:34
model false comfort about its accuracy
26:36
instead I will make explicit its
26:38
assumptions and oversights quanta are
26:41
asked the following by some trader they
26:43
say well look you’ve just measured the
26:45
risk in this portfolio it’s too big okay
26:48
to quant back to the drawing board
26:50
I want you redoing numbers and come up
26:52
with a smaller risk it doesn’t mean
26:55
change the portfolio it means change the
26:57
maths to make it look less risky people
27:00
can use the models to hide risk though I
27:06
will use models boldly to estimate value
27:08
I will not be overly impressed by
27:10
mathematics people make finance too
27:14
mathematical so mathematical that many
27:17
people who have to implement the models
27:19
don’t understand what’s going on and
27:21
once you have too much mathematics it’s
27:23
difficult to see where the mistakes are
27:25
I understand that my work may have
27:27
enormous effects on society and the
27:29
economy many of them beyond my
27:31
comprehension so this is a serious
27:34
business it’s what it’s saying the
27:37
quantitative finance banking has become
27:39
so enormous it’s it’s outstripped all
27:42
other all other businesses and really it
27:44
should just be a service for these other
27:46
businesses rather than we are everybody
27:49
is now working to
27:51
she service the banks move is what it
27:53
feels like it’s it’s completely changed
27:56
the nature of the world always banking
27:59
again so there’s a nice little picture
28:01
of the book of me and Emanuel Derman
28:06
with our with our Karl Marx beards on
28:08
because obviously it’s it’s basically
28:11
that the inspiration was a kind of
28:12
communist manifesto you take the
28:15
combined the communist manifesto with
28:17
the Hippocratic oath and this is what
28:19
you’ve got when I first came to the
28:21
field I was sort of optimistic about
28:23
using quantitative methods on the
28:24
financial markets and I don’t think
28:26
they’re useless but them but I’m trying
28:31
to think how to say it I don’t think you
28:32
can use quantitative methods to explain
28:34
markets either people like borer
28:37
Einstein or Schrodinger or Fineman
28:39
discovered things that um that seem to
28:42
be God’s true for most you know even if
28:44
they’re they’re not 100 percent accurate
28:45
and I’m I don’t think that’s possible in
28:48
finance I sort of think it’s an illusion
28:50
it’s the world the financial world and
28:53
their world of people is changing the
28:54
whole time history doesn’t repeat itself
28:57
whereas in physics history repeats
28:58
itself all the time you can do the same
29:00
experiment over and over again so I
29:02
don’t know somewhere somewhere somewhere
29:03
after five or six years in the field I
29:05
began to realize that it wasn’t the same
29:09
thing as doing physics in physics if you
29:11
wake up in the morning and think of an
29:13
equation or think of some theory you
29:16
actually have a small hope in hell that
29:18
you might actually be right but in
29:20
finance if you write down some set of
29:21
assumptions and you look at yourself
29:22
honestly it may be useful but you know
29:25
it’s not going to be right in some
29:27
absolute sense
29:30
because you’re dealing with people and
29:31
and people don’t work that way
29:43
another weekend trying to remember all
29:46
the parts of the city I haven’t seen
29:48
since I started the course longing to
29:51
visit art galleries eat out every night
29:53
to live the day at the library seem to
30:01
have more hours than the normal 12
30:06
studying alone with other people doing
30:08
the same thing I feel like a monk in a
30:11
monastery it’s peaceful the library is
30:14
quite old sometimes we have to cover the
30:17
air-conditioner with old Soviet
30:19
mathematical journals from the 60s
30:37
once I dreamt of doing pure science
30:40
working on rocket ships working at a
30:42
small start-up company
30:47
there has to be a way to be creative as
30:49
a quant – like designing new financial
30:51
products and the math to price them
30:59
do you think it’s always possible for
31:02
people to express a worry they have
31:05
about the things they’re building or
31:07
writing it’s possible people may not
31:09
listen to them in the end most of these
31:11
people are employees people don’t always
31:14
listen to you but yeah it’s possible to
31:16
do it and I think people should do it
31:17
and I think people who use the model
31:19
should should understand that but I
31:22
don’t honestly believe that the models
31:25
are responsible for what happened in the
31:28
world I think what’s just one for what
31:29
happened in the world is that they’ve
31:30
been an increasing number of they’ve
31:35
been an increasing number of crises
31:36
since 1990 financial crises in the world
31:38
since 1994 and every time people are
31:41
used to people are used to constant
31:44
growth and acceleration and every time
31:46
it slowed down the government stepped in
31:49
and tried to stimulate it again by
31:51
lowering interest rates just like
31:52
they’re doing now and so you get these
31:55
sort of a rise and a collapse and then
31:56
people don’t like the collapse so they
31:58
lend money cheaply enforcer’ rise again
32:00
and each time the oscillations get
32:02
bigger and bigger and they doing exactly
32:04
the same I have no idea what’s the right
32:06
thing to do but they’re doing exactly
32:07
the same thing now which is trying to
32:09
stimulate the economy every time it
32:11
looks like it stops growing fast
32:17
it shocks me that as a person who runs
32:20
many businesses that we can talk about
32:23
an economy shrinking by 1% is also
32:27
growing by 1% is fantastic this
32:31
difference of 2% how can that difference
32:34
in 2% have such a big impact on the
32:36
world around us 1% plus or minus in my
32:40
businesses I won’t notice the economist
32:42
sir they think that they’re scientists
32:45
so they come up with these what they
32:47
call laws they’re not laws laws of
32:51
gravity that’s a law anything that Isaac
32:54
Newton comes up with it is a law but
32:56
when the Economist comes up it’s just a
32:58
framework an idea it may work it may not
33:01
sometimes it’s that’s not a law but they
33:03
think their laws and so they build up
33:05
this whole edifice of theory based upon
33:09
this very shaky foundations and they get
33:11
all sorts of nonsense coming out of it
33:20
let’s ease off
33:25
I think that the natural world is
33:29
something you learn to appreciate
33:32
through a struggle in the financial
33:36
world
33:36
you know money is a man-made phenomenon
33:39
right it’s like a game right where you
33:41
make the rules well money is a game that
33:43
people make the rules for but out there
33:46
the day-to-day activity is not about
33:48
making money the day-to-day activity
33:50
trying to grow an animal a healthy
33:53
animal or a group of healthy atoms
33:55
that’s a big difference
34:04
that is beautiful
34:06
believe it or not that is beautiful the
34:08
beautiful thing about this is it says
34:09
that in the risk-neutral
34:11
I’ve got to keep emphasizing this is the
34:14
risk-neutral version when mu equals R if
34:18
it was the real world if this was the
34:20
real version it would have some dim UD
34:23
T’s in it
34:23
now let’s do some manipulations now some
34:25
of these manipulations are
34:26
straightforward six over zet in which
34:29
case there are no Zed’s in there at all
34:30
if you say to me the d by d big t
34:33
version because we want them we are
34:35
trying to find the stochastic
34:36
differential equation not for log said
34:39
so you’re going to end up with new minus
34:40
1/2 Sigma squared let me backtrack it a
34:43
wee bit here and we have a stochastic
34:47
differential equation for Z then we can
34:51
also write down stochastic differential
34:52
equation for F there was a very very
34:57
short period of time when conser in the
35:00
doghouse so to speak the people were
35:01
saying but all banking is changed
35:03
forever a Kwan serveth I’ve finished
35:06
there’ll be no more these credit
35:08
instruments and I said you know second
35:10
guys you really don’t know your history
35:11
you don’t know human nature this will
35:14
all blow over you know in a matter of
35:16
months because we’re back to the big
35:17
bonus is everything goes back to as it
35:21
was if people don’t complain now then it
35:25
serves them right when the next
35:26
financial crisis happens
35:31
twelve hours to go before the evening
35:33
classes start
35:35
I feel United with my classmates but the
35:38
enormous workload it’s actually the fees
35:42
that we’re trying to maximize right of
35:44
course we have to maximize returns we
35:47
have to do a good job in managing their
35:49
money otherwise where we’re going to do
35:51
pretty poorly at collecting those fees I
35:54
wanted to feel challenged again and
35:56
enrolled in a quant program
35:58
it cost me $60,000 tuition which means
36:03
more debt that I now have to take on the
36:07
incentive fee structure basically means
36:10
that maximizing the twr is like
36:13
maximizing fees think about that that’s
36:16
kind of tricky
36:18
this course is a year and a half
36:20
full-time one and a half years no salary
36:24
expenses living in downtown Manhattan
36:26
plus paying full-time tuition so no
36:30
alcohol for me not a drop at least till
36:33
the end of the first semester I can’t
36:35
afford to lose a day to a hangover
36:37
hardly any social life for the time
36:39
being
36:43
most of the other students are Asian or
36:46
East Europeans math is their first
36:48
language and our common language we
36:51
Americans are the minority maximizing
36:55
the number of times that we’re going to
36:56
penetrate the previous high-water mark
36:59
we’re actually maximizing incentive so
37:02
you can see that this this type of
37:04
optimization is very hedge fund like
37:07
does everybody get it so far
37:12
used to be the physicists were splitting
37:14
the atom whose splitting the atom these
37:15
days building bridges who is people
37:18
building bridges everybody wants to move
37:19
into this field scientific creativity is
37:23
becoming financial creativity which is
37:25
all of the bogus
37:39
Kwan’s are essential to modern banking
37:41
because so much of it is based upon new
37:44
techniques like the latest thing is the
37:46
algorithmic trading that high-frequency
37:47
trading for what you need math skills it
37:52
used to be you know historically you
37:53
just have like floor traders and brokers
37:55
you know screaming and shouting down on
37:58
the floor of exchanges and trading
37:59
stocks you know and the order came down
38:01
and they would run up and they sort of a
38:03
muscle there he added we’re a different
38:05
color jackets you know the classic
38:06
pictures we’ve we’ve all seen Matthew
38:09
Goldstein almost obscene list for PES
38:12
below Reuters do same from the ears to
38:15
the Kefauver format high-frequency
38:16
trading on cotton the reality is so much
38:20
of this doesn’t even take place there I
38:22
mean that’s becoming such a lesser part
38:24
of trading in what goes on it goes on in
38:26
the back rooms and it goes on in these
38:27
these modeling’s where these programs
38:29
are put together by computer geeks
38:31
basically so high-frequency trading is
38:33
just about taking all this data
38:35
analyzing very very rapidly and then
38:37
putting on trays that may last
38:38
milliseconds what worries me the most is
38:42
I was disturbed to hear that some firms
38:45
get faster access to the markets than
38:50
other people I forget what they call it
38:52
now but people get like a tenth of a
38:55
second advantage big firms which i think
38:57
is unfair hedge funds try and get the
39:00
black boxes as close to an exchange as
39:02
possible because it takes time for the
39:06
signal to get from the black box to the
39:09
exchange to buy or to sell now of course
39:11
that is dictated by the speed of
39:13
lightning
39:14
now we’re talking about trading at the
39:16
speed of light
39:19
the classic crash was the 87 the 19th of
39:25
October 1987 crash that happened within
39:27
a day all that the big move the 20% fall
39:30
and S&P 500 was within a day the next
39:33
crash could be within minutes so what is
39:36
the black box a black box is just
39:39
something that has it has inside some
39:41
kind of formula
39:43
maybe secret or maybe not that takes in
39:45
lots of data and the data might be stock
39:50
prices and might be other information
39:51
and it tells you what to trade what to
39:54
buy and sell and my favorite is is
40:00
Google search terms trading based on
40:04
what people are searching for it’s not a
40:13
black box in the sense that um you know
40:16
if you if you saw the algorithms you
40:18
could fit what you want you and me might
40:20
not be able to figure it out but but
40:21
wiser minds maybe could and computers
40:23
can certainly read it so it’s a black
40:25
box in a sense that it’s almost hard for
40:26
the human mind to get their arms or you
40:29
know wrap themselves around to really
40:30
understand what’s going on
40:36
and you know people have said for years
40:38
that Goldman itself is a black box we
40:41
don’t really know how it makes all this
40:42
money in the billions of dollars and you
40:44
know the big bonuses we hear about the
40:46
New York Stock Exchange building is big
40:47
facility out in New Jersey which is you
40:49
know right near in New York and and
40:51
basically it’s being built for
40:52
high-frequency traders so they can have
40:53
their equipment very close in a very can
40:56
you know tightly knit factory
40:58
essentially to do high-frequency trading
41:00
well who gets to have their server
41:02
where’s there going to be a lottery you
41:04
know you know does someone pay more to
41:06
get closer I mean it’s sort of a it’s
41:08
sort of absurd when you think about this
41:10
is what it’s come down to the
41:12
battleground is ultimately going to be
41:14
who has the most resources who can pay
41:17
the best salaries to hire the best
41:19
brains in reality we’re talking maybe
41:21
about a dozen or so really top players
41:22
you know and not everyone can be a
41:24
customer of goldman sachs not everyone
41:26
can be a customer of morgan stanley or
41:28
no berkeley also it does the the high
41:32
frequency trading means people more
41:33
concerned with the price of something
41:36
and not its value value means what it’s
41:39
really it’s really worth price is just
41:43
what people buy and sell for and if you
41:45
buy something now sell is second or two
41:49
later all you care about is the price
41:51
you sold it for is greater than the
41:52
price you bought it for it’s actual
41:54
value who cares it sort of flies in the
41:57
face of what we sort of think about what
41:59
what the what the markets are really
42:01
about the companies themselves almost
42:03
don’t matter what they do doesn’t matter
42:05
it’s just the fact which way their
42:07
stocks move is all that matters and
42:10
what’s sort of great thing about it that
42:13
I’ve I’ve seen from the standpoint is
42:15
the systemic risk that might be involved
42:16
it’s so much of this trading just takes
42:19
automatically and just takes place so
42:21
quickly that the the human element gets
42:24
more and more divorced from it I mean
42:25
the human beings are obviously
42:26
responsible for for writing the programs
42:29
but there’s no human being intercepting
42:31
between these trades and we saw this a
42:33
year ago with United Airlines there was
42:35
a false of bankruptcy rumor some wire
42:37
service inadvertently and transmitted an
42:40
old story about a UI
42:41
bankruptcy filing the problem is all
42:45
these news reading algorithms saw that
42:47
and immediately started sell sell sell
42:49
in a matter of minutes United Airlines
42:51
stock is cut in half that is clearly a
42:53
case where the computers have gone wild
42:59
banking is taking over the entire planet
43:01
and is having such a major impact on the
43:05
man in the street and it really should
43:07
not banking is supposed to be to take
43:09
money from people with too much to give
43:12
to people with too little who maybe want
43:14
to start a business if you’re a business
43:16
idea but that’s not what banking is
43:18
about anymore
43:19
banking is just about gambling on these
43:20
these numbers not realizing that behind
43:24
these numbers there are human beings
43:26
with jobs
43:34
there’s always been a joke about the New
43:37
York Stock Exchange becoming a museum at
43:38
some point and they’ll just have it for
43:40
like a show there and people running
43:42
around this is the way we used to trade
43:43
stocks you know isn’t it so quaint in
43:45
everything at the same time one can
43:58
argue though that if there’s this big
44:01
backlash in high-frequency trading
44:02
we may see revival to some form of human
44:05
element inside that people may say you
44:07
know as flawed as human beings are we
44:10
don’t want to give everything over to
44:11
the machines either
44:15
just walk past a crowded Wall Street
44:18
full of Chinese tourists asking me if
44:20
this was the actual stock exchange Wall
44:25
Street as a location is not any longer
44:28
what it was many banks moved their front
44:31
offices uptown and their back offices to
44:34
newer and cheaper spaces in New Jersey
44:37
now deutsche bank is the only major firm
44:40
left on Wall Street proper nearby is
44:43
Goldman Sachs
44:45
with no name on the door also about to
44:48
move there are almost no large firms
44:51
headquartered in the neighborhood that
44:53
was the cradle of American Finance only
44:56
the New York Stock Exchange remains its
44:59
facade one of the most iconic symbols of
45:01
global capitalism
45:19
I’m always trying to encourage young
45:21
people to do what I’m doing I mean it’s
45:23
a young person’s you know it’s pretty
45:25
some pretty physically intensive they
45:33
really haven’t grown that much I may not
45:39
make it to Christmas no I like a bigger
45:44
we sell a much we typically sell a much
45:46
bigger oyster right what do you find
45:48
more satisfying
45:50
well software is much more mental you
45:53
know the pleasure in the mental exertion
45:56
is pretty intense I get million lines of
45:58
software’s a lot – man you have it all
45:59
memorized right and there’s a pleasure
46:01
of like ask ruble Scrabble doing that
46:04
kind of word puzzle kind of thing uh
46:07
although it’s not that healthy you sit
46:09
in front of a machine you have the
46:10
terminal face effect you know it’s not
46:13
the same as this oh yeah this is pretty
46:15
uh not good I mean day like today pretty
46:19
idyllic right you’re just out in the
46:20
water a nice feeling bringing food and I
46:25
think we we still about 150,000 oysters
46:29
which is uh that’s $100,000 you know of
46:35
course I live off interest you know so I
46:39
don’t this is nice to have I make some
46:42
pocket money etc etc and the overhead
46:45
here is pretty small
46:49
you have to come to grips with nature
46:51
like I these these oysters should be
46:53
bigger every year the ones that I pick
46:55
in September and October are ready by
46:58
November why they aren’t I don’t know
47:00
and there’s nothing you can do about it
47:01
right we’re in software you can do
47:03
something about everything
47:04
you can modify you can get you can creat
47:07
make you know this virtual world you can
47:09
make what you want here you know you
47:12
have to live constrained by the real
47:16
world