Saturday, August 29, 2009

"The Smartest Goodfellas In The Room" - Part III

It was a bright August Friday afternoon as the Made Men of Goldman
Sachs filed once more into the 30th-floor auditorium.

Only this time there wasn't fear - rather, there were smiles all around.

The fellas were swapping jokes - and passing out real Cuban cigars - as
they waited to be called inside.

It had been a remarkable first half of the year for the Goldman fellas.
While every other major investment bank on Wall Street was still struggling,
things at Goldman Sachs had never looked better. The firm had just booked
over 3 billion dollars in second -quarter profits, and the rest of the year was
shaping up to be even better.

And when the word was passed that some of the bonus money would be
passed out NOW, well, that just meant that Christmas would come
twice this year.

Then, the doors opened, and in the same pre-arranged order, the
Made Men filed in - the soldiers and button men first, then the underbosses.

Next, the Caporegimes filed in to their accustomed places in the Front Row.

And then, all stood and applauded as the Dons filed in and took their places
on the stage behind the speaker's rostrum.

And finall, the house lights darkened, and under a rock star's spotlight,
Capo Di Tutti Capi Lloyd Blankfein strode to the podium to thunderous whistles
and applause.

The Man Who Saved Goldman Sachs acknowledged the applause, and then
waved his hands in the air for seats and silence and began speaking:

"Goodfellas!!! (More cheers and Whistles)"

"Gentlemen- we did it! Thanks to the efforts of everyone here, Goldman
Sachs has not only been saved, but is now stronger than ever.
And here's the best part !!"

Just then, from off the stage, two armed soldiers emerged from the stage wings
wheeling an enormous strongbox.

"Fellas" Blankfein continued, " Just as promised, I told you that there
would be rewards if we all stuck together. Now, earlier today, you were notified
that your stock bonuses were credited to your house accounts and
your cash bonuses were directly deposited. But this here is a little
something extra from your Godfather and your Dons. Together,
we are kicking in some of our bonus money to give you guys an extra cash reward. Now it varies according to your longevity and your contribution of
course, but the smallest envelope we are handing out is about 150K
to you newest fellas. Most of you will get substantially more than that. "

"All Together" ...Blankfein tapped the box for emphasis "There's over
Two Hundred Million in Cash in this box, which we are gonna distribute to you
right now" (Thunderous Cheers and Applause).

"But first, before we get to the important events, I just want to go over a few
of the things that I believe made this possible. First of all, regardless of
your functional area of responsibility, it's because of the
remarkable intelligence and work ethic of you guys. Some of you fellas were
really hauled over the coals in the Press. But you manned up and didn't say
anything, as I wanted. I'm very pleased to see that we still have discipline
here in Nostra Famiglia.

Now, because of our discipline and hard work, we also got lucky. People who
are disciplined and stay focused usually get that way. That discipline made the
market's volatility work for us rather than against us. When times are volatile,
that usually means you can keep the bid/ask margins high - but only if you keep
a sharp watch on the trading desk. Our new high frequency trading programs
have helped - and we all really have to thank Don Mighele for the way in which
he has made the HFT programs such a big part of all our lines of business - but
you have to know what to do with them to make it work. You proprietary traders
have done an outstanding job with the tools we've given you - in equities,
fixed-income, Treasuries, options, everything. We thank you.

" Another thing that helped was reduced competition. Bear Stearns'
and Lehman's disappearance really helped us. Fewer players dividing a
bigger pie.And we've been able to re-sell our clients on the unique value
proposition of GS compared with the other guys. Our clients who are
players and not putzes recognize this. That's why right now we have more
exclusive client relationships than we've ever had. They want an institution
that knows what it's doing. They want us to be profitable.

" Portfolio re-balancing also helped. Everyone's flying to quality now.
Everyone knows that we not only saw this crisis coming, but that we
acted upon it. That means people trust us. The Hedge Fund problems are a
huge help in this regard. They take one look at them and then look at us.
We're picking up by far the lion's share of Hedge Fund redemptions right now.
That's just huge for our Institutional Advisory business. The more the Hedge
Funds shrink - the better we do. Of course, I better say this before Don Carlo
has a heart attack - this doesn't apply to our hedge funds - they're doing
better than ever, right Carlo?"

Don Carlo spoke quietly, in Italian : "Padrino, our Hedge Fund partners
value our guidance as never before. So loyal are they that many of them
even contributed to the celebration we are having this day. "

The Capo Di Tutti Capi continued; "Thanks Carl. Tell your clients we value
their business and thanks to the good work of these guys here, they'll continue
to prosper.

" Another thing that has really helped us is the fact that the 10yr/2yr spread on
Treasuries has been over 200bp for almost two quarters. Since your bond trading
desk almost always has a long bias, for us, at the volumes we do, that's a built-in
profit we don't have to work that hard for. Another thing that helps us is the
preferential access at the discount window as both a Bank Holding Company
and an SLP for the market. Virtually free money. Between 20-30bp.
As much as we want.

" What this has really meant to us is that we've been able to triple our VAR
at any time in our trading operations. In fact,as we speak right now,
we don't have anything at risk for all practical purposes. We're 100%
leveraged - we've been able to use this facility in place of our own capital.
Of course, when we trade, we never lose - so it's perfectly safe.

" And that's because of our High-Frequency Trading initiatives, which
we share with a select few of Don Carlo's hedge fund guys. We owe a lot to
Don Mighele and Caporegime Chen - our very first Asian Made Guy - who
put this together. And thanks to Don Paolo and of course our esteemed
Don Enrico, we've located the brains of the system right at the
NYSE's computer facility. What you also need to know is that ever since
we placed our system there, the security for the entire NYSE IT facility
has been placed under the control of Don Giovanni and his men.

" And that's why the Sergei Aleynikov affair is not what it seemed. I can't
tell you everything I know, but I can tell you this - he would have had about
as much chance of stealing any code from us as I would have of stealing the
nuclear war codes from the Pentagon. What this was was a setup. There's
a certain organization in Chicago that wanted to get their hands on the code
that generates our trading algorithms - to try to do what we do. We of course
knew all about them, because they made the mistake of approaching Sergei
-our Made Guy. We decided to play along and really try to burn these guys.
But somehow, they got wind of it. We had to make it look as if Sergei had
stolen the computer code we had given him to plant. But it'll blow over -
Sergei is out on bond-posted by us-and he's enjoying a nice vacation with his
girlfriend safely out of the country. Oh, and by the way, he is getting
a nice bonus and we're letting him keep the $1.4 million those Chicago
guys fronted him for his trouble.

" Another spinoff from our High Frequency Trading Program is that we have
been able to explore new marketing initiatives in our Advisory space. Now,
we're not allowed to give different advice regarding any specific security to
different clients, especially published advice. But what we can do is adjust the
timing. So, when our analysts come up with a recommendation on any specific
item, we "huddle up" and make sure it goes first to our traders and Don Carlo's
hedge fund guys for exploitation. Then, maybe just a few minutes later, to those
clients a bit further down the food chain. An hour later, to our institutional
subscribers, and so on down the line. By the end of the day, when the newsletter
is published on the subscriber website, the same advice has been given out to
everyone - just that some guys got it sooner than others. HFT makes it
all possible. By the time the news appears on the ticker or on the
news networks, we're already covered. And everybody's happy - that's
the key. Everyone who subscribes to our advisory services thinks they're
getting the inside information that the HFT Magic Box has given us.

" It's not magic - the fundamentals of trading and security analysis haven't
changed in half a century. The mechanical and statistical methods are
all the same. A great trader fifty years ago would be an even better trader
today, just because of better and faster tools. That's why I get so tired of people
saying that HFT is like being in a poker game where we get to sit next
to the dealer and see everyone else's cards before they do. You still have to
know how to play poker. HFT sometimes tells us not to even get in the
game at all because the "pot", if you will, isn't large enough to interest us.

" The big thing that HFT does do for us is let us make market
more cost-effectively. The market as a whole relies on us and a few of our
competitors to keep orderly markets in thousands of different equity issues.
Plus, we are required to have the backup liquidity to ensure that things
run smoothly. Especially now that the markets are geared to short-term
trading rather than pure speculation or investment. Keeping everything in line
costs us a great deal of money; and the cost reductions and efficiencies we've
been able to institute because of HFT far outweigh any money we might have
made by "front-running" someone. The other thing that HFT lets us do is to
arbitrage the fees the exchanges pay us to trade on their exchange.
The fees are small - a fraction of a basis point - but it lets us shop for the
best deal whenever we place an order either for a client or for our own
account in real time. And when you deal with the volumes we do, it's
significant - it's just one reason why we make money trading
when others don't.

" Timing and efficiency are everything. It gets back to what I've always
preached - when you take a risk, you should make money. When you
reduce a risk, you should make money. The key is to be able to do
both - and that takes timing, positioning, and influence with the
right people in the right places.

" Now fellas, I've kept you here longer than I intended to. If you'll just form
a line, in the aisle, Don Dominic and his guys are gonna pass out the envelopes.
Now just let me re-iterate, we're being watched - so go out and have a good time,
but keep it discreet. I don't want no scenes out of Entourage with
twenty Goldman guys in a strip club at once showering $100 bills on strippers.
Some of the old Dons and some of our highly-placed friends elsewhere are very
moral, home-family-church type guys. They don't take kindly to that sort of
thing at all. With so many people out of work, and Main Street USA losing
its ass, we're the ugly face of Corporate America to a lot of people.
Keep that in mind - so keep a low profile whatever you do.

" That goes for conspicuous consumption too - I better not see a fleet
of Ferraris and Lamborghinis in the parking garages around here.
Besides, I don't think you need a car at all here in Manhattan; our in-house
car service is discreet, secure, and inexpensive. I use it myself.
And if it's good enough for me, it should be good enough for you.

" So, finally, thanks to all of you for your good work, enjoy your bonuses,
spend or invest them wisely, and have a great weekend - you've earned it. "

And to thunderous cheers, whistles and applause, the Capo Di Tutti Capi
left the room.

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