JCL Blog

Goldman Sachs Looks Funny in a White Hat

Today in the Wall Street Journal, Goldman Sachs calls for more regulation and says everyone should support IEX, the new exchange started by Brad Katsuyama and featured in Flash Boys by Michael Lewis.

The article references in internal email that says:

"While we think that a regulatory response may be needed to address these market structure issues, it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes in our US dark pool, Sigma X."

It took forever, but it finally happend.  Back in 2010 I wrote this post saying that more regulation would not happen on Wall Street until the Wall Street guys decided it would be good for them.  At the time I thought that they would want it because individual investors would be leaving the market.  Any maybe that is why they are calling for it now.

Another potential motivation comes out in Flash Boys however.  Goldman Sachs is way behind the other high frequency traders.  This could be because they cannot get or keep good programming tallent -- because they got the FBI to jail one former employee.  They also show their neaderthal tendencies when they refuse to participate in the open source community and proclaim all open source code to be proprietary to them.  So they were losing to the other scammers -- what a perfect time to call for more regulation.

Book Review: Flash Boys by Michael Lewis

I met Michael Lewis when he was on his The Big Short book tour and I asked him why John Gutfruend would meet with him at all?  You may recall that Gutfruend was the guy that took Solomon Brothers public in the '80s, which was like giving all of the Wall Street piranhas steroids and testosterone supplements.  At the time Michael Lewis worked at Solomon Brothers and he was so affected by the way the industry gleefully devoured its own customers that he left the firm and wrote Liar's Poker.  Thirty years later, and it would take at least that long for anyone to get over begin skewered the way John Gutfruend was in Liar's Poker, Michael Lewis called him up and asked him to lunch!  And he went!  And Michael Lewis wrote all about it in The Big Short.  

Anyway, the answer Michael Lewis gave me was illuminating, he said (and I am paraphrasing) that John Gutfruend was incapable of understanding how people outside of Wall Street perceived him and his industry.  The converse to his incapacity, is the ability to understand what is going on inside an industry when viewed from the outside.  It is just that understanding that makes Michael Lewis so fun to read.  Time and again he pulls back the curtain and reveals the inner workings of very complicated, mostly financial, businesses in a way that educates and entertains all at once.  Clearly, I am a Michael Lewis fan.  I eagerly anticipated the release of Flash Boys last week and read it right away.  So if you don't like him or you want a balanced review, just skip to the reviews I linked to at Slate or The Guardian.  

This time around the fun of reading the book was followed up by the fun of reading all of his detractors right after.  The Wall Street Journal is on the attack and every day comes out with another effort to discredit Lewis. On April 2 they published a piece by money managers saying that your money is safe (with them!), and that Lewis is pumping up IEX for personal gain, and on 4/3 the editorial board said Lewis was just selling books, and yesterday they tried to get the blame to stick to the regulators.  (see my twitter feed for links to all of these articles)

Felix Salmon on Slate did a pretty good job, but dismisses the book as just more of the same from Michael Lewis.  John Naughton at The Guardian delivered the most balanced review agreeing that in fact front running is bad and manages not to get sucked into the argument that we should be happy that there is less corruption on Wall Street now than there used to be.

Just about every Lewis detractor takes the angle that high frequency traders do front run the market (make risk free return by profiting from the prior knowledge of investor's intent in the time between when they know what the investor wants, and the time the trade is placed), but that they front run less than they used to.  Good point.  It is getting harder and harder to skim money off of each trade, but at the same time it is getting easier and easier to do so systematically with the aid of computers.  Who knows if the aggregate skimming is more or less than before.

I cannot speak for Michael Lewis, but if I had to guess I would say he is mostly aiming to again expose the culture of Wall Street and how everyone considers the customer a fool and easy prey.  Just like when he was at Solomon Brothers in the 80s.  

Making Victims As Opportunity Slips Away

Imagine a father and son talking about a poor report card.  The son says the teacher doesn't like him.  The father says that is just not fair.  So the son doesn't learn and improve from the report card experience and the next report card is worse.  The teacher or the system is blamed again and soon the son drops out.  

This scenario is repeated many times in our education system.  In our state about 1 in 4 students that start high school never finish.  I propose that a meaningful number don't finish because of this negative reinforcement loop.  Clearly, even if the father is right and the teacher has treated the student unfairly, the victim is the student.  We cannot blame this failure on the student.  By the time we get done with that he has already dropped out and is well on his way to a low income future.

Michael Lewis wrote a book a few years back about how this can happen at the other end of the economic spectrum.  He went back to his privileged New Orleans high school to interview the baseball coach, because, like many coaches, this one was tough on the kids.  In the 70's, when Michael Lewis was there, that was how it worked, these days, the parents were trying to have the coach removed.

If they could not get the coach removed, these lawyers and doctors wanted to intimidate the coach into telling their sons that they were better athletes than they were.  They wanted the coach to give more playing time, not run the guys so hard, you know the drill.

Those student athletes are the victims just like the high school drop outs.  Sure those rich kids are probably going to be just fine, but think of the missed opportunity for life shaping lessons.

Lawyers are particularly good at making victims like this.  In the now famous McDonald's vs Liebeck case, where Liebeck was awarded over $3 million to compensate for burns she suffered when she spilled her coffee in her lap.  I think it is a shame that she was burned by her coffee spill.  However, the real damage came later when she was persuaded to sue McDonalds.  The case went on for two and a half years, and then was negotiated down after the award to something less than $600,000.  Sure that is a lot of money, but Leibeck was 79 years old at the time of the incident.  She came to believe that she was a victim and she turned two or three years of her life over to that way of thinking.  

Imagine all of the people that choose to enter into the aggravation of such a fight and lose years of their lives and in the end, many don't even win any money!

Next lawyers will be telling their sons not to worry about their schoolwork because they can just sue the school instead.  

Here is the book Coach by Michael Lewis should you be interested in reading it.

Under the Cover of Darkness


People will do the darndest things when they think no one is watching.  Just think Tom Cruise in that scene from Risky Business.  Michael Lewis wrote a whole book about the crazy antics of people when ushered unsupervised into a dark room full of money (Boomerang).  

Operating in the light of day however is a whole different thing as we found out with all of those cables exposed by Bradley Manning and Wikileaks.  What a surprise it must have been for all of those people that thought they could do whatever they wanted and no one would find out.  I think it is safe to say that no matter your politics, those cables cut deeply into the public opinion of the people sending them.

Under the cover of darkness, people convince themselves that they are right even while pursuing the most evil schemes.  I think this contributes to the negative opinion of lawyers -- who are always trying to make things even darker with confidential deals.  This is getting harder and harder to do in the age of the web and the resulting free flow of information.  Just look at the hole AT&T is digging for itself on the whole unlimited bandwidth business.

I admit that evil is a strong word for anything having to do with AT&T's billing practices.  Unnecessary too because there are so many examples of people behaving in truly evil ways.  The governments of North Korea, China, Syria, Egypt, Pakistan, and just about all of the rest of the middle east, most of Africa, and Russia depend heavily on the cover of darkness when they do what they do to the people they oppress.

Whether or not you agree with the intentions of the Kony 2012 campaign, anyone shining a light on bad behavior is doing good work.  (here is a post about Bono's reaction to Kony 2012).

When I was in middle school, my family hosted two young men that had escaped from Uganda.  They lived with us for a while as they were getting back on their feet after having run for their lives from Idi Amin's police.  Ironically, they escaped under the cover of darkness.


Tracking Every Pitch

There were many great parts to the book and movie Moneyball.  If you have not either read it or seen it – you should.  In addition to the great storytelling by Michael Lewis, the main theme resonates in our business and just about everywhere:  we now have the capability to track everything.  This may not seem like a big jump from the prior method of measurement by sampling, but it is a big big deal.  Sampling is the Nielsen ratings: where a small population of representative viewers track their TV habits and the results are applied to the total population.  The tracking everything equivalent is having every single set top box send in data for every single viewer.  The story in Moneyball helps to demonstrate the difference.  To know from sampling that a pitcher behind in the count is 25% more likely to throw a fast ball than anything else – could help you.  If you know from measuring everything that this particular pitcher is more likely to throw a fastball on the next pitch because you have a complete database of every pitch he has thrown in the past 5 seasons – well, that is different.

For the past decade, businesses have been making this same transition.  From sampling data about their customers to tracking everything.  The leaders in this revolution will win.  The businesses that understand this will jump very far ahead of their competitors.  The businesses that do not understand this will say that a statistically significant sample is the same as a complete database and will not go to the effort to track everything.  They will lose.  Some businesses, like the grocery stores, are tracking our every purchase, but I just don’t think they know what they have in the data.  Here is my post from last year on that topic. 

Governments will be in a unique position to capitalize on the data they collect.  A dramatic example of that is happening right here in the Seattle area with the tolls starting on the 520 bridge.  I can go online and see a record of every time my car has gone across the bridge.  Imagine the possibilities here!  Not only could parents or insurance companies learn about driving patterns, but some super smart PHD is going to figure out how to match up drivers for ride sharing – by evaluating the driving patters in the data.  Or I could sign up for a service that sends my family a text when my car passes the tolling camera – that calculates what time I will be home based on the other traffic data.

In our marketing services business, we started tracking every single interaction about five years ago.  Before that, the proprietary closed databases in many of our systems aggregated data – because storage space in the database was more valuable than individual activity records.  Sounds hard to believe given the current environment, but these old databases actually wrote over themselves every night – just to save hard disk space.  As a result we have pretty good predictive data on what will happen if we email an email address, or call a phone number, based on our past experience.  Using that experience data, we direct resources to the highest value activities first.  It is a game changing practice. 

Privacy experts say that this kind of customer data collection is an invasion and should be made illegal.  There definitely are steps that should be taken to protect the consumer and protect the data.  Increasingly however, customers are demanding that the businesses that serve them know their stuff.  Today there are many simple requests that I want in this area.  I want Amazon to tell me if I am buying a book for the second time.  I want the credit card department at my bank to realize that I already have a credit card and to stop calling me with new credit card offers.  I want Starbucks to know my order before I order it.  I want Delta airlines to know what seats l have sat in.  This is just the beginning.

Book Review: Boomerang by Michael Lewis

Michael Lewis is one of my favorite authors. His magic is the ability to rapidly become an insider on a subject, without losing the perspective of an outsider.  He is an Earthling that sees the world through the eyes of a Martian.  Or a bond trader that sees Wall Street through the eyes of main street.  His latest work, Boomerang, takes us on a tour of what he is calling the new third world.  This is great irony capitalizing on the recent fashion of using the term “developing nation” instead of the term “third world”.  It is no longer correct to count the worlds.  Counting or not, we have leap frogged in the backward direction - over the developing nations.  His tour of countries worse off than the third world starts in Iceland, and goes to Ireland, Greece, Spain, Germany, and well, California. 

The recurring theme is examining what people do when told they are in a room full of money and:  “The lights are out, you can do whatever you want to do and no one will ever know.” It’s a great mental picture that takes all of a half second to absorb.  Lewis makes it even more powerful by applying it to nations.  “Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish…”

The section on Germany was particularly interesting as Lewis investigated that culture’s fascination with human waste, which made them particularly vulnerable to the toxic waste products being packaged by our people on Wall Street.  It will be a long time before anybody anywhere in the world ever trusts Americans again.  WMD + Abu Ghraib + Goldman Sachs = Americans are liars. Our reputation could not be repaired even if we had the money to do another Marshall Plan.  Looks like we are going to be sewing Canadian flags on our backpacks for many years to come.

There have been many great reviews of the book.  Here are links to a few of them:

NY Times:

The Guardian:  


Washington Post

Seeking Alpha:  

As I do with many books, I listened to this one on Audible.  It was another great production, this time read by Dylan Baker.

Conditions for Real Change

David Brooks posted an interesting piece this week showing how we are in an unusual situation with both parties losing favor with the voters.

We can see our nation getting more polarized every day, but this is the first time I have thought about how the polarization is hurting both sides.

Here is an interesting poll showing one example of how the people fueling the fire are impacting their constituents:  Fox News viewers less informed than people that consume no news at all.

Add to this the way the the Occupiers are shining a bright light on inequality and the growing number of people that are giving up hope of earning a living, and we could be approaching a time where real change could happen.  I am not talking about the kind of real change that is easy, measured, and pleasant.  

I am talking about the kind of change that Michael Lewis chronicles in his new book Boomerang.  Here is the part about what is happening in Vallejo CA, and could happen to other parts of our country.

Meanwhile those jokers in DC are arguing over who is to blame for the demise of the Supercommittee...brother.

Book Review: The Big Short by Michael Lewis

Michael Lewis just put out another book about Wall Street - the topic that originally made him famous when he wrote Liars Poker in the '80s.  Readers of this blog know that I am already a fan (see Moneyball and The Home Game) and The Big Short does not disappoint.  

Knowing that I am not going to get another new work by this author for a year or so, I did my best to pace myself, but it was hopeless and three days later I was done.  Even though I am familiar with the story (see Too Big to Fail) I was not tempted even once to skim.

In a strange way the book restored some of my confidence in our free market system because the people that the author chooses to follow in the book are small time outsiders who were able to figure out very early what was going to happen in the market for mortgage bonds. Simultaneously however, Lewis reinforced my view that the Wall Street game is rigged and only a fools expose their money to parasites like Goldman Sachs. 

Here are my take aways:

  1.  The people at Goldman Sachs really are the best and the brightest -- and they really are amoral.  They invented the complex instruments that caused the problem, made the fees, and promptly offloaded the risks to others -- like AIG.  They did their very best to conceal the truth by influencing everyone from the ratings agencies to the government -- which permitted the problem to get very big before it blew up.  I can't help but wonder how many other times the economy got wobbly and was prevented from behaving like a self correcting rational market because Goldman and others like them were madly pulling all of the levers to maximize their winnings.
  2. Our government has no idea what to do about it.  Clearly the regulators are being deceived and worse yet they don't know it.  They were nowhere to be found while Bear Stearns, Lehman Bros, AIG, and others were placing gargantuan bets with other people's money and, amazingly, enough of their own money to blow themselves up.  When it came time to assess the situation and decide about TARP there was not a single government official that really knew what was going on.
  3. The author makes an effort to get to a root cause and drills to the Solomon Brothers conversion from a private company to a public company and therefore shifting the risk of their activities away from themselves and to their shareholders.  Everyone of John Gutfreund's peers considered it a betrayal at the time, but they all eventually followed suit.  Once they had suckered others to bear the risk -- they cranked the compensation models in their own favor and the RTC/Junk Bond blow up, the Long Term Capital Management blow up, the latest melt down, and the next catastrophe were set in motion.

That is right, we have not fixed a thing and just as the insiders are on their way to their next really big payday, the rest of the country is on its way to another "surprise" on Wall Street.  If you have a hard time believing this, check out this article in the Guardian about David Tepper.  Tepper decided he was not being fairly compensated at Goldman Sachs -- so he started Appaloosa Management that bet big on the government bailout of the banks.  His fund is up $4.5 billion and he gets $2.5 billion of it.  I wonder what is going to happen when the size of the problems created on Wall Street exceeds the financial capacity of our government to pay the bill.  Will we call that financial armageddon?

Here are some other reviews:

The New York Times

The Washington Post


Here is a link to get the book on Amazon.com.



Book Review: Moneyball by Michael Lewis

Micheal Lewis continues to be one of my favorite non fiction authors. His book Moneyball is not new (2004) but I just got around to reading it. A film based on the book starring Brad Pitt got sidelined in mid last year and aparently the producer is looking for ways to cut the budget. Funny thing, because the book is all about how the Oakland A's general manager, Billy Beane, did more with less money than anyone else -- so maybe Columbia Pictures should call him!

There are too many great stories in the book to recount and the creativity and new thinking they applied to baseball can clearly be instructional for business. Here are my take aways:

  • New Ideas Can Work: Baseball has been around for a long time and has tradition and momentum enough to stop even the most persistent innovator. If these guys could change the thinking in baseball, the sky is the limit for people that want to innovate in business.
  • New Blood: Billy Beane brought in people from the outside. The less experience they had in Baseball the better.
  • Measure Everything: Even if you don't know what you are going to do with the numbers. Question all of the existing numbers and figure out new ways to collect data on activities.
  • Don't be Rational: Eventually the outsiders figured out how to reverse engineer runs. They tinkered and tinkered until they got a formula that they thought would work and then they applied it to the past to test it. They were able to suspend their own rational thinking long enough to try things that on the surface just did not make sense.
  • Don't Let the Facts Turn Into Excuses: The A's knew they had no money, if you can call a $40 Million payroll no money, and they got over it and moved on to finding solutions. So at the same time they faced the facts (constrained budget), they were not willing to use the facts to lower their expectations of themselves.

Here are some other reviews:


NY Times 

Here is a link to the book on Amazon.

Book Review: Home Game by Michael Lewis

I have liked Michael Lewis ever since Liar's Poker, and he did not disappoint in the New New Thing either. Moneyball is still on my list. I just finished "Home Game" and it was great. It is an easy one or two night read as long as you don't stop too often and read passages to your spouse like I found myself doing.

The opening story set at a resort pool in Bermuda was so hilarious that we (unintentionally) woke up the kids even though we were trying to keep a lid on it. I admire writers who can tell the funny stories and also just lay out the unflattering stuff too.

Micheal Lewis has quite a talent. I am so glad he did not get sucked into wall street all those years ago.

Here is a link to the book on Amazon