Tuesday, March 20, 2012

Finance's Unholy Trinity of Permawar: Goldman, Bloomberg, and the CME

Last week, just as I was completing an explanation of how financial trading firms are the biggest beneficiaries of our system of "permawar," the financial firm sitting at the pinnacle of the industry woke up to find one of its young stars poking it in the eye. "It makes me ill how callously people talk about ripping their clients off," wrote Greg Smith, in a public letter of resignation that ran in the New York Times on Wednesday, March 14, 2012, entitled, "Why I Am Leaving Goldman Sachs."

Critics of Goldman Sachs surely enjoyed seeing the firm get its comeuppance, though on close reading it became clear that Smith wasn't really criticizing what Goldman stands for, just the fact that it had gotten a bit off course. "Make the client the focal point of your business again," Smith wrote. The problem, according to Smith, is that "people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals."

When I stopped to think about this, I realized that Smith wasn't criticizing the underlying problem that I see - the reliance of financial trading firms on "vol" (volatility) for profits, and their resultant addiction to global strife. In Smith's (and Smith's idealized Goldman's) worldview, it's "us and our client against the world," even if the world is going down the tubes.

And when you realize that, you realize that once a firm's credo becomes "anything for the client, and the rest of the world be damned," it's only a short step to saying, "And, while we're at it, screw the client, too!"

The really difficult thing is a for a firm -- hell, for a person! -- to take a step back and say, "What needs to be done here to make the world a better place? What's the right thing for society?" It is the lack of this behavior that forms the basis of permawar.

I found it notable that Mayor Bloomberg made a consolation call on Goldman after its diem horribilis. This, of course, is the Mayor Bloomberg who made his fortune through the introduction of the "Bloomberg terminal" into financial trading operations -- an analytic tool that revolutionized the field of trading by giving everybody the tools to profit from the "vol"! (The Bloomberg terminal didn't do anything that a first year finance student didn't already know how to do with a slide rule and graph paper; it just did it instantaneously, fueling an entire industry of trading in risk instruments.)

And that's what gives Bloomberg pride of place up alongside Goldman Sachs in the permawar pantheon: he made his fortune on the "vol." (As one observer commented, "These are his people, and he felt their pain.") Only one other entity can even come close to these two, and it's the exchange that made risk hedges into the most highly tradeable instruments possible - namely, the Chicago Mercantile Exchange (CME), with its interest rate futures and other, increasingly exotic, instruments. Make no mistake: without interest rate futures, the CME would still be a backwater, relying on trades in milk and pork bellies; it wouldn't be a terribly interesting place, and it certainly wouldn't have gone public a few years ago! Interest rate futures are a way for an enormous number of people to play the "vol" connected to our government's military-budget-driven debt and world instability.

If you have any doubt about the connection between permawar and this unholy trinity -- Goldman, Bloomberg, and the CME -- ask yourself these questions:
  • Do you think Goldman Sachs' proprietary trading operations would be more or less profitable if there wasn't a war leading the news headlines every day and roiling the markets?
  • If peace broke out in the Middle East, would that make oil prices more or less predictable? What would that do to trading profits related to energy and all the other downstream aspects of the world economy, including interest rates?
  • If U.S. military spending was brought under control, would that make U.S. Treasury borrowing more or less difficult? Would this make interest rates more or less stable? Would this lead to more or less trading in interest rate futures?

Let's face it - it would be a pretty boring -- and unprofitable! -- world without U.S. war-making.

Still wondering if the connection between permawar and the unholy trinity is real? For the doubters among you, consider the magnitude of their political contributions:

That's millions every year from just these three entities. And it's all going to solidify the power of the people who have the final say-so to keep permawar, well, permanent! (Unless, of course, you imagine they are making those contributions in order to urge politicians to reduce defense spending and end U.S. military adventures abroad . . . .)

It's important to recognize that Goldman, Bloomberg, and the CME -- and ALL of the entities and individuals that profit from the "vol" -- can live with more or less taxation, or more or less regulation, or more or less business-friendly legislation. The one thing they can't live with? Peace . . . .
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Goldman trading area from Business Insider
Bloomberg terminal from Quora
CME traders from The Guardian ("Traders on the Chicago Mercantile Exchange trading floor react to the latest announcement from the US Federal Reserve.")

Related posts

More than anyone else, the beneficiaries of permawar are the politicians who thrive on the power to make and control wars. The number one prime beneficiary is the President, as well as presidential aspirants. But it doesn't end there . . . .

(See J'ACCUSE: The Beneficiaries of Permawar )

To many people, the relationship between finance and war is obvious: banks finance the military-industrial complex. In my opinion, however, that misses the point. Banks finance everything (in our society); so why, in particular is it so desirable to have all these ongoing wars?

(See Why Permawar? It's All About the "Vol" .... )