Ben, hope is not a trading strategy.

And notice what isn’t there. The Fed is not charged with distorting natural market pricing mechanisms to the point of perverting risk. It is not asked to promote ever increasing stock prices. It does not have to guarantee that property prices are rising. It is not asked to manipulate bond, equity or commodity markets. It is not asked to seek the profitability of ‘too big to fail/prosecute’ firms on Wall Street, or to promote their interests. It is certainly not asked to indulge in secret and complex financial transactions with no clear benefit to the wider public.

Yet evidence that the Fed may have lost touch with its mandate are mounting. Sometimes it’s the little things. The Fed is reported to have leaked the minutes of its FOMC meeting to a number of major banks, including JP Morgan, Goldman Sachs, Citigroup, Barclays and others. Within hours of receiving the data, Goldman Sachs issued a research note suggesting that clients short gold. It remains to be seen whether that note was based on the leaked Fed information, but Congressmen Alan Grayson and Daryl Issa are rightly seeking immediate clarification of the issue. Whatever the outcome of those investigations – and frankly the Fed’s record in this respect does not generate much confidence – it’s astonishingly inappropriate for such data to be transmitted to major Wall Street firms ahead of the market more generally.

But it’s the bigger things too. I’ve talked about the matter before on these pages, but one of the biggest scandals in recent American history should have been the way that, during the most turbulent phase of the current financial crisis, the Fed – secretly and without the knowledge or consent of Congress – placed vast amounts of taxpayer money at risk in the support of numerous banks, many of them foreign. The idea that unelected officials should dispose of more than a trillion dollars of your money without Congress even knowing is, to my mind, a greater abuse of democracy than the Watergate scandal. Watergate was bad enough, but it didn’t involve a trillion dollars.

And yet, I suspect that there are worse things yet to be uncovered. Suspicious indicators abound.

For one thing, there’s the grotesque leverage being operated by the Federal Reserve Banks. The New York Fed has seen its leverage ratio rise in excess of 100:1. Those are the kind of numbers that make Lehman look prudent. Heck, those are the kind of numbers that make Greece look safe.

Then too, there’s the appalling conflicts of interest that are built into the system. The board of directors of the Federal Reserve banks are largely composed of officers of the very banks the Fed is there to supervise. So when crisis struck Wall Street, how was it a surprise that the Fed – supervised and directed by Wall Street bankers – was so fast to ride to the rescue?

And look too at the rise and rise of the stock market. Europe is in a slo-mo financial crisis. Japan (a country more highly indebted than Greece) has decided to devalue its currency and double up on its money supply in a massively risky gamble to get out of trouble. America is seeing weak growth and a rapid increase in the kind of toxic debt products that brought us to our knees five years back. Corporates are hoarding money instead of investing it. Jobs growth remains anemic.

So how come the stock market is rising? Who is the final buyer behind that rise if not those magic money-printing machines at the Fed? And if the Federal Reserve believes that rising financial markets are necessary to restore the country to health, we deserve an explanation of exactly how bubbling up financial assets to untenable levels is going to help with the things that actually strengthen economies: physical investment, innovation, new business formation, job growth.

It gets worse. The VIX is a measure of stock market volatility or simply put price movements up and down. It’s long been an interesting measure and has long had a part to play in financial markets. But it’s gone crazy recently. Trading in the VIX doubled from 2011 to 2012. The volume of futures contracts traded is up nearly 2000% since 2009.

I’m a hedge fund manager. I deal in these markets. And I have no idea which institution; private sector firm, sector or individual could be trading in these volumes due to the vast margin requirements (not least, because proprietary trading is now heavily restricted, at least in theory.) So could it be the Fed? And is its strategy to reduce price swings, influence and maintain the stock market’s otherwise inexplicable rise? I can’t be certain, but I think that the Fed should come out and publicly disclose any dealing or influence it has had in this area.

These questions go still. further What products and markets is the Fed trading in? The Fed has admitted to trading swaps with the ECB, which compels us to ask: which other off balance sheet derivatives is the Fed currently trading? Is the Fed active in gold swaps? Is it trading in gold, silver or other metals, futures and or options? Bear in mind, that the Fed’s leverage is so extreme that a small movement in prices could make them insolvent. And given that there’s no known exit strategy to their QE program, the risk of a disorderly exit with catastrophic losses is highly probable.

These are disturbing questions, and I’m not the only one asking them. David Stockman, Director of Management and Budget in the Reagan administration, looks at our current financial landscape and calls it ‘a giant Ponzi scheme’. He’s right. That’s why I wrote Planet Ponzi 2 years ago. Nobel Prize winner and former chief economist at the World Bank, Joseph Stiglitz, commented recently, ‘If we [at the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’ He’s right too.

All the evidence suggests that the Fed has turned into an entity which is too big to fail/jail/bail or prosecute, manages the financial system on behalf of Wall Street and is accountable to no one. That system delivered one huge financial crisis in 2008-09, but an even larger aftershock is brewing now. Isn’t it time we demanded some answers? Isn’t it time we demanded change?

But here’s the thing. Do you care to guess how much J&J lost thanks to that currency movement? Answer: a cool hundred million dollars. Johnson is a pretty large company, but even so. To lose a hundred million bucks? In Venezuela? That sounds a little disturbing, no? A bit like the start of one of those killer-virus horror flick, where the pretty teenager who comes down with a benign little illness ends up dying horribly as some unknown disease takes hold.

Central Planners Bernanke, Draghi & Merkel Hard at Work

Well, that is now the reality of the world economy. The loose money policies at the world’s leading central banks are beginning to broadcast that virus right across the globe. The vector of transmission isn’t just low interest rates. It’s money printing too. It’s the purchase of government bonds so that the long end of the yield curve is as manipulated as the low end.

Indeed, you simply can’t set a bound on how widespread and intensive the destruction of value has been, not merely in the U.S., but across the globe. Take, for example, the Fed’s willingness to purchase toxic real estate assets — using your money to acquire securities which are now shunned by the market. Or take the Bank of England’s efforts to shove easy money at banks making corporate loans. What happened to good old-fashioned faith in markets? The belief that transactions of commercial merit will be struck between a willing buyer and a willing seller … and that any other sort of transaction should be strongly discouraged?

The simple fact is that the world’s major central banks are indulging in a massive proprietary trading scheme placing your money at risk in support of poor quality assets. When I wrote Planet Ponzi, I argued that Wall Street and government between them had created the world’s biggest ever Ponzi scheme. Well, the central banks want to play at that table too — and right now they’re the ones with unlimited money and zero accountability.

In recent months, the Japanese yen has plummeted 30 percent against the euro and some 20 percentagainst the U.S. dollar. Those figures are astounding enough in themselves, but get this: The euro currency probably won’t even exist in a few years’ time. The outcome of the Italian election gave a more than quarter of the vote to a comedian, Beppe Grillo. (He is literally a comedian; I’m not just using the term as a synonym for “Italian politician.”) Grillo wants to exit the euro and default on Italian debt. Other parties shared nearly all the remainder of the vote. The only politician to stand four-square behind Angela Merkel’s austerity ad infinitum plan was Mario Monti, who secured just one tenth of the vote.

Grillo’s plan, as it happens, isn’t dumb. The euro has been killing Italy, and though Italian debts are high, they are, for the most part, funded domestically and the national budget is not far from being in balance. So Grillo’s plan keeps it simple: quit the euro, self-fund the debt, go back to doing what Italian governments have always done. If that sounds nuts, bear in mind that Italy’s economy has been a post-war miracle — growing way faster than the U.S. economy, albeit from a lower base. Italy only really started to fail when it joined the euro: Meaningful growth has been absent ever since. Italy’s competitiveness — never so secure — has been systematically wiped out by its adventure with the euro.

If Italy follows a path that’s anything like the one Grillo has mapped out for it — or if civic unrest grows — or if some European bank found itself obliged to admit to the true value of some whole new pile of nasties on its balance sheet — then the euro is dead; but this is the currency against which the yen is devaluing.

The precise path of these currency wars is impossible to predict, but it’s not hard to predict the final outcome. First, there will be huge losses. Japan has an economy that’s almost twenty times larger than Venezuela’s. If Johnson & Johnson can lose $100 million in Venezuela, just how much more will be lost in the Far East and Europe, not just by that one company but by every other multinational one too?

Spain's civil disorder - A coup d'état in the air? Euro departure?

Secondly, civil unrest. We’ve seen bouts of unrest already surging across the world — from riots in Greece, to the Occupy movement, to the indignados in Spain — but these things are only going to get worse. Suppose, for example, that Italy does successfully quit the euro; what will that say to the Spaniards and Greeks and Portuguese and Irish who are currently suffering its death throes?

And thirdly: inflation. The trouble with currency wars is that they’re too easy to wage. You just have to print money. The mainstream media barely reports the ongoing activity and the Fed is either in denial or lying. It all sounds a little technical and dull. We assume that the people in charge of looking after our money supply are on our side, that they have our interests at heart.

But do they? Again and again, we see that central banks make the error of equating happy financial markets with strong economies — precisely the mistake that was made by central banks ever since the dot-com crash (and, indeed, before.) Here’s the simple truth. Financial markets prefer excessive valuations and excessive liquidity. Sure, they love it if the Fed prints a ton of new money. Obese kids would probably like it if McDonald’s gave away their stuff for free on street corners.

But the interests of Wall Street are not your interests. Global stock markets are making new record highs — on what? What’s so great about the world economy? The truth is that stock markets are up because of Fed-based ‘hopium’: the torrents of cash artificially manipulating prices. Yet whatever goes up must come down and no one at the Fed even pretends to have an exit strategy. The simple fact is that the Fed has created the mother of all asset bubbles, and the popping will be on a scale previously unknown.

Indeed, you only have to look at the personnel in key positions across the globe to understand how deeply Wall Street has penetrated institutions that were meant to be there for us.

Jon Corzine - What happened to MF Global's missing Billions? Who said there is no revolving door between Wall Street and Washington?

Mario Draghi, head of the European Central Bank is an ex-Goldman guy. So is William Dudley President of the New York Fed — who controls the FOMC. So is Mark Carney, soon to be Governor of the Bank of England, currently the Governor of the Bank of Canada as well as the Head of the Financial Stability Board in Switzerland. When you start to add in key politicians with affiliations to the same institution (Mario Monti, Hank Paulson, Robert Rubin, Gary Gensler, Jon Corzine), you start to realize that our entire political system has become heavily conflicted and corrupted. The interests of Wall Street have come to dominate the interests of ordinary citizens.

All Ponzi schemes must come to an end. They always bring disaster when they do — but that’s no reason to close them down, because the collapse only gets bigger the longer you leave them. We are in the end stages of a huge, global Ponzi scheme right now. The losses are rising, the risks are getting greater. And the worst disasters lie ahead.

Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

But it’s not Zuckerberg who gets to choose the company’s valuation. It’s the banks he retains to manage the transaction. I wrote that the firm was being ‘vastly and obviously overvalued at the levels currently being discussed.’

Unfortunately, I’m being proved right at sickening speed. The firm had its IPO (Initial Public Offering) on 18 May – that is, the date when its shares first began to trade on the market. Since last Friday, the firm has lost 31% of its value, in comparison with the intraday high of $45 per share. Yesterday’s close was $31.

Disappointing: Facebook shares have lost 31pc of their value since the company’s IPO last Friday

But let’s not talk about the firm. Let’s talk about you. If you invested £1000 in the company’s shares, that money is now worth around £700. Realistically, given various costs and fees, you might well find that money worth just £600. And you’ll lose more before things stabilise.

So what happened? Well, quite simply, the banks did what banks do: they looked after their interests and didn’t give a damn about yours. Here’s how the whole ugly operation proceeded.

Step one: they pumped up Facebook’s valuation as high as they could. Since a bank’s fees are in general a percentage of total money raised, the more highly they valued the firm, the greater the fees they got to rake off the top. They were assisted in this by irresponsible cheerleading from across the mainstream financial media.

Allegations: It has been claimed that Morgan Stanley told institutional investors that the shares were overvalued, but left retail investors in the dark

Step two: since banks know that professional investors aren’t that easy to fool, they didn’t try too hard to do so. Facebook is a company with a huge profile amongst ordinary retail investors, so it’s pretty easy to ensure a huge retail following for the IPO. Morgan Stanley, one of the firms involved in running the whole operation, stands accused of effectively differentiating between different classes of investor.

Allegedly, one of its analysts shared negative news about Facebook with institutional investors that it did not also share with retail ones. If those allegations prove true, Morgan Stanley was effectively protecting its most valuable clients and letting the retail investors – that means people like you – go hang. Or to put it at its starkest, the suggestion is that Morgan Stanley sold a stock that they knew to be overvalued to retail investors while protecting its wealthiest clients.

Step three: they launched the IPO, took their fees, watched the share price plummet, and will now wait until a sensible price has been reached, before going back to their original rich clients in order to start the business of actually trading the stock in the normal way.

Have I left anything off? Well, yes actually, Step Four – the one step no Wall Streeter would ever forget about – the bankers involved will almost certainly pay themselves giant bonuses.

Now, I want to be clear that Morgan Stanley vigorously denies these accusations. (No surprise there: it is possible that a serious criminal offence has been committed). A spokesman for Morgan Stanley said in a statement, ‘Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations.’

OK. So one of two things is true. Either, Morgan Stanley did not follow those regulations, in which case I personally would argue that the only fair penalty would involve a significant number of Morgan Stanley bankers serving a long sentence in jail. Remember that during the London riots, we saw people jailed for breaking a couple of windows and nicking a couple of TVs. The destruction of value in the Facebook IPO has so far run to many billions of dollars and we haven’t seen the last of it yet. My own rule of thumb – call it the Feierstein rule – is that for every million dollars criminally destroyed by a bank, one banker should spend one year in jail.

It’s a pretty gentle rule, in all honesty (the London rioters were dealt with far more harshly), but even so, thirty billion dollars translates into thirty-thousand years of banker jail time. Sounds good to me.

That’s option one. Here’s option two: what Morgan Stanley says is correct. Let’s say it scrupulously followed every regulation, every procedure, every last detail of compliance. If so, those regulations have totally failed to protect retail investors. Who cares if the rules are followed, if they don’t do what they need to do?

Or actually, now I think about it, there’s a third option. Which is both of the above. Maybe, Morgan Stanley didn’t follow those rules and maybe, in any case, those rules are inadequate. Maybe the regulators are feeble; the banks dangerous, slipshod and unethical. Maybe the courts just can’t cope with the money and sophistication of the bandits they’re struggling to deal with. Perhaps, in fact, the entire, ugly, destructive machinery of Wall Street and the City of London is the same as it was in 2007: destroying value, threatening economies, beyond reach of the law.

Time will tell which of these options is correct. But until we see the ‘too big to fail’ firms broken up and until we see bankers in jail for ruining the lives of countless retail investors, the system is failing. The end can’t come too soon.

I published this in todays Daily Mail

Facebook is a phenomenal company. Mark Zuckerberg is a remarkable man and an astonishing entrepreneur. He’s created something sensational — something genuinely world-changing — and he’s young enough to be my son.

But Facebook the company is one thing. The mooted valuation of Facebook is quite another. I admire the first, and hate the second.

Let’s start with some facts. Facebook enjoyed first quarter revenues in 2012 of $1.058 billion. Those revenues are up around 45 percent from the same quarter in 2011. They are somewhat down on the company’s fourth quarter, but Facebook is (strangely enough) a seasonal business, with a strong fourth quarter and a quiet first one.

It’s OK for firms to make money. That’s what they’re there to do. But real firms, durable ones, the ones who care about their reputation, their future, and the generations that come after, have figured out that you need to take care of yourself by taking care of your customers. Do the second thing right and the first will come of its own sweet accord.

Greg Smith’s recent wail of resignation made it clear that Goldman Sachs has long lost touch with these simple truths. In his words, ‘It makes me ill how callously [Goldman staffers] talk about ripping their clients off.’ The thing is, though, you don’t have to be a client of Goldman’s to lose out, you just have to be, well, a human — or at any rate a human whose assets amount to more than a mud hut and a couple of scrawny cows.

Because this is a financial story, we need to start with the money. As of December 2011, Goldman Sachs owed $814 billion. That’s more money than is owed by all but five of the European Union’s 27 members. Indeed, that’s hardly putting it strongly enough. Spain owes somewhat more money than Goldman Sachs, but is almost buckling under the pressure. Not Goldman. If Goldman wanted to raise more capital and expand its balance sheet, it could easily do so. Spain couldn’t. That’s how big the firm is. How big and how powerful.

How you use such power matters and unfortunately Goldman’s sticky fingers are all over the scene of recent economic crimes. Take the meltdown in Greece, which brought the world to within a whisker of financial catastrophe last fall. Part of the problem there was that Greece kept fiddling its data: it lied to European officials about the true extent of its borrowing. Those lies needed some help and Goldman — how unsurprising is this? — was there to provide it. In the words of Der Spiegel, ‘Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.’

Or, to put it simply, Greece wanted to lie about its finances, at huge cost to its taxpayers and to the world economic system, and Goldman was on hand to make it happen. Goldman reportedly made a gross profit of €600 million on the trade.

Athens burns while Goldman's profits with impunity

But we don’t have to travel overseas to find economic crimes sticky with Goldman’s prints.

During the financial crisis of 2008-09, the American government bailed out insurance giant AIG at a costof some $182 billion. Those billions flowed largely to various Wall Street firms, including Goldman. For a long time, Goldman protested that the money ($12.9 billion) it received was simply passed on to clients … until, oh gosh, the facts proved otherwise. It turned out that in fact Goldman collected $2.9 billion for its own account. And that’s $2.9 billion of pure profit.

You need to notice two things about this. First, where the money ends up — Goldman guys with huge bonuses — but secondly the amazing wastefulness of the system. Taxpayers shelled out $182 billion. Goldman pockets just under $3 billion. Some of those surplus billions went to other Wall Street firms, but much of it went to support foreign banks and foreign bankers. American taxpayers should not be called upon to support failed businesses in other countries, but the Goldman merry-go-round wouldn’t have worked any other way, so to hell with the American taxpayer.

And who engineered this bailout? Why, none other than Goldman old boy, Hank Paulson. Who avoided some $200 million in personal taxation when he become US Treasury Secretary — a gain which puts into the shade his mere $40 million annual compensation while at Goldman.

Not that, mind you, it makes much sense to obsess about a few billion dollars snatched from the American taxpayer, when the real rip-off ran to the hundreds of billions of dollars. A July 2011 report from the US General Accountability Office found that the support for Goldman Sachs in total amounted to some $814 billion. Or approximately the quantum of Goldman’s entire liabilities. You want a rip-off, that’s it right there.

Or take other economic crimes against humanity. When broker MF Global went bust — because of excessive leverage and a reckless approach to risk — it turned out that its clients’ money had gone walkabout. As of today, according to Reuters, ’MF Global U.S. trustee James Giddens is trying to track down an estimated $1.2 billion of customer assets that have seemingly disappeared from the broker’s books.’ What idiot could lead a firm to such a horrendous collapse? Why, a Goldman guy, of course: stand up Jon Corzine, former senator, former NJ governor and former chairman and CEO of Goldman.

We could go on. Robert Rubin, formerly co-chairman of Goldman Sachs, became US Treasury Secretary under Clinton and piloted through the repeal of the Glass-Steagall Act and helped to exclude OTC credit derivatives from oversight by the Commodity Futures Trading Commission. Those things might sound arcane and technical, but they stand at the very epicenter of the 2008-09 financial crisis. If credit derivatives had been strictly regulated, and a strong version of Glass-Steagall had remained in force, Main Street would not have been required to bail out Wall Street. Lehman could have folded, Bear Stearns and Merrill could have folded or been bought up for a handful of nickels — and no one would have cared. These things did not have to affect your life, your job, your wage, your savings or your pension fund. (If you were the guy with the mud hut and the scrawny cows, you probably did just fine, however.)

Or take Mario Draghi, formerly vice chairman and managing director of Goldman Sachs International. As incoming head of the European Central Bank, Draghi has been responsible for pouring €1 trillion of easy money into a tottering European banking system. You can call that a rescue operation if you like — but what exactly is being rescued? The collapsing banks and irresponsible governments most responsible for the current crisis. The firms and institutions who form Goldman’s crucial European client base, in fact.

We could go on. Sometimes it’s (alleged) crimes that you notice: people like Rajat Gupta, former Goldman Sachs director, currently under arrest on charges of insider trading. But more, it’s the extent of the firm’s influence. Not only does it seem to be the preferred supplier of US Treasury Secretaries, its alumni pop up seemingly everywhere. The current Prime Minister of Italy, Mario Monti, is a former Goldman adviser. Or check out the resumes of Petros Christodoulou, Peter Sutherland, Otmar Issing, Antonio Borges, Bob Zoellick. Important people, who have taken fistfuls of money from Goldman Sachs. Important people who have, to a remarkable degree, supported and defended the reckless leverage and opaque accounting of a system from which Goldman draws its colossal profits. The influence reaches far past matters of country, party or ideology. The only ideology which matters is that of self-enrichment. That of allegedly ripping off clients.

It’s time to put a stop to this. In Britain, a firewall is (slowly!) being erected which will, in effect, build a Glass-Steagall-style barrier suited to the twenty-first century. The United States needs just such a barrier, and neither the watered down version of Dodd-Frank nor the current shenanigans over the Volcker Rule promise to provide one.

But regulatory barriers are only half the story. The corruption of excess influence also needs to be terminated. No US Treasury Secretary with strong links to Wall Street should ever again be appointed. No central banker with a past in casino capitalism should be trusted to keep his instincts at bay when placed in charge of a national (or international) currency.

Wall Street will argue that such a policy would be reckless in the extreme: you might get a Treasury Secretary who didn’t fully understand credit derivatives or the subprime mortgage game. And that’s perfectly true. You might. Which would be an unmixed blessing. Opaque financial products that normal smart people don’t understand? We didn’t want the damn things in the first place. Soft loans to weak banks in support of crumbling governments? Who the heck would vote for that?

Not me. Not you. No one beyond those on Wall Street. It’s time that the excessive influence of a single wealthy firm was halted. Let’s just say no.

My blog Goldman & Friends was also published in todays Huffington Post

Those two acronyms apply — with as many exclamation points as you care to add — to a piece published yesterday in the New York Times. The op-ed by Greg Smith, a former Executive Director of Goldman Sachs, accused the firm of having abandoned its principles in pursuit of profit. Specifically, he says, ‘The environment [at Goldman] now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.’

That may not immediately strike you as remarkable — or at least, you might find it remarkable merely that it took Greg Smith a dozen years to notice the nature of the beast he worked for. It would be like a Santorum aide quitting because he found his boss too Catholic. Or like a Romney aide quitting because he didn’t want to work for a rich guy.

Yet Smith’s testimony is important in two ways. First, Smith is a genuinely senior figure. The Goldman spin machine is already out in force to blat away his comments, but Smith ran the US Equity Derivatives business for Europe, the Middle East and Africa. That doesn’t place him at the top of the firm, or even in the next rank down, but his job is — sorry, was — of real heft and substance. It’s people like Smith who are most closely in touch with how the firm treats its clients day to day.

Secondly, his article summarizes the entire problem of the last few years in a remarkably succinct way. The financial industry — exemplified and led by Goldman Sachs — lost touch with its clients. It forgot its ethics. It forgot that its first duty was to serve others.

I believe Smith is right. When I first joined the financial services industry thirty years back, Goldman had an almost unblemished reputation. It cared more about its integrity than its rivals. For a long time it wouldn’t handle a hostile M&A bid, because it wasn’t sure it would be able to preserve its ethics in the trench warfare of a proxy fight. The firm did well financially, because it did right ethically. The two things fed each other.

But as other firms improved their act, as competition intensified, Goldman sought other ways to maintain its edge. Since everyone fought over the same Ivy League and business school graduates, since everyone paid top dollar, since everyone compelled their employees to work all the hours of the clock, Goldman figured that it could make money from an ethical arbitrage. In plainer language, the firm’s senior executives thought, ‘We’re Goldman, we can shaft our clients.’

And they did. I think the firm has been going sour for longer than Smith suggests, but he works there. Maybe he knows more. They key point, however, lies in his remark that, ‘I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them … It makes me ill how callously people talk about ripping their clients off.’

And of course, competition breeds a response. Goldman has been so good at doing what it does that others follow. There has been, during my time on the Street and in the City of London, a long slide downhill in ethics. We used to serve clients. Now we serve ourselves. I myself became a hedge fund owner so I could choose my own investors, select my own investment strategy, and cleave to my own ethical path. I’m shocked to reflect that there is almost no leading Wall Street firm I would now be willing to work for. I think they’re cowboys.

There is a still more somber side to this story, however, and it’s that the people we pay to protect us from these rogues have become the rogues’ own henchmen, nodding dolls that wave through every new outrage. David Stockman, a former White House budget director, said in an interview with the Associated Press,

Here’s the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything [it does] is designed to keep this rickety structure from unwinding. If you had a [former Fed Chairman] Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn’t have half, you wouldn’t have 95 percent, of the speculative positions today.

He’s right. Smith is right and Stockman is right. Read those two pieces (here and here) and you have everything in a nutshell. The moral corruption at the heart of the Wall Street. The regulatory failure that means the Fed, the SEC, Congress and every other regulatory agency we have are failing in their duty to protect ordinary citizens. That Goldman is a vampire squid has long been recognized. The conflicted and non-transparent nature of the aquarium is, as yet, far too little understood.

Asked how he sees the immediate financial future, Stockman says, ‘The carnage will be unimaginable.’ He’s right again and I’ll bet Greg Smith agrees. But you know what? Nothing will change. There are times when you have to be teenage to know what to say. OMG and WTF.

This article was published in the Huffington Post and may be found here

And Goldman’s the same. It’s a traditional sort. Once it’s got into a habit – excessive leverage, taking huge risks and disguising them, helping to bankrupt Western capitalism, paying its staff huge bonuses – it likes to keep it up. Think of it as a sort of tradition. Think halloween crossed with a multi-billion dollar balance sheet … and remember that on Wall Street it’s always halloween.

The latest news from Chateau Goldman is this. The former Goldman CEO, Jon Corzine, came to head up a firm called MF Global. That fine firm ‘last week reported a record loss, had two of its credit ratings cut to junk and drained bank lines’ and is now facing ‘a pivotal few days as the futures broker pitches itself to potential buyers to avert failure.’ (more info from Bloomberg here.)

The problem: massive leverage plus crazy risk-taking.

The consequences for creditors: hideous.

The consequences for Mr Corzine: well, let’s see. But here’s my bet: nothing will happen.

And just one more comment. Massive leverage, crazy risk-taking, unsound investment goals, inadequate supervision. What does that sound like to you? To me, it reminds me a little of a Ponzi Scheme.

Now Ponzi Schemes are totally illegal and – just to be clear – I’m not accusing Mr Corzine or MF Global of criminality. But I do say that either what they did was illegal or it should have been. And anyone who operates a Ponzi Scheme should go to jail. For a long, long, long time.

That sweet old Goldman magic: part 2

Hey, what do you know? Since writing the previous post, MF Global – Jon Corzine’s baby – has gone bankrupt. That’s funny for a guy with some very well-connected friends. Bet he gets one less card this holiday season.

But the story gets stranger still. Investment firms need to keep client funds strictly segregated from the firm’s own cash. You’d think that Goldman-alumnus Jon Corzine would know that rule. After all, it’s quite an important one.

But Bloomberg reports that as much as $700 million of client funds are not yet accounted for. Not accounted for as in ‘gone missing’, vanished, gone AWOL. As a financial expert, I’m in a position to tell you that $700 million is quite a lot of money. And at the moment, no one knows where it is.

Care to enlighten us, Jon? Or perhaps, Mr President, you could ask your buddy where that money is. We’d sure like to know.