The market making results of Goldman Sachs are simply amazing!! According to its recently filed documents with the Securities and Exchange Commission for the first quarter of 2010, Goldman Sachs had zero trading days where it lost money from its trading activities!! Toomre Capital Markets LLC ("TCM") is stunned by this news.

According to the filing, on more than half of the 63 trading days in the quarter, it recorded more than a hundred million dollars in net revenues for that day!! Further, with the understanding that 76% of the firm's $9.7 billion in revenues came from trading activities, the average net revenue for each day was approximately $117 million — and on at least twelve of those days, the net revenues were north of $160 million!!

The chart to the left is from the Zero Hedge blog and their post Unfuckingbelievable: Goldman Has Zero Trading Loss Days In Last Quarter. As that post states, "The statistic probability of this event is itself statistically undefined." TCM whole-heartedly agrees that these results are unbelievable. Utilizing classic risk management measures, one could even argue that Goldman Sachs was not taking enough risk since it never experienced a penny of loss!!

Goldman Sachs and one of its Structured Finance Vice Presidents, Fabrice Tourre, were sued in civil court by the SEC for fraud on Friday, April 16, 2009 regarding representations that they made in the marketing and offering materials for what is known as a synthetic CDO named Abacus 2007-AC1. This news has sent the Goldman Sachs common stock lower by more than ten percent. It is also significant implications as the investigation is said to be still open and on-going.

Toomre Capital Markets LLC ("TCM") has received several messages looking for more insight on this latest questionable activity in the mortgage and structured finance markets. We have been busy on a detailed review of the detailed Exhibits related to the Examiner's review of the Lehman Brothers bankruptcy. We will shift our focus and hope to shortly have some further insights posted here.

During 2009, Morgan Stanley dramatically underperformed both Goldman Sachs and JPMorgan in the performance of its securities business, particularly in the area known as FICC (fixed-income, currencies and commodities). The Financial Times article from February 1st 2010 entitled Morgan Stanley In Hiring Push has more details.

According to Morgan Stanley's new chief executive, James Gorman, Morgan Stanley plans to hire several hundred new traders over the next several years to hopefully close the gap with Wall Street trading rivals. Rather interestingly, he stated "We are not showing clients enough. We don't have people on the ground. We are not sufficiently penetrated with large clients and there are some smaller clients we are missing out on." He continued: "We need to seriously grow our footprint in products like currencies, equity derivatives and commodities. We could easily be 25 percent bigger than we are. [Investor's] bias is to do more business with [Morgan Stanley], the burden is on us to deliver."

What Toomre Capital Markets LLC ("TCM") finds so interesting with the article is the degree to which Morgan Stanley under-performed. Apparently, in 2009 Morgan Stanley had revenues of $5bn in fixed income trading (or $8.8bn excluding an accounting loss) compared with $17.6bn at JPMorgan and $23.3 recorded by Goldman Sachs. Put another way, Morgan Stanley's FICC unit only generated revenues one half of JPMorgan's revenues and thirty-eight percent of what Goldman Sachs recorded. WOW!! Clearly Morgan Stanley is not even close to its two rivals in this business area, which is counter to what many market participants perceive.

The article concludes with the thought that the need to add more traders and sales people to better staff the basic product areas of this business unit is an admission that at least one of former CEO John Mack's decisions was wrong. His decision to focus on various complex derivatives and associated products popular before the credit crisis left Morgan Stanley ill equipped to benefit from the pick-up in the trading of simpler fixed-income products.

President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:

My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.

According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.

Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.

Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.

Ahead of President Barack Obama's meeting on December 14, 2009 with senior banking officials from institutions like Goldman Sachs, JPMorgan and Bank of America, The New York Times is reporting Citigroup Nears Deal to Return Billions in Bailout Funds. "Citigroup was close to a deal on Sunday night to be the last of the big Wall Street banks to exit the government’s bailout program, after trying to persuade regulators that it was sound enough to stand on its own. Negotiations between the bank’s executives and senior government officials went into the night and could still collapse."

Toomre Capital Markets LLC ("TCM") wonders how much of this drive to repay TARP funds is driven by executive compensation desires. Wall Street is still an incredibly "alpha" environment where most participants judge themselves by how well they are being compensated. With Goldman Sachs having a year very close to the earnings in its 2007 peak year, many "stars" are very much aware of the pay possibilities that exist at firms without the government imposed compensation restrictions. Surely Citigroup must be smarting from being the last major bank to have TARP funds outstanding and hence needing to limit what it can pay its investment banking, sales & trading and investment management employees.

According to Bloomberg News, Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer arrested last week for stealing software, told an FBI agent he uploaded proprietary code to an encrypted server he had used on “multiple occasions.” Mr. Aleynikov, 39, told the agent about 1 a.m. on July 4 that he had logged into Goldman’s computers through remote access from his home and sent encrypted files to a repository server with the URL identifier svn.xp-dev.com, according to a copy of his FBI statement in court files in Manhattan federal court.

The Bloomberg News story goes on to explain that Xp-dev.com is run by a London resident Roopinder Singh, who describes himself on a blog linked to the website as "a trading systems developer working in London's financial services industry". That website offers "subversion hosting." Subversion, commonly referred to by the acronym SVN, is a common version of source control software that allows users to track current and previous versions of programming code and other documents. [Toomre Capital Markets LLC ("TCM") uses two competing products known as CVS and Microsoft Visual SourceSafe to manage its programming source files that are part of either internal or client projects.]

On Monday July 6th 2009, various news outlets are reporting on the rather brazen bank theft by one Sergey Aleynikov. Rather than brandishing a gun or cracking a vault, Sergey hacked the algorithmic trading secrets of his then-employer Goldman Sachs by downloading proprietary, "black box" computer models that Goldman uses to execute rapid-fire trades in the financial markets. The value of this intellectual property, experts say, could be incalculable.

Toomre Capital Markets LLC ("TCM") has written extensively about the topic of Algorithmic Trading. Interested readers, for instance, might want to review the white paper entitled Market Risk and Algorithmic Trading that TCM wrote on behalf of Advanced Micro Devices some months ago. As that paper starts,

In the evolving financial markets, ever-more complex quantitative analyses are performed. Some constantly assess the market risk of portfolio exposures, while others calculate the probability of reward for various strategies in the continually shifting markets.

Increasingly, algorithmic trading programs automatically execute the trade orders that result. With the growing adoption of the AMD Opteron™ processor, high performance computing for quantitative modeling and algorithmic trading in the financial markets likely will increase.

Simulation modeling techniques quantify market risk, measuring the probability and magnitude of potential loss due to change in prices. As market liquidity decreases, typically price volatility and, hence, market risk increases. With the recent introduction of decimalization, the U.S. equity market structure dramatically changed. Trading spreads shrunk, trading venues proliferated, and market liquidity fractured. As a result, a new form of trade execution emerged: algorithmic trading.

A top story of the day on many of the news outlets is about Sergey Aleynikov, the thirty-nine year-old former vice president who allegedly stole trade secrets from Goldman Sachs and stored them on a foreign server. The breathless headlines are staggering. Code theft could cost Goldman millions, US says, To Catch a Rogue Quant, Russian Said to Be Ex-Goldman Worker Charged in Theft and The Dumbest Man at Goldman Sachs.

As President Obama visits Russia, the homeland security, terrorism and anti-immigrant blogs are abuzz about the alleged Russian spy. You have to look hard to find the headline, Goldman sees no impact from computer programmer-source. It isn’t as exciting.

Before Aleynikov is hung for international espionage, I thought it would be good to dig a little bit deeper into what happened. According to the an affidavit by Michael G. McSwain entered into the Southern District of New York, FBI agent McSwain charges Mr. Aleynikov with “unlawfully, willfully, and knowingly, without authorization, copied, duplicated, sketched, drew, photographed, downloaded, uploaded, altered, destroyed, photocopied, replicated, transmitted, delivered, sent, mailed, communicated and conveyed, a trade secret that is related to and included in a product that is produced for and place in interstate and foreign commerce with the intent to convert that trade secret to the economic benefit of someone other than the owner thereof, and intending and knowling that the offense would injure the owner of that trade secret, to wit, Aleynikov, while in New York, New York, and elsewhere, copied, without authorization, proprietary computer code belonging to a financial institution in the United States and then uploaded the code to a computer server in Germany.”

Toomre Capital Markets LLC ("TCM") has been rather quiet in recent weeks about the investment banks and the on-going credit crunch started by sub-prime mortgages and the bursting of the real estate bubble. While some in the industry (like Dick Fuld, CEO of Lehman Brothers, and John Mack, CEO of Morgan Stanley) have suggested that the credit crunch is closer to the end, Lars Toomre and Toomre Capital Markets LLC have subscribed to the view that the collapse of Bear Stearns was just the nasty end to front edge of a massive credit deleveraging hurricane.

In the time since the Federal Reserve helped to broker the sale of Bear Stearns to JP Morgan (with some $29 billion dollars of potential assistance) on March 17th, the capital markets have stabilized. Credit default spreads have narrowed from extreme wide spreads. The equity markets rallied from the March lows. Also, in many fixed-income product sectors, spreads to risk-free securities have significantly narrowed from oversold conditions. In short, the massive oversold (or biased) positions in the Capital Markets have had time to return to more stable conditions.

Or at least that was the case until the last ten days or so when slowly conditions have started to deteriorate again. Are these deteriorating conditions indications of another wave of the credit hurricane about to hit the Capital Markets? Time will tell. TCM suspects that market participants are about to learn that various financial firms did not perform well during the second quarter and that there will be further asset write-downs in various portfolios where liquidity has been sharply curtailed due to the credit crunch. Such news will be no great surprise.

Amidst the turbulence of the various news reports about layoffs, resignations and common stock declines, TCM has begun to wonder just where is there value in the major investment banks [Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers] and their universal bank counterparts [Barclays, UBS, Deutsche Bank, and Credit Suisse]. What are these franchises really worth in a world of sharply reduced liquidity and where new regulations on risk and capital are likely to be imposed? Assuming that these institutions go back to the "old days" of client flow trading, aren't each of these franchises worth significantly less than their current market values? Reader comments and thoughts are welcome.