AT the dawn of the progressive era early in the last century, muckrakers attacked the first billionaire, John D. Rockefeller, for creating capitalism’s most ruthless monster. “The Octopus” was their nickname for Standard Oil, the trust that controlled nearly 90 percent of American oil. But even in that primordial phase of the industrial era, Rockefeller was mindful of his public image and eager to counter it. “His great brainstorm,” writes his biographer, Ron Chernow, “was undoubtedly his decision to dispense shiny souvenir dimes to adults and nickels to children as he moved about.” Who could hate an octopus tossing glittering coins?
It was hard not to think of Rockefeller’s old P.R. playbook while watching Goldman Sachs’s behavior when the Dow hit 10,000 last week. As leader of the Wall Street pack, Goldman declared surging profits, keeping it on track to dispense a record $23 billion in bonuses for 2009. But most Americans know all too well that only the intervention of billions of dollars in taxpayer bailout money saved Goldman from the dire fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans, meanwhile, are waiting with increasing desperation for a recovery of their own.
Goldman is this century’s octopus — almost literally so. The most-quoted sentence in financial journalism this year, by Matt Taibbi of Rolling Stone, describes the company as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” That’s why Goldman’s chief executive, Lloyd Blankfein, recycled Rockefeller’s stunt last week: The announcement of Goldman’s spectacular third-quarter earnings ($3.19 billion) was paired with the news that the company was donating $200 million to its own foundation, which promotes education. In Goldman dollars, that largess is roughly comparable to the nickels John D. handed out to children a century ago. At least those kids could spend the spare change on candy.
Teddy Roosevelt’s trust-busting crusade ultimately broke up Standard Oil. Though Goldman did outlast three of its four major rival firms during last fall’s meltdown, it is not a monopoly. And there is one other significant way that our 21st-century vampire squid differs from Rockefeller’s 20th-century octopus. Americans knew what oil was, and they understood how Standard Oil’s manipulations directly affected their pocketbooks. Even now many Americans don’t know what Goldman’s products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism’s casino, and for Washington to look the other way as a new financial bubble inflates.
As Wall Street was celebrating last week, Congress was having a big week of its own, arousing itself to belatedly battle some of the corporate suspects that have helped drive America into its fiscal ditch. The big action was at the Senate Finance Committee, which finally produced a health care bill that, however gingerly, bids to reform industries that have feasted on the nation’s Rube Goldberg medical system. At least health care, like oil, is palpable, so we will be able to keep score of how reform fares — win, lose or draw. But the business of Wall Street, while also at center stage in a Congressional committee last week, is so esoteric that the public is understandably clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all.
The first stab at corrective legislation emerging from Barney Frank’s Financial Services Committee in the House is porous. While unregulated derivatives remain the biggest potential systemic threat to the world’s economy, Frank said that “the great majority” of businesses that use derivatives would not be covered under his committee’s much-amended bill. It’s also an open question whether the administration’s proposed consumer agency to protect Americans from mortgage and credit-card outrages will survive the banking lobby’s attempts to eviscerate it. As that bill stands now, more than 98 percent of America’s banks — mainly community banks, representing 20 percent of deposits — would be shielded from the new agency’s supervision.
If it’s too early to pronounce these embryonic efforts at financial reform a failure, it’s hard to muster great hope. As the economics commentator Jeff Madrick points out in The New York Review of Books, the American public is still owed “a clear account of the financial events of the last two years and of who, if anyone, is seriously to blame.” Without that, there will be neither the comprehensive policy framework nor the political will to change anything.
The only investigation in town is a bipartisan Financial Crisis Inquiry Commission created by Congress in May. It is still hiring staff. Its 10 members are dispersed throughout the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems highly unlikely to match Congress’s Depression-era Pecora commission. That investigation was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the current S.E.C. has hired a former Goldman hand as the chief operating officer of its enforcement unit.
Even as we wait for Congress and its inquiry to produce results, the cultural toxins revealed by our economic crisis remain unaddressed by the leaders in the private and public sectors who might make a difference now. Blankfein may be giving $200 million to “education,” but Goldman is back to business as usual: making money by high-risk gambling, with all the advantages that the best connections, cheap loans from the Fed and high-speed trading algorithms can bring. As the Reuters columnist Rolfe Winkler wrote last week, “Main Street still owns much of the risk while Wall Street gets all of the profit.”
The idea of investing in the real economy — the one that might create jobs for Americans — remains outré in this culture. Credit to small businesses remains tight. The holy capitalist grail is still the speculative buying and selling of companies and the concoction of ever more esoteric financial “instruments.” The tragic tale of Simmons Bedding recently told in The Times is a role model. This successful 133-year-old manufacturing enterprise was flipped seven times in two decades by private equity firms. Investors made more than $750 million in profits even as the pile-up of debt pushed Simmons into bankruptcy, costing a quarter of its loyal workers their jobs so far.
Most leaders in America are against this kind of ethos in principle. Last month the president of Harvard, Drew Gilpin Faust, contributed a stirring essay to The Times regretting that educational institutions did not make stronger efforts to assert the fundamental values of pure intellectual inquiry while “the world indulged in a bubble of false prosperity and excessive materialism.” She rued the rise of business as the most popular undergraduate major, an implicit reference to the go-go atmosphere during the reign of her predecessor, Lawrence Summers, now President Obama’s chief economic adviser.
What went unsaid, of course, is that some of Harvard’s most prominent alumni of the pre-Faust era — Summers, Blankfein, Robert Rubin et al. — were major players during the last two bubbles. As coincidence would have it, the same edition of The Times that published Faust’s essay also included an article about how Harvard was scrounging for bucks by licensing a line of overpriced preppy clothing under the brand Harvard Yard. This sop to excessive materialism will be a scant recompense for the $11 billion Harvard’s endowment managers lost in their own bad gamble on interest-rate swaps.
Obama has also passed through Harvard. (Disclosure: so did I.) He too has consistently said all the right things about the “money culture” of “quick kills and bloated bonuses,” of “reckless behavior and unchecked excess.” But the air of entitlement that continues to waft from his administration sends another message.
In particular, the tone-deaf Treasury secretary, Timothy Geithner, never ceases to amaze. His daily calendars reveal that most of his contacts with the financial sector in the first seven months of 2009 were limited to the trinity of Goldman Sachs, Citigroup and JPMorgan. And last week Bloomberg News reported that his inner circle of “counselors” — key advisers who, conveniently enough, do not require Senate confirmation — are largely drawn from the same club. It’s hard to see how any public official can challenge a culture that he is marinating in, night and day.
Those Obama fans who are disappointed keep looking for explanations. Is he too impressed by the elite he met in Cambridge, too eager to split the difference between left and right, too willing to compromise? As he pursues legislation, why does he keep deferring to others — whether to his party’s Congressional leaders or the Congressional Budget Office or to this month’s acting president, Olympia Snowe? Why doesn’t he ever draw a line in the sand? “We know Obama has good values,” Jeff Madrick said to me last week, “but we don’t know if he has convictions.”
What we also know is that if Teddy Roosevelt palled around with John D. Rockefeller as today’s political class does with Wall Street’s titans and lobbyists, the tentacles of the original octopus would still be coiled tightly around America’s neck.
Statistical Method Evolves From Physics to Wall Street to Battle Against AIDS
By MARK SCHOOFS JUNE 21, 2011
Scientists using a powerful mathematical tool previously applied to the stock market have identified an Achilles heel in HIV that could be a prime target for AIDS vaccines or drugs.
The research adds weight to a provocative hypothesis—that an HIV vaccine should avoid a broadside attack and instead home in on a few targets. Indeed, there is a rare group of patients who naturally control HIV without medication, and these "elite controllers" most often assail the virus at precisely this vulnerable area.
This is a wonderful piece of science, and it helps us understand why the elite controllers keep HIV under control," said Nobel laureate David Baltimore. Bette Korber, an expert on HIV mutation at the Los Alamos National Laboratory, said the study added "an elegant analytical strategy" to HIV vaccine research.
"What would be very cool is if they could apply it to hepatitis C or other viruses that are huge pathogens—Ebola virus, Marburg virus," said Mark Yeager, chair of the physiology department at the University of Virginia School of Medicine. "The hope would be there would be predictive power in this approach." Drs. Baltimore, Korber and Yeager weren't involved in the new research.
One of the most vexing problems in HIV research is the virus's extreme mutability. But the researchers found that there are some HIV sectors, or groups of amino acids, that rarely make multiple mutations. Scientists generally believe that the virus needs to keep such regions intact. Targeting such sectors could trap HIV: If it mutated, it would disrupt its own internal machinery and sputter out. If it didn't mutate, it would lie defenseless against a drug or vaccine attack.
The study was conducted at the Ragon Institute, a joint enterprise of Massachusetts General Hospital, the Massachusetts Institute of Technology and Harvard University. The institute was founded in 2009 to convene diverse groups of scientists to work on HIV/AIDS and other diseases.
Two of the study's lead authors aren't biologists. Arup Chakraborty is a professor of chemistry and chemical engineering at MIT, though he has worked on immunology, and Vincent Dahirel is an assistant professor of chemistry at the Université Pierre et Marie Curie in Paris. They collaborated with Bruce Walker, a longtime HIV researcher who directs the Ragon Institute. Their work was published Monday in the Proceedings of the National Academy of Sciences.
To find the vulnerable sectors in HIV, Drs. Chakraborty and Dahirel reached back to a statistical method called random matrix theory, which has also been used to analyze the behavior of stocks. While stock market sectors are already well defined, the Ragon researchers didn't necessarily know what viral sectors they were looking for. Moreover, they wanted to take a fresh look at the virus.
So they defined the sectors purely mathematically, using random matrix theory to sift through most of HIV's genetic code for correlated mutations, without reference to previously known functions or structures of HIV. The segment that could tolerate the fewest multiple mutations was dubbed sector 3 on an HIV protein known as Gag.
Previous research by Dr. Yeager and others had shown that the capsid, or internal shell, of the virus has a honeycomb structure. Part of sector 3, it turns out, helps form the edges of the honeycomb. If the honeycomb suffered too many mutations, it wouldn't interlock, and the capsid would collapse.
For years, Dr. Walker had studied rare patients, about one in 300, who control HIV without taking drugs. He went back to see what part of the virus these "elite controllers" were attacking with their main immune-system assault. The most common target was sector 3.
Dr. Walker's team found that even immune systems that fail to control HIV often attack sector 3, but they tend to devote only a fraction of their resources against it, while wasting their main assault on parts of the virus that easily mutate to evade the attack. That suggested what the study's authors consider the paper's most important hypothesis: A vaccine shouldn't elicit a scattershot attack, but surgical strikes against sector 3 and similarly low-mutating regions of HIV.
"The hypothesis remains to be tested," said Dan Barouch, a Harvard professor of medicine and a colleague at the Ragon institute. He is planning to do just that, with monkeys. Others, such as Oxford professor Sir Andrew McMichael, are also testing it.
The Ragon team's research focused on one arm of the immune system—the so-called killer T-cells that attack other cells HIV has already infected. Many scientists believe a successful HIV vaccine will also require antibodies that attack a free-floating virus. Dr. Chakraborty is teaming up with Dennis Burton, an HIV antibody expert at the Scripps Research Institute in La Jolla, Calif., to apply random matrix theory to central problems in antibody-based vaccines.
Frankenstein finance: How supercomputers preying on human fear are taking over the world's stock markets
73 per cent of shares on the New York Stock Exchange are traded by computer
By Robert Harris Last updated at 6:31 PM on 2nd October 2011
A spectre is haunting Europe: the spectre of capitalism. A vast and highly unstable mixture of debt — trillions of dollars of sovereign, corporate and private borrowing accumulated over decades — is strapped to the advanced Western economies like a suicide bomber’s gelignite vest.
The task facing our politicians is somehow to defuse this bomb without inadvertently triggering the sequence of defaults and bankruptcies that would set it off. No wonder they walk around the problem scratching their heads, prodding it gingerly here and there. The horrible truth is dawning that the problem may well not be technically solvable.
For the first time in my life — I am 54 — I get the sense of what it must have been like to have lived in my grandparents’ or great-grandparents’ generation: in 1913, say, or 1937. One feels a great smash coming ever closer, almost in slow-motion, and yet there seems to be nothing that can be done to avoid it.
How have we got ourselves into this mess? After all, we were supposed to be living in an era of unprecedented peace and prosperity.
Communism had collapsed and the threat of nuclear annihilation had receded. Immense advances in computer technology were creating whole new economies. Vast markets were opening up in the developing world. Above all, we were supposed to have learned enough about economics to have created the necessary institutions — the World Bank, the International Monetary Fund, the G20, the OECD — to ensure we never repeated the mistakes of the Thirties.
Where did it all go wrong?
Bizarrely enough, as good a place as any to start looking, in my opinion, is a hole in the ground near the small town of Waxahachie, Texas — or, to be more precise, 17 holes in the ground, each of them an air shaft leading down to 14 miles of abandoned tunnel dug into the hard Texan rock, which are all that remains of a grandiose scientific project called the Desertron.
The Desertron — or the superconducting super-collider, to give it its proper scientific title — was supposed to be America’s answer to CERN’s Large Hadron Collider in Geneva, a gigantic experiment to investigate the most fundamental laws of our universe. With a circumference of 54 miles, it would have been three times as large and powerful.
Unfortunately it would also have been nearly three times as expensive. In October 1993, in order to save projected future costs of $10 billion, the U.S. Congress voted to abandon the whole scheme — writing-off the work already done at a cost of $2 billion.
For a whole generation of American academic physicists, that decision wiped out their planned careers.
One physicist with a PhD I spoke to when I was researching my new novel, now in his 40s, told me he cried when he heard the news. What was he supposed to do now? He had to earn a living somewhere. His solution, like that of a majority of his colleagues, was to go and work on Wall Street — in his case, in the giant investment bank Merrill Lynch.
The resulting collision of brilliant but unworldly scientists trained to manipulate sub-atomic particles and aggressive financial traders eager to devise new products was to be more spectacularly dangerous than anything that might have been produced beneath the dusty surface of Waxahachie.
For this was the deadly partnership that helped give us a whole alphabet soup of fearsomely complicated financial derivatives — loans and mortgages and investments packaged up into bundles and sold around the world — that almost no one, and certainly not the regulatory authorities, ever really understood.
Only a matter of time: Billionaire investor Warren Buffet has criticised what he calls 'financial weapons of mass destruction'
When these toxic ‘financial weapons of mass destruction,’ as the U.S. billionaire Warren Buffett presciently called them, duly blew up in 2008, the same U.S. Congress that had saved $10 billion shutting down the Desertron had to come up with a rescue package for the banking system that has since been estimated as costing the American taxpayer $3.7 trillion.
If ever there was an example of the Law of Unintended Consequences in action, this must surely be it. But that may be only the start.
Before I began my research, I subscribed to the widely-held view that people in the financial sector generally had qualifications in economics or business, wore striped shirts and braces (if they were male), and sat in trading rooms shouting wildly into four phones simultaneously.
To my surprise, I found that this image is entirely outdated.
'Quant': Traders these days are more likely to have qualifications in maths or physics than economics
One extremely successful hedge fund manager I spoke to — with $12 billion in assets under management — won’t hire anyone without a top PhD in maths or physics; even economics is considered too ‘soft’ a degree. Increasingly, the people in the dealing rooms these days — young, casually-dressed — look as though they should be in lecture halls. They are known in the business as ‘quants’ — short for ‘quantitative analysts’.
Quants analyse the market with intense mathematical and statistical precision to predict share price movements and the level of investment risk; they sit at screens and rarely talk in anything louder than a whisper.
The trading is mostly done by computer, for which the quants write the programmes. Now, 73?per cent of shares in New York are traded by computer, either by so-called ‘high-frequency strategies’, which may hold the shares for only a few milliseconds, or by algorithms devised by quants. Algorithms are sophisticated programmes designed to predict the behaviour of the markets.
There is something slightly creepy about it. In the words of Emanuel Derman, himself a leading quant: ‘When physicists pursue the laws of the universe, it seems selfless. But watching quants pursue sacred laws for the profane production of profit, I sometimes find myself thinking disturbingly of worshippers at a black mass.’
Increasingly, the role of the trader is like that of a pilot in a fly-by-wire jumbo jet. The job is done by computers: he — for some reason quants are mostly men — sits at a screen and monitors the operation, only intervening when something goes wrong.
Recently I watched an algorithmic system in Geneva belonging to a hedge fund trading on the New York Stock Exchange. The computer had picked the stocks it wanted to trade. It communicated with the broker’s computerised system in the U.S. which, in turn, communicated with the computerised exchange that facilitated the deal. At no point was a human involved.
In the 20 minutes I was watching, the machine made a profit of $1.5 million. This hedge fund has made a return for its investors of more than 80?per cent in the past three years, at a time when most of us have seen the value of our pensions and tracker-funds go down in a falling market.
‘Our computers love it when the markets panic, because when people panic they behave in very predictable ways,’ I was told. In other words, the machines thrive on fear.
Volatility: Computerised trading thrives on fear
There is even a way of estimating this human weakness: the Standard & Poor 500 Volatility Index (VIX) measures the expected volatility on the Chicago Stock Exchange over the coming month, based on a hugely complicated mathematical formula devised by quants. It is popularly known as ‘The Fear Index’.
In 1965, the founder of the computer firm Intel, Gordon Moore, propounded what is known as Moore’s Law: that computers would double in power and halve in cost every 18 months. His forecast has proved amazingly accurate.
To take one example: as recently as the Nineties, CERN’s experimental data was all analysed by a Cray X-MP/48 supercomputer which cost the scientists $15 million. Yet that machine had less than half the computing power of a modern Microsoft Xbox, which costs $200.
When something continues to double in size — in this case computer power — it is called exponential growth. But as Moore himself observed a few years ago, exponential growth can’t continue for ever. It can be pushed to its limit, he said, ‘but eventually disaster happens’.
We have been warned.
Computers have become so powerful in the world of financial trading that the human involvement has been reduced to that of the quants and their obsessive statistical analyses. But computer programmes based on statistics, however brilliantly analysed, do not allow for common sense.
Computers predicted the U.S. property market would rise for ever because statistics showed the country’s house prices had never fallen in history — and every financial institution worldwide piled into the American’s mortgage market. We all know what happened next: the housing market crashed, U.S. mortgages were worthless and the so-called sub-prime loan crisis sent the world’s financial markets into meltdown.
Most of us in Britain remember May 6 last year as the date of the General Election. But about two and a half hours before the polls closed in the UK, at around 2:30 pm on the American East Coast, the U.S. financial markets experienced what came to be known as ‘the Flash Crash’.
The events of those few minutes provide a terrifying snapshot of what the modern markets have become. First, there is their sheer scale: 19.4 billion shares were traded on that day, more than were traded in the entirety of the Sixties.
But the figure is misleading: hundreds of millions of these shares were never actually sold, but merely held for a few thousandths of a second as computerised high-frequency traders tested the waters in the market.
They ‘sniped’ and ‘sniffed’ (in the jargon of the industry), making bogus offers to buy or sell shares so that they could find out the price, but the traders never went through with the sale.
The trouble is that the computers registered these bogus offers as real sales, and so much of this activity took place that the online trading section of the New York Stock Exchange temporarily froze. It was unable to cope — all the ‘sniping’ and ‘sniffing’ had made the amount of shares traded seem ten times larger than it actually was.
Drop: Huge lurches in the markets are now common
In the ensuing panic, the Dow Jones Industrial index dropped by roughly 700 points in the space of 20 minutes, wiping out nearly $1 trillion of investors’ money. This, then, is the financial world which we now live in: a world of extreme volatility, with lurches of 3 or 4?per cent a day on the markets no longer uncommon.
A world of terrifyingly complicated financial instruments designed to spread risk but which have, instead, spread a contagious lack of confidence; a world of instant communications, in which tremors of panic spread across the whole globe in the time it takes ripples to spread across a lake; a world in which thousands of the most brilliant minds on the planet are no longer paid to pursue scientific progress, but to devise financial strategies that are mostly non-productive and sometimes potentially highly dangerous.
The novelist and physicist C.?P. Snow delivered a famous lecture in 1959 about what he called ‘the two cultures’, the humanities and the sciences, and the failure of the one to understand the other.
‘A good many times,’ he said, ‘I have been present at gatherings of people who, by the standards of the traditional culture, are thought highly educated and who have with considerable gusto been expressing their incredulity at the illiteracy of scientists.
‘Once or twice I have asked the company how many of them could describe the Second Law of Thermodynamics. The response was cold: it was also negative. Yet I was asking something which is the scientific equivalent of: “Have you read a work of Shakespeare’s?” ’
It seems to me we now have to add a third culture to Snow’s list: the financial markets.
How many of us, for example, have the least idea of what the latest financial instrument — an exchange-traded fund — actually is? Yet the quants are now busy turning exchange-traded funds into a trillion-dollar industry, up 40 per cent in Europe alone in the past year. And like all these computer-devised financial derivatives that preceded them, they are cloaked in mystery and are risk damaging the financial system.
How many of us even know what short-selling is? I certainly didn’t, before I started researching my book.
As the current sense of sleepwalking towards calamity continues, my worry therefore is not so much the obviously imminent Greek default, or even the strains in the Eurozone, or the U.S. budget deficit, or the long-term intentions of the Chinese.
It is that the financial system itself has somehow slipped all human control — that it has become the preserve of a profoundly anti-democratic, super-rich elite, and that it girdles the planet like some alien entity from an H.?G. Wells novel.
The digitised financial machine does not work for us: we work for the machine. And I do not believe that our political leaders have the faintest idea how to bring it under control.
Robert Harris’s new novel, The Fear Index, published by Hutchinson, is out now.
Now cable company Hibernia Atlantic [ http://www.hiberniagfn.com/index.php ] is spending $300 million to build a new transatlantic cable to shave 6 milliseconds from the present 65-millisecond transit time between London and New York. It will be the first new cable to cross the Atlantic in a decade and trading firms are likely to pay premium rates to use it.
This is because even though a computer can execute millions of instructions in a microsecond, the furthest light can travel in that time - even in a vacuum - is just 330 metres. That is an age if algorithms are competing to execute the best trades.
Bach proposes speeding up signals by shifting from the solid-core optical fibres used at present to hollow-core fibres. Glass slows light down by about a third, says Philip Russell, who studies hollow-core fibres at the Max Planck Institute for the Science of Light in Erlangen, Germany.
Bach also suggests a few changes to the way in which signals are sent. One is to stop data compression, normally done to save bandwidth. "We can't afford 2 to 3 microseconds to compress data," he says. This would mean less information could be sent at once, but it would be quicker.
A second is to abandon error-correction codes, which improve signal quality but take time to process, by designing a system that is more error-resistant. Ending the practice of retransmitting lost data packets could also help, says Bach. This can confuse computer-trading software by scrambling the sequence of trades. Even random fluctuations of 1 to 2 microseconds in the arrival of data packets, an effect called jitter, can confuse computer algorithms.
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