Matt Taibbi, Sausage-Making, and the Bond Rating Agencies

Short and sweet today. Gotta pack for the Association of Certified Fraud Examiners global annual conference in Las Vegas next week – Andy Fastow (one of the King Weasels of Enron infamy) is among the keynote speakers, and it promises to be an interesting week interacting with auditors and fraud investigation professionals from all over the world. More to come as events unfold.

Today’s main rage-inducing topic is yet another excellent article from Matt “Vampire Squid” Taibbi in Rolling Stone. If you haven’t read the previous RS articles or his 2010 book Griftopiado yourself a favor and get familiar. 

His latest article helps clean up some odds-n-ends from the various polemics he’s written over the past few years, and he focuses a lot of his laser-sharp analysis on some of my least-favorite entities in the universe – the ratings agencies. Taibbi frames his story with emails and other documentary evidence of the epic greed and dishonesty that was (is) endemic within the likes of Standard & Poor’s, Moody’s, et al. Just to give you a taste of the outrageous shit these cats were getting away with during the insanity of the MBS/derivatives tulip mania, here’s an internal S&P email Taibbi quotes:

“Lord help our fucking scam . . . this has to be the stupidest place I have worked at,” writes one Standard & Poor’s executive. “As you know, I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it,” confesses a high-ranking S&P analyst. “If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value,” complains another senior S&P man. “Let’s hope we are all wealthy and retired by the time this house of card[s] falters,” ruminates one more.

Read more: 

There HAS to be a reckoning for the ratings agencies. Let’s see if anyone in Washington has the political will to bring them to task. I can’t say I’m overly optimistic, and I’m hearing anecdotal evidence that new bubbles are forming as we speak.

Have a great weekend, I’ll report in from Vegas as the conference kicks off!Image



I, For One, Welcome Our New Robot Overlords. Or Not…


So today we have two items tangentially related to All Things Auditing, but they’re interesting and potentially extremely important to larger society as well, so here goes…

Ever heard of Apache Hadoop? Me neither, until last week’s completely unsurprising revelations that the NSA knows my wishlist and that I like to watch cat videos on YouTube. At any rate, Andrew Leonard over at Salon has written a revealing and somewhat terrifying piece detailing the prevalence of this open-source software ecosystem and the potential implications for those of us who are affected by big data. In other words, everyone:

Netflix, Facebook – and the NSA: They’re All in it Together

The other noteworthy item this week is an ongoing media brou-ha-ha centering around our machine friends, specifically the High Frequency Trading Platforms that are now used to buy and sell the majority of equities in the global financial markets.

I gotta say, when even notorious corporate shills CNBC has reservations about you, you just MIGHT be evil (see above link). This week’s controversy centers around the fact that many market research organizations are now selling their data to the HFTs ahead of their release to other paying customers/the general public. And when I say ahead, I mean often only a second or two ahead of everyone else.

Why is this a big deal, you ask? Well, because the HFTs consist of enormous arrays of concentrated computing power that are programmed to analyze enormous amounts of data input and make trading decisions on that information in time increments that are measured in picoseconds. Therefore, a two second jump on the rest of us is more than enough time to front-run us mere mortals and place massive, market-moving orders on either side of any given entity (from

How Two Seconds Can Be Worth Millions –  The WSJ shines a light on the high-speed traders who receive access to various non-government economic reports two seconds before everybody else, allowing them to make tens of millions of dollars through algorithmic trading. When a recent University of Michigan consumer report came in below expectations, for example, various firms bet nearly 7M shares that stocks would decline, which they did. And it’s all perfectly legal.

On one hand, the owners of the various HFTs (investment banks, hedge funds, this guy, this other guy, etc.) argue that sure, they gain an advantage from the early access to economic data, but they pay a private company for it, no harm, no foul.

I see their point, but there are a couple of issues here that trouble me: First, as an average-joe investor, it seems to me that no matter what, I’m going to be front-run by the machines no matter how quickly I make a move in the equity markets. Then again, how is that any different than things have always been? As George Carlin said, to paraphrase, “It’s a big club, and you ain’t in it.”

The other thing that bothers me about the HFTs is that, as an auditor, how can I even come close to effectively auditing these behemoths? I’m glad I don’t work for the SEC, because I might end up becoming so disillusioned and frustrated that I give up and just do this all day. Is anyone really surprised that a hedge fund or Wall St. investment bank is able to invent and deploy a money-making apparatus that is fundamentally opaque and appears to be impossible to effectively regulate or oversee?

On that happy note, have a fun weekend!

S&P, Moody’s, Fitch: “You Didn’t Actually BELIEVE Us, Did You?”

A couple of things today:

  1. The new Queens of the Stone Age record, …like Clockwork, is excellent. Dave Grohl on drums and former members Nick Oliveri and Mark Lanegan making return appearances means a trippy, laid-back, but paradoxically super-heavy vibe. After the first few listens, I have to say it’s my favorite QOTSA record since Rated R.
  1. You may be familiar with the highly popular Wall St. gossip blog Dealbreaker. While much of the site is decidedly gossip-centric, specifically regarding the investment banking and hedge fund industries, staff writer Matt Levine regularly posts VERY comprehensive (And footnote laden! Love me some footnotes!) analysis of finance topics that are usually only glossed over by the mainstream media. I highly recommend reading his work.This most recent post, regarding the almost-incomprehensibly arrogant ratings agencies and their strategic utilization of the Nazi Party’s Big Lie methods (my characterization, not Mr. Levine’s), details some of the intricate machinations that the ratings agencies are currently engaged in as they try and convince various and sundry courts to dismiss billions of dollars in litigation filed against them for that little debacle we had back in 2007-2012.This would almost be funny if it weren’t for the objective fact that the ratings agencies basically enabled the world’s largest investment banks to, I dunno, almost destroy the global financial system. That’s not hyperbole, either. Anyway, one of Mr. Levine’s gem observations pretty much sums up the hilariousness:

“What’s fun here though is to consider S&P’s two main arguments which are:

  • ‘When we say we have a policy of objectivity and independence and avoiding conflicts of interest, we don’t want anyone to take us seriously about that, and
    • What do you mean our ratings of RMBS CDOs in 2007 were wrong? They were fine, stop whining.’

Here’s the whole article. Check it out if you’ve already taken your blood pressure med/antidepressant for the day.

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