Is the Federal Reserve Still Shoveling Money to Goldman Sachs?

It is a very strong possibility.

There is a lot of mystery surrounding Goldman's high velocity trading. When Goldman's 3Q earnings were announced, I wrote:

So what is this "velocity" all about? Who knows? Max Kaiser seems to think it is front running, it may very well be. You really need someone at Goldman or the NYSE to explain the high flying black box that Goldman is using. That's the only way to understand it, for sure. Goldman has captured the NYSE, so they are as likely not to tell you as Goldman itself.

But maybe it isn't even exchange traded activity. Rolfe Winkler points to an interesting exchange between bank analyst Meredith Whitney and David Viniar - Goldman Sachs- EVP, CFO, during Goldman's investor conference call following the release of 3Q results.

Whitney asks:

I have a few questions. The government purchase program was supposed to end this quarter. They’ve extended it to next quarter. How much of that is a driver of velocity of flows? And how are you positioned when they exit, if they exit, for any type of principal risk? And what do you think that impact is going to be in the larger market? That is my first question. Start off with an easy one.

Whitney clearly suspects that some of Goldman's black box high velocity trading may be tied in with Fed purchases. Winkler notes Viniar's answer is a non-answer:

Viniar: Not a problem. Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing. I think that they are going to do it carefully. They are going to do it slowly and over time. I think they are signaling the market. I think they are doing a very good job of letting people know they are going to continue for a while, but they aren’t not going to continue forever. As far as our positioning, I don’t think it really matters at all. As you know, as I said, most of what has happened has been the velocity, not the positioning. And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

Whitney tries again:

Okay, but in terms of the flow volume, right — so you have been the greatest beneficiary of increased flow volumes. How are the flow volumes going to be influenced as they exit?

Viniar:

I think that they will try to time their exits for the market being healthy enough to pick up that flow. And so I think the flow will continue.

Whitney tries another direction to get at the same answer:

And then who would you imagine would be the substitute buyers?

Viniar:

The various market participants. I think it will be the various financial institutions, funds. I think the whole variety of buyers. And there is a lot of cash out there to buy.

Then another biggie from Whitney:

Okay. And then just a last one. I was teasing when I said it’s the easiest one. But it was easy for you. The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

Viniar:

Oh, I would say that it was much more markups than sales…I don’t have the exact number, but it would be much more markups than sales.

Got that? Of the reported $1 billion in principal revenues, it wasn't cash sales but just markups. There is something very fishy going on here.

Goldman's high velocity black box may be even more suspicious than even I first suspected. It may be the Fed propping up certain markets by buying assets from Goldman, and then, on top of this, Goldman marking up the remaining like assets. When Whitney asks who is going to step in to buy these assets once the Fed stops propping them up, that's one helluva question. Just who would prop up a market to shovel money to Goldman?

This Whitney-Viniar exchange is reason enough to demand an audit of the Fed.

I issue another Bleg to anyone who knows what Goldman/the Fed might really be up to, please contact me at rw@economicpolicyjournal.com Confidentiality is guaranteed.