NC has been on fire lately with terrific posts and great comments. I should just sit back, shut up and enjoy but I can't resist encouraging everyone to tie things together on the international level. The story of competition between Wall Street, the City of London and Kasumigaseki — in "private" and "public" sectors — is essential for understanding this mess.

I would say that the principle systems problem is, as you say, one of scale, but it isn't necessarily a white shoe vs. track shoe struggle. Both advisors and traders are in a position to know how _their own_ position stands, at least in principle. This promotes a culture of the 'captain of capital,' where smart guys of either footgear expect to know what they are doing and where they stand on a given day if they're competent to play this game. But the positions taken by the traders now, or for that matter the complexity of securitized and derivate bolstered LBO deals is such that nobody really knows where the deal stands. Individuals still want to run their positions and shops like captains but they're directly too many pixels for the latter to hear the trumpets call above the din. One needs a talented staff whose sole function is to know where all the pieces are all the time.

The scale and speed of the flows don't allow for individual control, one needs systems of control and teams of controllers, in a phrase. But the culture of the ibanks calls for 'rainmakers,' just as we see: these boys all think they're up to it, but the scale is bigger than their egos are, even. Imagine that, folks.

that it has so successfully penetrated government. When the meltdown happened, our Treasury Secretary Hank Paulson, former Chairman and CEO at Goldman was working a deal to takeover AIG. Lloyd Blankfein the current CEO of GS was the only banker allowed into those meetings. Saving AIG saved GS. At the same time, Lehman a company that Paulson disliked was allowed to go into an uncontrolled bankruptcy sparking the meltdown. Paulson put a GS board member Edward Liddy in to run AIG and Liddy just happened to OK to paying off a major chunk of AIG's CDS portfolio at full value and before any default, creating a $13 billion windfall for Goldman. Paulson also named another protégé from Goldman Neel Kashkari to run the TARP with its opaque non-accountable loans to "banks" like Goldman. Paulson also greased the wheels to rename GS a bank holding company, a laughable fiction, so it could have access to more government credit lines, another way he saved the company.

Meanwhile the Chairman of the NY Fed was Stephen Friedman another former head of Goldman. When Geithner moved to Treasury, he made Mark Patterson, a Goldman lobbyist, his chief of staff. His former job as President of the NY Fed was given to William Dudley, who had been GS's chief economist.

With connections like these you don't have to be smart or even good. Having the Treasury and the Fed as your piggybank, would allow anyone to "bounce" back no matter how many catastrophic decisions one made.

The majority whip in the US Senate, Dick Durbin (D- IL), who unsuccessfully fought the banks to allow bankruptcy judges to renegotiate mortgage principal amounts said, “the banks are the most powerful lobby on Capital Hill and frankly, own the place.”

We are bailing out Wall Street because the banks convinced politicians that this will revive the economy, but I don’t believe the economy is benefiting. The politicians are bailing out the status quo by not allowing capitalism to work; instead, zombie banks responsible for this credit crisis should be allowed to fail and thereby, reduce debt. There are now no legal restrictions on what banks can do with the bailout money from the Federal Reserve, consequently, I believe zombie banks are using this money to speculate in the stock market rather than making new loans. The value of loans from 21 of the largest banks getting bailout money fell in June, 2009 to $4.34 trillion dollars, down 0.8% or $35 billion dollars. Instead, bailout money should be going to Main Street rather than simply propping up Wall Street and the stock market. I believe we are in a secular bear market which have occurred 50% of the time since 1900 (i.e., 1906-1921; 1929-1949; 1966-1982; 2000-?) and will not abate until 2017, assuming we take correct actions politically. Japan has been in a secular bear market for the past twenty years, with their stock market down 76% to date (Nikkei Index: 38,916 to 9,421), and we following in Japan’s footsteps.

Americans are not benefiting from a free and open discussion in Congress concerning the causes of the 2008-09 credit crisis and the proper remedial actions, nor, I believe, within academe because banks sponsor academic journals and consequently, greatly influence their publication policies. The existing financial economic theory which governs how the stock market functions is incorrect, but profits Wall Street so it remains in place and is taught to all business college students. The current theory assumes that the stock market is a huge casino where stock prices incorporate all available information, so beating the market, when controlling for risk, is impossible, resulting in the standard recommended strategy for the investing public, i.e., put your money in the stock market, hold on and hope for the best. Risk management, as a consequence of this outdated financial theory, is useless which is a major cause of the 2008-09 credit crisis [along with control fraud and changed/repealed US financial laws]. I’ve written a research paper that disproves the outdated financial economic theory that Wall Street so desperately clings to; but, I cannot get it published in a good academic journal. I am happy to e-mail a PDF copy of my paper entitled “Credit Crisis, Systemic Risk and Economic Analysis” to anyone interested: elprentis@earthlink.net.

I really wonder what was in the software that Russian stole.

That was an awful lot of code… millions of lines of code or more.

Welcome to the world of OTC markets.

The firms are not "brokers" in these markets. A broker has a fiduciary duty (believe it or not, even real estate brokers supposedly have fiduciary duties) and collects a fee. In an OTC marker, there is no fee, just a bid an offer price (and if you ask for a quote, you have to say what size and whether you want to buy or sell. Bloomberg and other services show only indicative prices).

Historically, order flow traders (who made money in theory made money off the bid and offer) always did a position trading too, shading the size of their inventory based on short-term market views.

Prop trading made that position trading a separate activity and also gave them license to play with more capital and go over longer time horizons.

And in unregulated OTC markets like FX, front running customer orders is perfectly kosher and therefore done all the time.

Do they use the order flow data to help them trade?

Are they tracking their best performing customers closely and following?

Isn't there a fundamental conflict of interest when a broker also trades on their own account?

Yes, it’s a sore spot. Want more? I thought not. I could become quite an ogre about it myself.