on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy over at 85 Broad (or maybe 1 New York Plaza, his detailed Bloomberg Bio page has disappeared) had the following responsibilities at Goldman Sachs according to Linked-In:

• Lead development of a distributed real-time co-located high-frequency trading (HFT) platform ..

In the 5 days immediately preceeding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder. After all, from the affidavit: "certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.

A quick recap: Programmer at Goldman's High Frequency Quant trading division decides to quit for 3x his salary, and transfers source code out of the US. 32 megs of it. They figure it out but take a month to do so, and have him arrested. Now, the code's been out there for a month, presumably looking for a buyer. It's likely someone already knows about it - and despite Goldman's "security" claims, it could have been a potential [failed] buyer that raised the alarm.

If it's true, it might be a volatile time for the high freq trading programs in the US. (In India, the high freq traders are all human. You should see the speed they can type orders.)

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

... for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

(One thing that I've always felt uncomfortable about is the concentration of wealth in retirement funds where you can't draw your money out, and are at the mercy of fund managers and indeed, your own risk taking in the case of 401-Ks. Such money leads to risk taking in retirement accounts and liberal spending or debt in regular accounts; not desirable. In good times, you'd risk the retirement for yield, and in bad times, when that money isn't there to save you - when else do you need it - you have to save from what you make otherwise. Need withdrawable retirement accounts, after say five years.)

But I digress. The point Simon makes is that the financial oligarchy is holding the U.S. to ransom, using the potentially devastating impact of their own demise. A financial suicide bomber, so to speak, who ask for government help - and use it to build more explosives. And the government is yielding - because the administration is now run by the very guys who built some of those explosives.

Why else were AIG's debts to Goldman (among others) made whole, but the government refused to respect the seniority of debts in the case of Chrysler? (They even gave an equal or more say to the unions, which are unsecured creditors - they should rank below secured debt holders!) And nothing can explain the PPIP - a plan that'll make these oligarchs substantially richer, if it takes off.

Banks got money at far better terms from the government - a private player like Buffett extracted far more for his piece than the government could, from a company like Goldman Sachs. And they get government guarantees on their debt, but can still play around in derivative markets without regulation.

If these banks aren't allowed to go bust, then there's not much of a banking system. A far better deal would be to just own these banks outright - like India does. Then, when life is better, break it up, sell or dispose of the pieces, and nothing will be that gargantuan in failure. Pre-privatisation or temporary nationalisation, it needs doing.

Simon says it best: "Anything that is too big to fail is too big to exist."

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

Tyler at Zero Hedge has done a great job exposing chinks in the Goldman armor, and so has Mike Morgan at http://www.goldmansachs666.com. Goldman seems to feel it - the oldies are closing ranks and keeping lids on data, and pursuing random legal options to keep such sites at bay. But there's too much out there known already.

Read the article - from market manipulation to blatant disregard for the rules and ethics in the game, there's stories of them all. (Oil will be at $100! Oil at $200! oh wait. Oil is now at $30? Frik, Oil at $75! ) Matt doesn't spare the ex-Goldman ex-Treasury Secretary Paulson either, and has scant respect for the insiders of all the big banks.

It seems to me that Goldman could be the next Enron. There's a lot of financial shit waiting to hit the fan - probably the worst kind since the Great Depression - and Goldman may just end up being a high-profile casualty. Or will they make it through this time too?

This post is written by Deepak Shenoy, at The Indian Investor's Blog.