Top 10 at 10: Goldman's black box heist; 'We have learnt nothing'; Long rates to double say Fed study; Dilbert

Here's my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below and please email any suggestions for tomorrow's Top 10 at 10 to bernard.hickey@interest.co.nz We don't need any pork in New Zealand. 1. This could be the beginnings of a juicy trading scandal around Goldman Sach's powerful 'black box' trading division that uses algorithim and hyper-fast computerised trading programmes to make a shedload of money. A Russian computerised trading expert who had worked for Goldman Sachs has been arrested in New York and charged with stealing trade secrets, according to Reuters columnist Matthew Goldstein, who broke the story.

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.

The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades. The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The charges also raise serious questions about the safeguards that Wall Street firms deploy to protect these costly-to-build proprietary trading systems.

2. Tyler Durden at ZeroHedge appears to have discovered that Sergey Aleynikov may have form, having been accused of copyright violation before. Goldman Sachs may not have done a google search before hiring Sergey, who is a ballroom dancer. 3. Bobswern at DailyKos captures the mood about this Goldman story nicely.

As Zero Hedge and Reuters are quick to point out, the case has the potential to actually pull the curtain aside for the public to take a look at the inner workings of Goldman's trading activities. Speculation is running rampant throughout the blogosphere tonight regarding matters as diverse as the fairly well-known fact that Goldman is at the heart of the government's Plunge Protection Team, a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called national security, since the "PPT" group, created during the Reagan administration, is supposed to step in and prevent our markets from crashing), to the possibility that Goldman could have easily been "frontrunning" the rest of the market due to the implementation of their exceptionally fast proprietary code, identifying others' market-making trades and strategies, then acting upon them for Goldman's own benefit,  executing in-house trades before the third-parties' trades were even concluded.

4. This is a beautiful 'We have learnt nothing' story from the Financial Times about how banks in New York and London are dreaming up new schemes to increase their leverage.

Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks' balance sheets, in the latest sign that financial market innovation is far from dead. The schemes, which Goldman insiders refer to as "insurance" and BarCap calls "smart securitisation", use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.

5. A study by the US Federal Reserve from 2003 estimated that US long term interest rates would double if the US government undertook the sort of deficit-funded spending it is now, The Telegraph reported.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a "debt explosion". Mr Laubach's study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case. Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr (US Federal Reserve Economist Thomas) Laubach came to the conclusion that "a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points". The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach's "typical estimate", long-term rates have to climb 2.5 percentage points.

6. The housing market collapse in the United States is far from over. Standard and Poor's raised its loss forecasts for Alt A and Sub Prime loans overnight, Calculated Risk points out.

Standard & Poor's Chief Economist David Wyss expects "home prices will decline by an additional 5%-7% from the 2006 peak before residential real estate prices start to stabilize in the first half of 2010, marking an overall decline of approximately 37% from the July 2006 peak."

7.  Here's an excellent photo essay from New York Times about the housing bust in the United States. It captures the mood in a set of stunning pictures. 8. Mish at GlobalEconomicAnalysis points out the problems faced by US hotels and resorts, including the 'godawful' Pheonix Arizona. I agree with Mish on the deserts. They are barren places you just want to drive through in a hurry. This following snippet is alarming.

Richard Warnick of Warnick & Co. said he'd be surprised if nearly all hotels and resorts, here and across the country, weren't in technical default on their loans, falling below required minimums on debt service coverage, for example, given the sad state of travel. That is often a precursor to more serious financial problems that prompt lenders to foreclose.

9. Wolfgang Munchau at FT.com has another cracking survey of what's really happening with Europe's banking and economic ugliness.

I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent's 40 or so cross-border banks at European level, and in particular Germany's inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse. The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks. Mr Trichet appealed to the banks to behave responsibly. Over the weekend, German politicians also made desperate and implausible threats against the banks unless they increased lending. Not only is this a waste of time but the banks are, in fact, behaving responsibly when they deny credit to customers whom they judge to have lost creditworthiness. Left to its own devices, banking is inherently pro-cyclical. This is one of the reasons restoring the health of the banking sector by whatever means necessary is a precondition for an economic recovery. Liquidity injections by a central bank, however large, cannot restore health to the banking sector in a sufficiently short period of time if the underlying problem is lack of solvency. Nor do accounting tricks that allow banks to freeze their bad assets in bad banks without any resolution mechanism, such as the German law passed last week. And since the European economies are far more dependent on the banking sector than their Anglo-Saxon counterparts, the need to sort out the banking sector is even more urgent there.

10. Here's an interesting piece from Caluculated Risk that looks at the role of part time workers in any economic recovery and concludes that lots of part time workers actually delay a recovery because employers are encouraged to work their part timers harder rather than going out and employing new people.