In case you missed the weekly Goldman Sachs (GS) furor, this week's installation was a Monday morning front page story in the Wall Street Journal which I won't do a full blown look at but let me give you the highlights. Actually for the Cliff Notes version all you need to know is you are being walked on, and Goldman is just smarter than you (by smarter I mean manipulating the system - bending the rules but not breaking them) - hence the 97% winning percentage last quarter. (Aug 5, 2009: Goldman Sachs Q2 Winning Percentage: 97%) It has nothing to do with dominating program trading, flash trading, algorithms, having access to information via political channels, front running internal research, or anything of that nature. Frankly if I were Goldman's CEO I'd make sure we were (ahem) "making some mistakes" this quarter to get that winning percentage down to say low 80%s...

For a more in depth summary of "this week in Goldman gaming the system" (many times firmly within the rules, if on the sideline boundary), in essence this is a tale of Goldman's research team giving its top clients short term trading calls that at times go against their longer term public views on a stock. One example:

• Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.
• The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry's research didn't find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.

While making short term calls is VERY common at any major financial institution the "selective disclosure issue" is the massive gray area. Especially since the way Goldman does it, is very different than many peers. For example:

• At many firms, traders, salespeople and analysts hold early-morning calls to review ratings changes, recommendations and market events.
• At least one competitor discloses such trading tips much more broadly. Morgan Stanley's research department sends blast emails with short-term views on various stocks to thousands of clients, and posts the information on its Web site. It doesn't call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure.

Selective disclosure is what it is all about. If you are newer to the markets, Eliot Spitzer used to have a job before "disgraced Governor"; he was New York's AG. His coup de grace was stopping the behavior of "selective disclosure" - that is disseminating information to a select group (who could act on it) before the masses. Which is effectively front running and illegal. Is Goldman doing that now? Technically no or perhaps - maybe? But remember, in a piece last week I said there is "spirit of the law" and "letter of the law"... many rules are placed with the expectation that the spirit of the law will be obeyed. Meanwhile, a horde of attorneys are pecking through the fine print (and in fact the lobbyists many time help create the "new rules" so the loopholes are already known) to find ways to get around the spirit of the law, without technically breaking the letter of the law. And it's not just in high finance - heck, I'd argue the whole corporate accounting profession is based on this.

• "The spirit of the law is twofold," says Eric Dinallo, who in 2003, when serving as a deputy to former New York Attorney General Eliot Spitzer, helped negotiate a $1.4 billion stock-research settlement with 10 major Wall Street firms, including Goldman. "Analysts should give consistent advice to all their customers, be they small investors or big trading clients." Any views that differ from an analyst's published rating but are "worth sharing with certain customers," he says, should be made "available to everyone."

So that's the spirit, but surely there are loopholes, which are being duly exploited.

• The 2003 case involved allegations that Wall Street firms were issuing overly optimistic stock research in order to win more lucrative investment-banking business. The settlement, in which Goldman and the other firms didn't admit or deny wrongdoing, erected walls between research and investment banking.

Now that 2nd bullet point is interesting... this "Chinese Wall" that was put up between research and the investment banking/trading arms of our financial oligarchs was something I assumed was actually working. But there I go again dropping my cynical facade for 1 second, and look at Goldman go! You see, what Goldman is doing by giving information to one group of clients and not the others is only part of the story - and I'd argue the smaller part. Although all the media reports since Monday have focused on THAT piece of the puzzle.

The part I am interested in, is the complete skirting of the Chinese wall... it's an amazing stretch and only a company so arrogant to essentially own the regulators would pull a stunt like this. But it's a financial oligarch country and there is none more powerful than these. Here is the part that SHOULD be getting all the attention at the SEC. Not only is the Goldman research term giving short term tips to a small group of their biggest hedge fund, there are some magical men sitting in on those meetings. These men are called "franchise risk managers" - they happen to work for Goldman's trading floor.

• Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle."
• Some Goldman traders who make bets with the firm's own money attend the meetings.
• ...