Geithner, as Member and Overseer, Forged Ties to Finance Club (Excerpt)
New York Times - April 27, 2009
by Jo Becker and Grethchen Morgenson

In making the Bear deal, the New York Fed agreed to accept Bear’s own calculations of the value of assets acquired with taxpayer money, even though those values were almost certain to decline as the economy deteriorated. Although Fed officials argue that they can hold onto those assets until they increase in value, to date taxpayers have lost 3.4 billion. Even these losses are probably understated, given how the Federal Reserve priced the holdings, said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “You can assume that it has used magical thinking in valuing these assets,” she said.

End of Excerpt

JT Note: I have already made public part of my basis for the statement about the Fed’s magical thinking in valuing assets, and I also raised concerns about Blackrock's role.

Blackrock has not inspired me with confidence given its track record both as an investor in related securities and as a CDO manager. How does Blackrock Financial Management explain its role as CDO manager in some horrific 2007 vintage CDOs such as Pacific Pinnacle CDO ($1 billion; closed 1/1/07; EOD 2/4/08); Pinnacle Point Funding ($2B closed 6/7/07; acceleration 12/13/07); Tenorite CDO I ($1 B closed 5/11/07; liquidation 2/7/08); or Tourmaline CDO III ($1.5 billion closed 4/5/07; EOD 3/31/08)? In my opinion, Blackrock is too close to the problem to be objective, and no bid contracts were inappropriate. [Disclosure: In some respects I am a competitor of Blackrock in that I could have assembled a valuation team. I was not approached, however, and I am not a government contractor.]

The following is from Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street p. 198 (John Wiley & Sons 2009):

“What happened to the $30 billion in Bear Stearns’ mortgage-backed products that the Federal Reserve bought through JPMorgan? From March to June 2008, it lost more than $1.1 billion in value; it has already eaten through JPMorgan’s $1 billion ‘cushion’ and is now eating into taxpayer dollars. It is a sticky bomb, as dangerous as the makeshift explosives stuck to tanks during World War II. In June 2008, the Fed admitted that it priced the assets as if we were in an ‘orderly market.’ But we are not in an orderly market, so the price should be lower, meaning we do not know how much taxpayer money is at risk. Who is helping the Fed price these securities since it cannot price the sticky bomb itself? Blackrock. Blackrock lost money when it invested in the Peloton fund that bought overrated and overpriced mortgage backed securities. They should know all about getting taken for a ride. Jamie Dimon claimed he by no means saddled the Fed with Bear Stearns’s riskiest assets. Given the performance of the assets the Fed took on board, JPMorgan’s shareholders may not feel reassured by Jamie’s testimony before the Senate Banking Committee.”

Of course, the Fed subsequently took on more assets from AIG and more that have deteriorated in value. As of December 31, 2008, the Fed admits to $9.6 billion of unrealized losses (“Bear, AIG Dumped $74 Billion in Subprime, CDOs on Fed,” Bloomberg News, April 24, 2009.


Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008), and
Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (John Wiley & Sons January 2009)

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