Role of Banks Eyed in Greek Debt Crisis
Globe and Mail– February 26, 2010
By Barrie McKenna and Joanna Slaten

Ms. Tavakoli said Mr. Bernanke didn't go nearly far enough in using moral suasion to rein in the trading of such instruments. [Any type of speculative transaction that would have the effect of increasing the cost of sovereign debt borrowing.] “He should say, ‘We're not going to tolerate anything that could contribute to the destabilization of Greece,'” she said, rather than, “‘Be careful, we might wag our finger in your face.'” She said she doubted anything concrete would emerge from the Fed's scrutiny of such instruments.

End of Excerpt

JT Note: Speaking of faltering economies, while Ben Bernanke and Chris Dodd are investigating transactions that destabilize countries, they should open investigations into the massive number of phoney securitizations issued by U.S. investment banking firms that helped destabilize the U.S. economy in recent years and contributed to the woes of the global economy. They might look into the derivatives transactions, too. They seem determined to ignore the blindingly obvious at home.

With respect to the EU, there are separate issues involving 1) the original legal asset securitizations for EU countries and 2) the current use of market instruments for hedging and speculation. The appropriate questions should be directed to the business purposes of the transactions.

The EU is shocked—shocked I tell you!—that weaker members used legal financial engineering to qualify for admission. Exactly how did they think these countries managed to meet the requirements? Leaders would have you believe they lack basic human curiosity. Countries may or may not have had legitimate plans to employ the present value of future receivables for a purpose that could generate better returns as opposed to say, blowing it all on national bling. In some cases, using the national credit card (backed by future receivables) may have been a futile attempt to appear prosperous enough to keep up with the Joneses. In a faltering global economy, the pain would be inevitable.

The financial media reports that sovereign credit derivatives are a fraction of the total debt issued. While that is true, it doesn’t take much to start a run on a country, because trading on the margin sets the price. Chairman Bernanke is right to question all related transactions, not just derivatives. One would want to investigate a variety of speculative transactions that have the effect of driving down debt prices. The issue is the business purpose. While banks may want to claim they are doing customer business, one should remember that Goldman Sachs claimed its destabilizing transactions with AIG were “customer business.” How did that work out?


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).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


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