The Nerve to Say No
New York Times - December 12, 2010
by Gretchen Morgenson

Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago, has provided a to-do list for officials at F.H.F.A.

In a presentation to the agency’s supervision summit meeting last Wednesday in Washington, Ms. Tavakoli said that if the agency hoped to determine the credit risk lurking inside Fannie and Freddie, it needed to ascertain two things: the probability of default on those loans and the loss rates when probable defaults actually occur.

“ They have to do their own statistical sampling of their portfolios to get a realistic idea of what those numbers are,” Ms. Tavakoli said in an interview. “And it has to be rigorous because we don’t know what kinds of impairments to expect from risky new mortgage products combined with a damaged economy and housing market.”

The F.H.F.A. cannot rely on estimates from the credit ratings agencies about the extent of those losses, Ms. Tavakoli said. “The whole idea of relying on third parties has not worked,” she said. “Once you feel better about the quality of your information, you’ll feel more confident about making your next decision.”

She also advised the F.H.F.A. to conduct a thorough fraud audit on the portfolios held by Fannie and Freddie to identify any improprieties that may have been involved in the loans the companies purchased.

“ Fannie Mae and Freddie Mac have inherited a system that is hostile toward them fixing this mess,” Ms. Tavakoli said. “They need to stand up to the pressure they are going to get from Congress to give imprudent loans to people to provide a fake stimulus to the economy. But it didn’t work before and it won’t work now."

END OF EXCERPT

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)


Clients of Tavakoli Structured Finance have the benefit of proprietary consultation, which is not available in any other paid or public forum. Clients also commission proprietary research and analysis.

TSF makes some information available to the general public. Please click here for other articles.