How to Rescue Capitalism
Forbes.com - April 27, 2009
by Michael Maiello

Janet Tavakoli, an expert in complex derivative securities and the author of Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street recently sat down with Steve Forbes [President and CEO of Forbes and Editor in Chief of Forbes Magazine] to discuss the lingering financial crisis and the future of Wall Street's banks. Tavakoli, who saw trouble brewing way back in 2005, believes that we still need an accounting of the crisis and maybe some perp walks for bank executives.

After her interview, Tavakoli sent a short essay to Steve Forbes outlining her belief that the financial system was laid low by predatory lending and predatory securitization. Her essay expanded on the themes of the Intelligent Investing interview (you can watch it here) and we offer these relevant excerpts from her essay for those who'd like to know more about how we got here and what's to come:

"As the mortgage bubble inflated, the motivations and viability of thinly capitalized mortgage lenders were not challenged. The explosion of predatory loan products--unprecedented in the risk they posed--was unchecked by regulators. Regulators seemed to actively ignore the shocking slippage in underwriting standards by our former investment banks and other financial institutions. Furthermore, dodgy practices still pervade large pockets of mortgage lending, credit cards and auto loans. Excessive leverage combined with riskier loan products in commercial mortgage lending and corporate lending have exacerbated the crisis.

Regulators failed to make sure banks maintained adequate capital cushions, and managers of financial institutions failed in their duty of care. But the global financial meltdown is not the result of an unfortunate mathematical error or an errant model. Predatory lending and predatory securitizations combined with excessive leverage and dodgy accounting contributed to our current crisis. This was not an innocent mistake. Rather Wall Street's financiers fed models misleading data to concoct securitizations in financial meth labs that both hid losses and destroyed value. There were no outliers, just outright liars."

In her interview, Tavakoli called for the regulation and compression of the credit default swap market, something that's actually occurring as the Intercontinental Exchange works to build the first transparent CDS exchange. Until recently, these transactions were all entirely private.

But that's not enough for Tavakoli, who'd like to see stricter regulation on the securitization and issuance of credit and credit products. Without that, she says, "Capitalism as we knew it will eventually perish. It will be permanently replaced by a financial sector oligarchy that holds sway over a once democratic government that failed to protect our money."

End of Excerpt

VIDEO: When Wall Street Lies to Us
Forbes.com - April 27, 2009

Steve Forbes, President and Chief Executive Officer of Forbes and Editor in Chief of Forbes Magazine, interviewed Janet Tavakoli on the causes of the global financial meltdown, lack of candor from Washington and Wall Street, and what needs to be done to fix our financial system.

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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