Banks Face Danger in Delphi
Financial Times Published: October 25, 2005
By Peter J. Davies

However, Janet Tavakoli, an independent industry consultant with more than 20 years experience in senior Wall Street roles, said that even the most sophisticated hedging models used by the banks in such transactions fail to guard against all the potential risks.

“For example, if one is short mezzanine risk but long equity risk, a correlation model’s delta hedge ratio, and the entire delta hedging process in general, is a poor way to hedge,” Ms Tavakoli said. “The reason is that the primary risk is default risk and hedging in this way does a poor job of hedging that risk.”

Furthermore, according to many dealers and investors, there is an imbalance in the CDO market between higher demand for selling protection on, or investing in, the mezzanine tranches and the limited demand for equity tranches, which could have left banks more exposed than they are ready to admit.


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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.

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