Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Speech to IMF on Credit Derivatives, Enron, and Misrated “AAA” Structured Products

Ms. Tavakoli was far ahead of the financial industry in pointing out the problems with the rating of structured financial products, lax underwriting standards, and excessive leverage–noting underwriters are responsible for performing due diligence appropriate to the circumstances and must disclose material information. Ms. Tavakoli also warned of problems with credit ratings in her book: Collateralized Debt Obligations & Structured Finance (John Wiley & Sons, 2003), in several subsequent articles, and updated again just in time for the financial crisis in her book: Structured Finance & Collateralized Debt Obligations 2nd Edition (Wiley 2008). Earlier, she addressed specific credit rating and language issues in her book: Credit Derivatives & Synthetic Structures (John Wiley & Sons 1999, 2001).

After Ms. Tavakoli gave this speech, conditions deteriorated even more, especially with respect to subprime backed paper, and Ms. Tavakoli wrote many articles following this topic very closely. Ms. Tavakoli’s was the first letter the SEC posted in February 2007, in which she said the NRSRO designation for the rating agencies should be revoked for structured products. She gave examples of misrated products including the fact that CPDOs did not merit a “Triple-A” rating.

At the end of this short segment from a speech in April 2005 speech to the International Monetary Fund, Ms. Tavakoli discusses structured credit ratings and how “Triple-A” collateralized debt obligations often traded as if it were lower rated, and structured credit products, even “Triple-A” rated products, are often very illiquid. She also notes that “Triple-A” paper is often misrated.

Other discussion included the importance of rewriting credit default swap language provided by dealers.


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