Brian Lamb, CEO of C-Span, interviewed Janet Tavakoli, president of Tavakoli Structured Finance and author of Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street on the causes of the global financial meltdown and how to fix it. Ms Tavakoli took on such topics as Tim Geithner’s cozy relationship with beneficiaries of the bailout, Hank Paulson and Robert Rubin as interested men, financial meth labs, incompetence at the SEC, backdoor bailouts, and more. (See notes below).

Notes Updated May 4, 2014

Janet Tavakoli asserts that the economy did not have a heart attack; it is more like appendicitis. “We are prescribing potent addictive painkillers, and that is not the way to go when the economy is having an appendix attack.” (around 3:50 minutes into the interview.)

Zero Interest Rate Policy and Inflation

Ms. Tavakoli said that bank depositors’ money is safe, if it is below the current FDIC deposit insurance limits. Banks did not need to be bailed out to ultimately protect depositors. We bailed out banks’ other creditors with public money. But because we are printing so much money, depositors should worry about inflation, which destroys investment gains.

Moreover, investors aren’t getting a fair interest rate on U.S. Treasuries; at the low rates available in May 2014 and the years since the crisis, investors are getting negative real interest rates.

Inflation is the great destroyer, and Ms. Tavakoli’s position is that Treasury and The Fed underestimate the effects of potential inflation. Inflation will wipe out investment gains (and more) much more quickly than taxes. If you earn, say, 5% on your deposits, 5% inflation will wipe out your gains. That is worse than any current or proposed tax rate, since that would translate to a 100% tax rate.

We also bailed out AIG’s creditors (Goldman Sachs among them), and unlike deposit-taking banks, there was no mechanism at the time to put AIG (or Lehman, Bear Stearns, Merrill) into receivership. Instead we weakened stronger banks like JPMorgan Chase (with the Bear Stearns merger) and Bank of America (with the Merrill merger). Congress acted quickly by passing TARP, and it could have passed legislation to allow receivership of non-bank investment banks, bank holding companies, and an entity like AIG.

Whether through higher taxes or inflation (which has great potential to be even worse) or both, the U.S. taxpayer foot the bill, because interested men chose to protect creditors of major financial institutions with public money.

Robert E. Rubin

In the course of this interview Ms. Tavakoli asserts that Robert E. Rubin, former co-chair of Goldman Sachs, Treasury Secretary in the Clinton administration, and subsequently a director at Citigroup, said, in effect, he did not know what a collateralized debt obligation (CDO) was; he claimed he knew, but he didn’t understand the risk implications and was surprised by the write-downs. He either knew and ignored the hidden risk when it wasn’t disclosed in Citigroup’s accounting statements and SEC filings, or he didn’t understand CDOs.

Rubin was hyped in the media as a “risk wizard” at Goldman Sachs and in his role as Clinton’s Treasury Secretary. Rubin had said: “I knew what a CDO was.” But when large write-downs due to collateralized debt obligations (CDOs) and the liquidity puts Citigroup had written (allowing investors to sell originally AAA rated tranches back to Citigroup at full price) were announced in the last quarter of 2007, Rubin said that he had never heard of liquidity puts until the CDOs containing them started causing problems for Citigroup in the summer of 2007.

CDOs pose many varieties of hidden risks, and there was ample literature available on those risks. For Robert Rubin to say he knew what a CDO was without understanding the risks, is like a man saying he knows what a “clear liquid” is, but is unaware that it is unsafe to drink bleach.

Illegal Activity

In her book, Dear Mr. Buffett, she reveals widespread systemic fraud in the run up to the financial crisis.

When asked whether or not certain individuals had done anything illegal, Ms. Tavakoli responded that she did not think anyone did anything illegal. The better answer would have been: “That is up to the Department of Justice to determine.” But in the following years, it became clear the Department of Justice was not doing it’s job. By May 2014, the statue of limitations had expired for many of the frauds perpetrated prior to the financial crisis.  The Obama administration had no desire to investigate and indict culprits of the financial crisis.

After reviewing a wider pattern of securitization activity and collateralized debt obligations brought to market in 2007, Tavakoli reached the conclusion that senior officers at banks signed off on statements they knew or should have known were false, and should be held accountable under Sarbane’s Oxley. See: “Repairing the Damage of Fraud as a Business Model.” – Presentation to the FHFA in Washington, December 2010.

As money flowed to banks and back to Washington in the form of campaign contributions, elected so-called representatives put their careers, not the welfare of their country, first.