Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Gasparino’s Glass Jaw is No Audience Draw

Updated January 2014

CNBC’s ratings were at a 20-year low for the last quarter of 2013. Charlie Gasparino left CNBC to join Fox Business in early 2010. Maria Bartiromo recently announced her move after 20 years with CNBC to Fox Business. Five years after the financial crisis, are on air anchors doing a better job of investigative journalism than before the financial crisis, or is there a reason the ratings are in the tank?  Perhaps a brief Gasparino retrospective will help you decide.

CNBC is financial entertainment. Guests and watchers should take it in the same spirit they reserve for Dilbert cartoons. Why expect more than it can deliver? Comic relief has its place, and in finance, that place is CNBC (and often Comedy Central’s Daily Show).

CNBC: No Early Warning

Why didn’t CNBC give early warning of Wall Street’s implosion? Perhaps because CNBC’s on air reporting usually isn’t hard hitting, despite what a profile in the Financial Times may say. It’s a good thing CNBC’s Charlie Gasparino didn’t try for the Golden Gloves.

Gasparino’s July 14, 2009 rant about Goldman Sachs was very late to the party. On the topic of Wall Street, the only “f-bomb” CNBC fails to drop is the fraud pulled off by Wall Street firms when they failed to properly mark their books and fueled massive problems for the American economy. On July 20, 2009, Gasparino was easily fooled by Goldman’s assertion it is responsible for a public service (liquidity and a backstop) and failed to analyze the key legitimate issues that need to be addressed by reformers: Goldman’s (and Wall Street’s) undue influence over Treasury and Fed officials and Wall Street’s need to make reparations to the U.S. Treasury.

Goldman runs a hedge fund. This observation isn’t new, and Goldman is not alone among our large banks in running invisible hedge funds. Many others raised substantive issues about Goldman and Wall Street long before Gasparino, and they haven’t caved.

See “Commentary: What Wall Street owes you,” by Janet Tavakoli CNNPolitics.com, July 15, 2009. In November 2009, I released an analysis that showed Goldman Sachs was the key architect of AIG’s distress, one week before Neil Barofsky’s SIGTARP Report confirmed my findings.

Investigative Journalism v. Access Journalism

There are many good reporters who actually read documents, analyze them, and know how to sift good information from bad, but Gasparino isn’t one of them these days. Here’s a tiny Bear Stearns sample:

“Jimmy Cayne built Bear Stearns from the ground up with one key ingredient: guts. (“We induct a Wall Street icon,” by Charles Gasparino Trader Monthly Jun-Jul 2007. Trader Monthly ended operations February 2009.) At the beginning of August 2007, Gasparino’s mantra was: “When I had dinner with Jimmy Cayne on Sunday night.”

Compare that with this 2005 expose of Bear Stearns’ collateralized debt obligations in the Street.com or BusinessWeek’s May 2007 Bear Stearns Asset Management related subprime CDO / IPO expose (Matt Goldstein, the articles’ author, joined the New York Times’ Deal Book November 2013.) or with Jody Shenn’s work on Bear at Bloomberg News.

I was quoted in these articles, which is why I had the examples handy. There are many other good reporters in financial media. For example, TSF named Allan Sloan, Fortune’s Senior Editor at Large, the Top Financial Journalist of 2013.

Footwork Needs Work

After-the-fact reporting is not the same as being “ahead” of everyone else. In Oct 2007, Charlie discussed Merrill Lynch with me. Not only was CNBC very late to the party regarding the meltdown, Gasparino makes a typical assertion: “When we reported [Merrill’s write-downs] here three weeks ago…ahead of anyone else…” right after I point out I wrote an article about Merrill’s short-able positions, “Subprime Mortgages: The Predators’ Fall,” [GARP Risk Review] ten months earlier (and gave warnings about Wall Street’s phony products, overrated products, and excessive leverage much earlier than that).

Loan problems were well known and, investment banks should have been reporting large losses much earlier. Subsequent Congressional investigations revealed investment banks suppressed unfavorable loan reports and did not disclose problems in securitization prospectuses, as required by securities laws. The bi-partisan Financial Crisis Inquiry Commission uncovered evidence that Wall Street placed loans that didn’t meet quality benchmarks into securitizations, the rating agencies also ignored due diligence reports, and the information in the due diligence reports was not disclosed to investors.

In an October 8, 2007 client note,  I told clients that Merrill’s mal de MER was just beginning. Jeff Edwards, Merrill’s CFO had made rosy statements in July of 2007. Massive losses reported in third quarter should have been reported much earlier.

CNBC’s October 24, 2007 video,“Inside Merrill Lynch,” wherin I appeared with Charlie Gasparino, then CNBC’s online editor, is no longer available. Fortunately, I captured the context of the times and relevant content of the video in my book on the financial crisis, Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009). Here’s an excerpt from the book:


Stan O’Neal, the CEO, appeared to have a big problem. At the time [Andrew Tobias emailed when Merrill was $75 per share and] asked me where Merrill stock would be in six months. I responded: “in someone else’s portfolio.”

On October 10, 2007, I reminded David Wighton of the Financial Times that Merrill was one of the lenders to the mortgage backed securities hedge funds managed by Bear Stearns Asset Management that collapsed in August 2007. Creditors had challenged BSAM’s mark-to-market valuations in April, and that is what got the ball rolling for the downfall of the funds: “Merrill was not so finicky when it came to marking its own books.”

Merrill began reporting massive losses, but in my view, they were quarters late. I was amazed O’Neal was still in his CEO chair. On October 24, CNBC’s Joe Kernan, with GE’s former CEO, Jack Welch, covered Merrill’s earnings report. I appeared on a segment with Charlie Gasparino, CNBC’s online editor.

I led off: “Way back in first quarter” I had called this and said Merrill’s risk managers should “get out and short. Short Merrill’s positions.”

Gasparino asserted: “When we were reporting this about three weeks ago, ahead of everybody…we reported there was going to be a larger 3rd quarter loss.”

I countered that O’Neal has a big problem: “They were not hedging properly in first quarter.” I added: “I laughed in disbelief” when I saw second quarter earnings. “It is an Enronesque kind of problem, it is a business management problem, not a risk management problem.”

Gasparino said he wouldn’t go that far and focused on the CFO (Jeff Edwards) and the potential ouster of a risk manager instead of picking up on my assertion about O’Neal. He said the problem with getting rid of Ahmass Fakahany: ‘Fakahany (the risk manager) and Stan O’Neal are very close.”

“I don’t think O’Neal survives this,” I responded. There is no problem getting rid of O’Neal’s friends if he is gone, and O’Neal will have to answer to shareholders and the board about failure to report losses in second quarter. Within a few days, O’Neal resigned. I added that the rest of Wall Street had underestimated how horrific the losses due to low recovery rates would be in subprime.

After the collapse of the stock market technology bubble and the outing of Enron’s and Worldcom’s problems, Stan O’Neal wrote an opinion piece for the Wall Street Journal [“Risky Busines,” April 24, 2003] saying “In any system predicated on risk-taking, there are failures, sometimes spectacular failures. But for every failure to be viewed as fraudulent or even criminal bodes ill for our economic system.”

I agree with O’Neal’s words on the face of it. It’s great to have an open mind, but don’t leave it so open that your brains fall out.

Gasparino Can’t Take a Punch

In the video below, around eight months before the global financial crisis and massive bank bailouts,  Gasparino attempts to deflect responsibility from banks that underwrote phony collateralized debt obligations and bought credit default swaps against them. I’ve been in print for more than a decade about the rating agencies, but when Gasparino tried to put the blame on them as a smokescreen for underwriters, I didn’t let him get away with it and ended up belly-laughing on air. As securities underwriters, the banks were obliged to perform due diligence.

As for Gasparino’s on air etiquette, Squawk Box’s Joe Kernen has the right attitude. In this January 2008 clip, around 3:44 minutes in, Charlie protests to me: “Would you just let me finish, would you just let me finish! You sound like me, now…let me finish.”

Joe Kernen laughs: “So you know you do it, I didn’t know you knew you did it, Charlie!”

Tavakoli on bond insurers negotiated discounts with banks on CDS on phony CDOs

VIDEO: The Bigger Problem for Bonds – CNBC – January 25, 2008

Insurance regulator Eric Danillo was meeting later that day to negotiate with banks, and I was forecasting how that meeting would go. Gasparino was trying to throw viewers off track by talking about the credit rating agencies; they played a role, but the topic in this January 2008 clip was banks and the imploding monoline insurers, including the largest municipal bond insurers, Ambac and MBIA.

Insurers were losing their “AAA” ratings due to credit default swaps they wrote on phony collateralized debt obligations underwritten by investment banks.

As I mentioned in a January 2014 commentary, the implosion of the monoline insurers damaged the municipal bond backed auction-rate securities market. Retail investors lost money both directly and indirectly.

Unlike the U.S. government’s 100 cents on the dollar bailout of AIG’s business counterparties, savvy insurers later negotiated with banks to settle contracts for a huge discount. For example in 2010, Ambac paid banks 16 cents on the dollar in cash plus a little over 12 cents on the dollar in new Ambac surplus notes for a total value of only 28 cents on the dollar. The banks that agreed to tear up $16.4 billion of credit default swaps and guarantees on collateralized debt obligations were: Citibank, Royal Bank of Scotland, Barclays, Deutsche, Bank, and others.

The issues were serious, but CNBC is rarely serious. Near the end of 2007, a producer for CNBC’s Squawk Box asked me if I wanted to go on regularly with Charlie, because I took him in stride. I declined.

The Financial Media Has Let You Down

Underwriters are obliged to follow securities laws. They must perform due diligence, and make honest disclosures. Among other things, they cannot conceal illegal conduct, affirm false representations or allow them to go unchallenged, distribute materially misleading information, fail to disclose red flags, or fail to disclose suspicions of potential fraud.

Unfortunately, regulators connected to the banking system have looked the other way, and the past and current Washington administrations have turned a blind eye to fraud. Most of the remedies have come from civil litigation.

Negligence by the SEC, failure to investigate, failure to initiate criminal prosecutions, ridicule from those directly and indirectly benefiting from malfeasance, snark from so-called reporters on so-called business television, apologias from on-the-payroll academics: none of these things change the obligation of underwriters to obey the law.

See also:

Michael Lewis, Wall Street’s Smart Aleck Apologist” – TSF – March 15, 2010

Repairing the Damage of Fraud As a Business Model” – Presentation to the Federal Housing Agency’s Supervision Summit, December 8, 2010.

Read finance articles by Janet Tavakoli.

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