Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Financial Reform: The Silent Guns of August

The financial reform farce continues. The DOJ and so-called regulators tickle bankers with feathers as CEOs shriek: You’re too tough!

September 2013 marks the five-year anniversary of the 2008 global financial crisis. Earlier this month, Attorney General Eric Holder said the DOJ is pursuing cases as the statute of limitations runs out for many of them. He “declined to discuss specifics or say when such cases would be announced.”

The revolving door between Washington (including friends and relatives) and Wall Street continues to spin. Grateful beneficiaries of campaign contributions protect cronies.

Bi-Partisan Corruption

This isn’t just an Obama administration problem. Former Countrywide head, Angelo Mozilo, contributed chiefly to Republicans, albeit he amply contributed to both parties. Courtesy of the Center for Responsive Politics, you can find the political donations of Angelo Mozilo and his wife here: Angelo Mozilo Donations.xls

The criminally unindicted Jon Corzine, former CEO of now bankrupt MF Global, is one of President Obama’s top campaign bundlers, and key advisor to President Obama’s 2008 transition team. VP Biden said they “trusted his judgment.”

Around $1.6 billion of MF Global’s customer money went missing causing distress to farmers and other customers. Evidence shows Corzine had specific knowledge of the circumstances and apparently lied to Congress about it. On August 1, 2013, Congressman Michael Grimm and seventeen other Members of Congress wrote to Eric Holder calling for the DOJ to “re-examine the criminal case against Jon Corzine.”

Corzine is just one of many examples. Regulatory failure has occurred under both Republican and Democrat-run administrations. In an ongoing theme, bailouts benefit corrupt bankers—and crony politicians—at the expense of taxpayers and at the expense of the U.S. economy.

DOJ and Regulation: You’re on Your Own

Attorney General Eric Holder’s statements ring hollow, since the evidence shows that when it comes to the global financial markets, you are on your own. The following are some highlights of warnings and regulatory failure over the past ten years in the month of August.

2012: Nickel and Dime Fines and No Criminal Indictments

Citigroup Agrees to $590 Million Subprime Settlement,” by Danielle Douglas, Washington Post, August 29, 2012. I was originally misquoted in this article. Regarding HSBC’s write-downs, I said Billions, not millions. It took the write-downs in the first quarter of 2007 for losses it suffered in the fourth quarter of 2006 related to subprime loans and other impaired mortgage loans. U.S. banks took no write-downs at the time, which is a classic situation of accounting fraud. Yet no senior executives have been indicted under Sarbanes-Oxley provisions.

Prince Harry Offered Partner Position at Goldman Sachs,” August 29, 2012.

Failed Regulators and Other Culprits of the Ongoing Financial Crisis,”Gil Weinrich, Advisor One, August 29, 2012. This interview misquoted me. I did not mention mortgage fraud when talking about Goldman Sachs, I discussed its problems with the SEC’s allegations of securities fraud for Abacus; Goldman settled those charges for an unprecedented $550 million, but that appears to be the tip of the iceberg. I brought up foreclosure in the context of Jamie Dimon, who is a master of public denial of problems instead of giving you the straight story. Regarding AIG, I refer to the “clawback” for the collateral calls made by Goldman, SocGen and others for CDSs on CDOs prior to AIG’s near collapse in September 2008. Instead of giving even more money, the U.S. government could have temporarily backstopped AIG, while it launched a rigorous investigation into the underlying securitizations. Instead there was a massive taxpayer-funded bailout and a Goldman Sachs-friendly cover-up enabled by so-called regulators.

“Crime and Mayhem in the USA,” by Janet Tavakoli, Huffington Post, August 1, 2012.

“I was unable to reach the parents of Bob Diamond (former CEO of Barclays Bank who “resigned” in the wake of the LIBOR fixing scandal), Jamie Dimon (current CEO of JPMorgan Chase, whose CIO unit lost $5.8 billion in risky trades [ultimately around $6.4 billion] for the first half of 2012 alone — losses that continue to mount — while the bank materially restated first quarter earnings and raised questions of potential fraud), Russell Wasendorf Sr. (former CEO of PFG Best now in custody), and Jon Corzine (former CEO of bankrupt MF Global) for comment.”

2011: USA loses “AAA” from S&P

Investors Gauge Downgrade Fallout,” by E.S. Browning, Mary Pilon, and Serena Ng, Wall Street Journal, August 6, 2011.

“Janet Tavakoli, an independent credit analyst and longtime critic of S&P and rivals Moody’s Investors Service and Fitch Ratings, said the U.S. downgrade was long overdue and the one-notch move to AA+ didn’t reflect the true state of the country’s woes. ‘People are now acknowledging that we haven’t fixed anything. That we’re not growing,’ Ms. Tavakoli said.”

2010: Bankers in High Cotton Ramp Risk as the Great Recession Continues

Despite Reform, Banks Have Room for Risky Deals,” by Nelson D. Schwartz and Eric Dash, New York Times (Front Page) – August 26, 2010

“JPMorgan Chase and Goldman Sachs, for example, each lost more than $100 million on transactions handled for customers in the period from April to July.

‘You can use client activity as a cover for basically anything you are doing,’ said Janet Tavakoli, who runs her own structured finance consulting firm. ‘It’s very problematic that losses like this are showing up. It’s a prime example of what the financial reform bill doesn’t address.’”

“Third World America: ‘Fast-Tracking to Anarchy’,”by Janet Tavakoli, Huffington Post, August 25, 2010. Bankers’ bonuses rise as the Great Recession grinds on. Municipal finances deteriorate and critical public services are cut.

“Goldman’s CEO to Treasury Secretary: OK, Now What?” by Janet Tavakoli (AIG Humor), Huffington Post, August 23, 2010.

“How to Thwart the Assassins of the American Dream,” by Janet Tavakoli, Huffington Post, August 15, 2010.

“JPMorgan’s Commodity Debacles,” August 9, 2010. Blythe Masters’ commodities division puts on a massive coal short as a proprietary trade for JPMorgan while the U.S. is at war. The trade’s size is bigger than the global coal market, and it goes wrong to the tune of hundreds of millions in losses.

“Stranguflation: Deflation and Inflation Where It Hurts America Most,” by Janet Tavakoli, Huffington Post, August 3, 2010

2009: Banks Created Consumer Dilemma

“Consumers’ Debt-Tactic Changes May Hurt Banks, Tavakoli Says,” by Jody Shenn, Bloomberg News, August 26, 2009

“Banks may be hurt as more consumers realize they would be better served by paying off their credit- card balances than making their mortgage payments, according to Janet Tavakoli, an industry consultant.

Tavakoli ‘warned that the biggest credit bubble in world history was coming well in advance,’ investor Jim Rogers wrote in a back-cover recommendation of her 2009 book, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.”

2008: Bailouts – TBTF and Too Late to Save

“The Next Step for Fannie and Freddie,” (Video), Bloomberg TV, August 25, 2008. Tavakoli says Fannie and Freddie’s bailout is imminent. If Fannie and Freddie aren’t restructured, taxpayers will be on the hook for bailouts. She recommends instead wiping out shareholders and subordinated debt holders and backing up the foreign-held senior debt. Of course, that isn’t what happened next.

At Freddie Mac, Chief Discarded Warning Signs,” by Charles Duhigg, New York Times (Page One), August 5, 2008.

“‘The top people should be booted out, and replaced by executives who have the confidence of the markets,’ said Janet Tavakoli, a finance industry consultant and observer of both firms.”

2007: Ponzi Scheme, AIG’s Losses, ABCP Crisis, Buffett, Bailouts, and Fed’s Fake Collateral

“Credit Crunch and ABCP,” BNN Squeeze Play – August 16, 2007. Video currently unavailable.

Illiquidity in the ABCP market. Ms. Tavakoli warned that structured investment vehicles known as “SIV-lites” invested in subprime mortgage loan backed assets and unsecured leveraged loan backed assets and were in jeopardy due to a liquidity crisis in their asset backed commercial paper. A Fed bailout ensued shortly thereafter. The Fed took suspect mortgages as collateral and lent money to banks. It was the “silent” bailout with no regulatory consequences.

More Bailouts: That same day, Countrywide borrowed $11.5 billion on its credit lines. The banks nearly balked at Countrywide’s request, but the Fed lowered the discount rate to 5.75 from 6.00 and accepted “investments” backed by Countrywide’s fraud-riddled loans—as long as they had fake “AAA” ratings—as collateral.

“AIG and ‘Regulation’,” (Video) CNBC Squawk Box, August 13, 2007. Video is available to clients upon request. Janet Tavakoli appeared with Steve Forbes, CEO of Forbes, and CNBC’s Carl Quantanilla to discuss AIG, hedge funds, and illiquidity (and insolvency) issues.

AIG Seeks Small Subprime Risk; Others See More” [AIG’s Phony Accounting], by David Reilly, Wall Street Journal Page C1, August 13, 2007.

Buffett and Bailouts: On August 9, 2007, The European Central Bank pumped $130 billion into the European banking system. The Fed pumped $24 billion into the U.S. banking system through the Federal Reserve’s Open Market Trading Desk. Warren Buffett told me two large corporations came to him begging for billions. He refused them.

Largest Ponzi Scheme in Financial History,” (Video) CBS Evening News, August 4, 2007. I meant to say recent mortgage lending (and the “funding” and securitization machine) is the largest Ponzi scheme—not merely “one of the largest”—in the history of the global financial markets.

“Subprime Winners and Losers,” (TSF’s Loan Loss Estimates), CNBC Squawk Box, August 3, 2007. Video is available to clients upon request. Janet Tavakoli talks with Joe Kernen about subprime losses, fraud, failing collateralized debt obligations as the biggest bag holders.  Ben Bernanke, Fed Chairman, had just announced loss numbers that were less than one-third of my loan loss estimates. He downplayed the risk. His estimates were too low, and he ignored the devastating effects of leverage enabled by CDOs and credit derivatives.

2005: Whales, CDO’s, and Credit Derivatives

Merrill and Citigroup Top CDO Field,” by Richard Beales and Jennifer Hughes, Financial Times, August 31, 2005.

“JPMorgan, for example, said in a recent research note that $137bn of CDO instruments had been issued so far this year, up from $89bn in the same period last year – and compared with $187bn in the whole of 2004. But Janet Tavakoli, an independent industry consultant, recently estimated that total issuance could top $800bn this year [of full notional equivalent risk], if the full amount of every CDO is included.”

Consider the Full Notional Amount of CDOs When Assessing the Risks and Rewards”, by Janet Tavakoli, Financial Times Letter to the Editor, August 19, 2005.

“If one considers the full notional amount of the CDO, it is easy to figure this out, but if one is misled by reporting only the sold tranche of the CDO, this risk and this insufficient reward is obscured.”

Wall Street – Exotic Debt May Pose Risk for Investment Banks” (CDOs), by Dan Wilchins, Reuters, August 18, 2005.

“‘The dealer’s exposure appears limited to a single tranche, but if market conditions change, dealers have to adjust their hedges. They could find that they have more risk and lower returns than they would have had if they had sold every tranche,’ Tavakoli said. ‘That could create large losses,’ she added.”[Massive fraud made the problem much worse.]

Bear Stearn Shakes the CDO Honey Pot,” by Matthew Goldstein, TheStreet.com – August 5, 2005.

“‘There are huge transparency issues,” says Janet Tavakoli, a structured finance and derivatives consultant and the author of a book on CDOs. ‘In some cases, investors have been taken in by hype. Some investors don’t know what they are getting into.'”

Invisible Hedge Funds” (Banks’ Trading Desks) by Janet Tavakoli, GARP Risk Review July/August 2004 Issue 19. Banks continue to have a “whale” of a time.

2003: Early Credit Derivatives and CDO Warnings and Freddie Mac

Collateralized Debt Obligations & Structured Finance, by Janet Tavakoli, John Wiley & Sons, 2003.

Advance copies of my book go out explaining how premeditated underwriting flaws: shoddy collateral, faux CDO managers, deceptive structures, the leverage and opacity of credit derivatives and flawed ratings resulted in a wave of overpriced structured financial products.

Regulators didn’t seize the moment. Instead, they let criminals use this book as a playbook for fraud, and in subsequent years, the situation deteriorated into one of the major causes of the financial crisis.

Tough Times Continue at Freddie Mac,” by Jenny Wiggins, Financial Times, August 25, 2003.

“The independent report released last month by law firm Baker Botts showed that [Greg Parseghian, then CEO of Freddie Mac and later ousted after investigations showed he understated income by around $4.5 billion in his previous role as head of investments]  was involved with some financial transactions that did not comply with accounting rules.

At the time, the board claimed Mr Parseghian’s involvement was ‘not wrongful involvement’ and that he was implementing policies set by corporate accounting and other senior officers rather than devising and directing the policies.

However, analysts have questioned Mr Parseghian’s actions. Janet Tavakoli, president of Tavakoli Structured Finance, a consultancy firm, said it was ‘difficult to imagine’ that Mr. Parseghian would have been unaware of the implications of some of the transactions in which he was involved.”


Share This Post