Derivatives expert Janet Tavakoli takes a hard look at what — and who — caused the financial crisis.
Janet Tavakoli calls it as she sees it — and what she often perceives isn’t a pretty picture. But for any advisor, or other investment professional, to ignore this industry veteran’s razor-sharp insights would be folly.
A gutsy critic of both Wall Street and the federal government, the Chicago-based consultant, specializing in derivatives and structured products, pulls no punches. Through her independent research into the global financial crisis, Tavakoli uncovered what she calls massive, widespread fraud committed by a network of mortgage originators, securitizers, and rating and regulatory agencies, among others.
Earlier, the founder of Tavakoli Structured Finance, 58, predicted the thrift industry blow-up and the demise of Enron. Then she foresaw that excessive leverage and structured products’ misratings would lead to a global financial crisis.
In her just-published e-book, The New Robber Barons, Tavakoli charges that the relationship between failed mortgage lenders and investment banks that securitized and sold risky loans was “the largest Ponzi scheme in the history of our capital markets … a financial Pearl Harbor,” where “investment bankers piloted many of the planes.”
Now Tavakoli sees another huge financial crisis looming.
The University of Chicago MBA has traded, structured and sold derivatives at firms including Merrill Lynch, PaineWebber and Westdeutsche Landesbank; and she had earlier stints at Bear Stearns and Goldman Sachs. Research recently talked with her about red flags and preventive solutions.
You write that, in the past three years nothing has been fixed but that we must hold Wall Street responsible for the fraud that resulted in the financial crisis. What should be done?
We need to have investigations. But with the pushback and all the lobbying, what they’ve been counting on is that the statute of limitations for some of these frauds is expiring. So if you don’t file complaints, you may not be able to.
Members of Congress are enabling the lack of punishment and covering up great misdeeds in our financial system — and they’re doing it with no fear of consequences — i.e., being voted out of office, in which case they could find themselves the subject of investigation.
What do you mean: “covering up”?
Many people are covering up for cronies who have a lot of money sloshing around. We threw money into the financial system with no accountability and thus made the problem worse. Our system has been completely infiltrated and bought off. Things aren’t changing because Big Money doesn’t want it to change.
What other indications are there of a cover-up?
The MF Global dog-and-pony show. The attitude toward bundlers like Jon Corzine [the firm’s ex-CEO], who is a big bundler for the Obama campaign, is that the guy can do no wrong. This was before he even testified. People who are raising big money for campaigns get off with no real investigation.
In the Sarbanes-Oxley age, for MF Global to say they were unaware of what they were doing beggars belief. And yet there has been no indictment.
Is President Obama part of the cover-up?
Yes, in that he’s enabled it. He’s left people in place who crashed the global financial system in the first place: [Treasury Secretary] Tim Geithner and [Federal Reserve chair] Ben Bernanke. Obama had told us: “You can’t keep doing things the same way and expect different results.” So he’s been quite a hypocrite.
Who else is in the cover-up?
Mary Schapiro was appointed [by President Obama] to head the SEC. She was formerly head of FINRA, the antichrist of investor advocacy! Yet she was chosen SEC [chair] because the regulators are captive by and serve the people they’re supposed to be regulating. They do not serve investors.
In a way, Obama has been the anti-regulator because he didn’t put people in the regulatory agencies, the Fed or the Treasury who would investigate and fix things that are wrong in our global financial system.
If he’s re-elected, then presumably, things will continue in this same way?
What if a Republican is elected President?
Who else is not in the pocket of Big Money interests!
So, no matter who’s President, these crimes — if you want to call them crimes — will be perpetuated?
Yes. And we do want to call them crimes! They are crimes.
What should Obama do now to help Americans?
He has a lot of resources at his disposal, one main one being moral suasion — he’s got the pulpit. When there was a crisis, Reagan, Carter, Bush went on television and explained what needed to be done. We haven’t seen that kind of leadership from President Obama. If anything, the American people have been told things to make them think [conditions] aren’t really as bad as they are: inflation isn’t as bad as you think because an iPad is cheaper now — nonsense like that.
So the public is being poorly informed?
Yes. Therefore, financial advisors need to be doing fundamental analysis of investments and not [only] be reading the Wall Street Journal or, God forbid, watching CNBC.
In other words, FAs should do their own research and figure things out for themselves.
Yes. Sadly, you’re on your own. That’s part of how we got into this mess: We lost the art of rolling up our sleeves and looking for opportunities.
On Internet TV, you stated that we’re “absolutely vulnerable to a repeat [crisis] because the fraud went unpunished and we printed money like crazy to bail us out of the last one.” That’s scary.
But the fact is we’ve bailed people out and had no consequences for them. So it emboldened them to turn around and behave in the same way. Look at banks like JP Morgan: Shortly after the crisis, they thumbed their nose at the idea of trying to separate speculation from the rest of the bank. So if you don’t have restraints on behavior, you’ll see it repeated. And now we’ve made it worse. It’s like handing a drunk driver who got into a crash the keys to a bigger, faster car together with a bottle of vodka.
In every area of finance where we bailed people out, you see the same wrongdoers volunteering to help fix the situation. That’s pretty funny: They weren’t trustworthy before, and they’re not trustworthy now.
But what about the investigations that already have been held?
They’re all for show, and people end up with a slap on the wrist for minor issues. Investigators should be looking instead at the interconnected fraud that infected the mortgage lending market. And there is still a lot today, especially fraud on borrowers. If you go to the root of the problem and choke off the money supply, you stop the fraud in its tracks.
But the banks say they lost money.
The fact that a bank lost money isn’t an indication that they were a victim as opposed to being a perpetrator. A classic problem with control fraud is that the parasites destroy the host — in this case, the host being the bank and the parasites being the bank employees. If you were the victim of a control fraud by the people who worked in your own bank but meanwhile, you were collecting huge bonuses, you overlooked the control fraud within your own institution.
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