 |
Expert on Structured Finance and Derivatives Gives the Big Picture
Washington’s Blog
Sunday October 4th, 2009
Janet Tavakoli is one of the foremost experts on structured finance and derivatives.
Tavakoli made an outstanding presentation to the IMF last week on the fraud which led to the financial crisis.
Tavakoli was kind enough to send me a summary of the IMF presentation (and to give me permission to reprint the summary).
Making many of the same points that William K. Black (senior S&L regulator and professor of law and economics) has made about fraud and the big picture of what has occurred in the current as well as the S&L crisis – see this and this – Tavakoli told the IMF:
Wall Street gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private-label residential mortgage backed securities (RMBS). Most of the RMBS was rated “AAA” … But many RMBSs were backed by portfolios comprising risky fraud-riddled loans. Most of the “AAA” investment was imperiled, and subordinated “investment grade” components were worthless. Wall Street disguised these toxic “investments” with new value-destroying securitizations and derivatives.
Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme…
A large share of certain banks’ tax-subsidized profits is due as reparation to unsophisticated investors, the U.S. taxpayers...By the end of 2006, public reports of implosions of large mortgage lenders eliminated CEOs’ plausible deniability. By January 2007, many (including me) publicly challenged the failure to account for losses. Instead, toxic securitization accelerated in the first half of 2007—classic malfeasance as a Ponzi scheme collapses…
In the spring of 2007, the Fed and the U.K.’s FSA reported that the degree of leverage in the global financial system was less than at the time of Long Term Capital Management, but in reality it was much greater. They are now repeating their mistakes. Winston Churchill said we must alert somnolent authority to novel dangers; but our regulators are complacent, and the dangers are not novel.[Remember: Tavakoli is an expert on various forms of leverage, such as securitization and derivatives. So if she is warning about too much leverage, we should take her seriously]
Wall Street supplies a swinging door of jobs for its financial regulators, and—in the case of many members of Congress and our Presidents—campaign contributions. This dependence is known as “capture,” and the result is that instead of reigning in Wall Street, dependent thinking enables mayhem.In the recent Ponzi scheme only the agents—mortgage lenders, rating agencies, fund managers, securitization professionals, CFOs, CEOs, and other fee or bonus beneficiaries—prospered. Controls and risk management were undermined. The financial institutions and their shareholders, for which these agents are failed stewards, collapsed. Investors in toxic securitizations lost money. Had regulators done their jobs, they would have shut down Wall Street’s financial meth labs, and the Ponzi scheme would have quickly choked to death from lack of monetary oxygen.After the Savings and Loan crisis of the late 1980’s, there were more than 1,000 felony indictments of senior officers. Recent fraud is much more widespread and costly. The consequences are much greater. Congress needs to fund investigations. Regulators need to get tough on crime.
Troubled financial entities should be put into receivership and restructured. Old shareholders will be wiped out. Debt-holders will take a haircut (discount) along with a debt for new equity swap to recapitalize the entity. But the job won’t be complete until we separate high risk activities from traditional banking in a return to a Glass-Steagall like structure with regulators that indict fraudsters, snuff out systemic fraud, and allow honest bankers to prosper.
The fact that many U.S. banks stuck to traditional banking and protected shareholders during this crisis is under-publicized, but their prudence worked.
We have the solutions. We need the will to implement them.
Prison
Planet.tv Members Can Watch
Fall Of The Republic
Right Now Online -
Don't Miss Out! Get
Your Subscription Today!
CANCER CONSPIRACY? Are
"they" suppressing the cure? Will YOU
be the next victim? Learn
the Secret Truth! - READ FULL STORY
-
- Social bookmarks
- Email this article
-
- Print this page
October 4th, 2009 at 7:40 am
AN EASILY UNDERSTANDABLE EXPLANATION OF DERIVATIVE MARKETS
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans)
Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she subsequently increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the banks corporate headquarters, expert traders transform these customer loans into Drinkbonds,Alkibonds, and Pukebonds. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really debt of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. So he informs Heidi.
Heidi demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and seven employees lose their jobs..
Overnight, Drinkbonds, Alkibonds and Pukebonds drop in price by 90%. The collapse bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The supplier’s of Heidi’s bar had granted her generous payment extensions and had invested their firm’s pension funds in various Bond securities. They find that they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the door of a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers. Now do you understand??? Does this sound familiar??? … Biker
My Proofreader Died Of Swine Flu Reply:
October 4th, 2009 at 10:49 am
Great story very accurate depiction, But there’s a part you left out. Heidi’s scheme started in the real world so when it came time to pay, the real world found out about it. Most derivatives start in the fake world high finance, so they just paper over their losses with more derivatives(debt). No matter how far you let Heidi’s (or country wide’s) credit line run, because they were linked to the real world their bubbles could only grow so big.
Banker/brokers selling derivatives back and forth to each other have made a 1 to 10 quadrillion dollar bubble Heidi could never hope to pull that off. It’s the reason the banks got the bailout. if the government didn’t bail them out their at least 1 quadrillion dollar bubble would have burst destroying the whole system, government with it. Of course at some point their mother of all bubbles will have to break for the time being at least they’ve plugged the hole with 25 trillion of our money.
Biker Reply:
October 4th, 2009 at 11:10 am
MPRDOF,
I agree with all that you stated. The derivatives bubble will not stay plugged forever. This story was on the basic side but easy to understand and it brought out the absurdity of the derivatives market in general. Something the government could have and should have regulated, was allowed to run out of control, to give the government more control. We are on the same page. Thanks!…. Biker
Paul Battis Reply:
October 4th, 2009 at 4:28 pm
Man, that’s really great. It works for me that’s for sure.
Brian Hill Reply:
October 4th, 2009 at 10:45 pm
We are near our end with mandatory vaccinations coming up BUT we aren’t dead yet so we might as well do something positive about it and defeat Big Pharmas plans to kill us off using the vaccines.
http://www.thepetitionsite.com.....d-vaccines
Sign this petition to declare your rights and conditions upon taking the vaccine or not. Declare your rights right now! Secure your body from forced vaccinations! Sign this petition and spread this petition out FAR and WIDE, writ it on napkins and leave it at restaurants, make fliers with our petition link or a shortened url linking to our petition, share this with everyone you know, share this with all forums you post at, share this in all your website and blogs, etc. etc and declare your rights to try alternative antii-virus treatments, and to refuse any forms of compulsory vaccinations. If you have a family all members should sign because it will only work if we get over half the American populations signatures! We need to get them quickly before the end of the month to prevent future violent civil wars over forced chemical vaccinations.
Please share this with Alex Jones, David icke, and others as this petition will be shared in more places then any other petition, even shared on traffic exchanges and blogs.
Please support the declaration of rights against mandatory vaccinations and your rights to sue the pharmaceutical companies under any medical damage.
Prof. Ulysses Crockett, Jr. Reply:
October 5th, 2009 at 4:25 am
Quite a correct metaphorical analytical summary of the criminal fraudulent bank bailout multi-trillion dollar theft of U.S. taxpayer funds by Bernanke-Rothschild privately-owned Federal Reserve Board of Governors, Paulson-Geithner Treasury Department, Goldman Sachs Directors, AIG Directors, et al.
U.S. taxpayers must demand Congresss repeal the unconstitutional 1913 Federal Reserve Act and demand re-issue of John F. Kennedy’s June 1963 Executive Order 11110 mandating U.S. own the Central Bank and issue its own currency as provided in U.S. Constitution Art. 1, Sec 8, cls, 5.6.
Benjamin Shalom Bernanke, Henry Merrit Paulson, Charles Christopher Cox, Timothy Geithner, Lawrence Summers, Nancy Pelosi, Sen. Harold Reid, Sen Christopher Dodd, Sen. Diane Fienstien, Barnie Frank, Nancy Pelosi (all investorrs in AIG) – must jointly and severally be criminally prosecuted for violations of U.S. state and federal securities laws, specifically violaions of 1934 Securities Act, SEC Rule 10-b-5 prohibiting non-disclosure of insider information in securities trading.
1890 Sherman Antitrust Act prohibiting conduct in restraint of trqade and the 1914 Federal Trade Commission Act, Sec. 5, prohibiting anti-competitive conduct on the parts of individuals and entities – must be strictly enforced. In this connection, Congress must adequately fund and staff the Securities Exchange Commission and Federal Trade Commission. The economic viability of the U.S. is dependent upon vigorous enforcement of regulatory laws already on the statute books.
Finally, the Commodity Futures Trading Commission must by, administrative rule, extend its regulatory authority to include hedge fund trading, oil futures trading, credit default fault swaps and derivative securities trading. Former CFTC chief Brooksley Borne made such a proposal to Alan Greenspan who politely told Borne that Greenspan did not believe there was such a thing as securities fraud. Then Treasury Secretary Robert Rubin and Lawrence Summers dissented from CFTC having expanded reguatory authority and forced Brooksley Borne from the CFTC. Borne published her account of the astonishing Greenspan meeting and statement in a recent Stanford Magazine issue, 2009. Quod Erad Demonstradum.
shocked and awed Reply:
October 5th, 2009 at 6:54 am
Great job Biker! You’re a natural born teacher, too bad your neighbors didn’t send YOU to Washington.
October 4th, 2009 at 8:52 am
Biker – Spot on!!! That was very simple and accurate and simply emphasizes the rip off that Goldman crooks and the Red reserve have pulled on the Americans and anybody either stupid enough to go along with it, or in the innocent tax payers have had no choice – despite angrily dissagreeing with it!!!!!!
October 4th, 2009 at 12:15 pm
Great piece biker and another solid follow up, My Prof. The general public at the mercy of the MSM gets intentionally drowned in details and ricketty reporting when the real case is as simple as the Heidi analogy. The 80’s S&L scandal’s handling was a joke but as another but it got more heat than this latest atrocity. C’Mon, McCain just came off of a presidential run and he was a member of the Keating 5. A forced awakening is coming with the sound of a giant bubble bursting.
October 4th, 2009 at 3:38 pm
Tavakoli is like M. Whitney and Roubini: she wears blinders. It’s all about paying for suburbia, keeping it going. And now nothing can. As long as the growth of suburbia was the economy (and hey, it was a Ponzi scheme to begin with), no one cared what was done.
So Tavakoli does not have her eye on the ball: the issue now is,
how do you maintain suburbia?
You have a big, fat class war on your hands. What are you going to do about it? CERTAINLY now turn it over to a blinkered idiot like Tavakoli. Look at her petit bourgeois solution to all our problems. Shoot her.
Instead, read my book The Eminent Domain Revolt.
October 4th, 2009 at 5:48 pm
I think your right John about “keeping suburbia going” and here’s why:
I was watching a home being built from my yard about 6 years ago, (the boom). I found out what the price for the new home was $234,000. Then my neighbor and I calculated what the real cost of building that home from scratch was. We came up with $70,000 and that’s doing alot of the work yourself, buying your own supplies at discount, using friends as subcontractors, basically not being ripped off.
Now along comes a young couple with 2 kids, he has a decent yob and she works part time. They get a loan from the bank…say the full amount 234K. When you do the math, and I don’t care what the interest rate is 5%, 6% or 9%, at the end of say 25 years on the loan the couple has paid triple! Three times 234K or about $700,000 !! Wow ! Talk about keeping suburbia going! Everybody makes out, the builders, the realters, the banksters. And guess who is left holding the bag. The innocent couple who were just super happy to get the loan. That’s the truth about our ecomony, it’s rigged so that nice guys like you have to work their asses off for 30 years just to pay the loan for a simple roof over your head.
October 4th, 2009 at 6:29 pm
Good Job Biker and Swine Flu. This will serve as an excellent primer for the masses. After one understands this lesson, we should complete lesson two- “Derivative justification and formulation” ….If lesson one doesn’t make a guy pull his hair out. Lesson two sure will!
October 4th, 2009 at 6:57 pm
Wow….. That is FUBAR! Thank you people for some good info.
October 4th, 2009 at 8:01 pm
Wow what great blogs tonight. Good job Biker and others for some good info. And then you read on and here comes “Truther”. Again with his repetative nonsense, over and over again ruining everything. Hey truther you could f--- up a cup of coffee.
October 4th, 2009 at 8:56 pm
Biker nice analogy. Can I pass it on to others or is it copyrighted?
Biker Reply:
October 5th, 2009 at 5:56 am
David S,
As far as I know it is not copyrighted. I got it in an email from my lawyer. I wish I could say I made it up, but I didn’t. I do think it hits the nail on the head pretty good! Good luck to all in the coming turmoil. I can feel that it is very close now…. Biker