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April 19, 2009
Janet Tavakoli
Author, "Dear Mr. Buffett: What an Investor Learns 1, 269 Miles from Wall Street"
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Info: Janet Tavakoli is founder and president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. . Her new book is called "Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street." Its the story of her meetings with Warren Buffet prior to the economic downturn and how that impacted the way she views investing. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She has also worked for Westdeutsche Landesbank in London, Bank One in Chicago, Merrill Lynch, PaineWebber, and Bear Stearns


Uncorrected transcript provided by Morningside Partners.
C-SPAN uses its best efforts to provide accurate transcripts of its programs, but it can not be held liable for mistakes such as omitted words, punctuation, spelling, mistakes that change meaning, etc.
Q&A With Janet Tavakoli

BRIAN LAMB, HOST, CSPAN Q&A: Janet Tavakoli, author of the book ”Dear Mr. Buffet,” what do you think of money?

JANET TAVAKOLI, PRESIDENT, TAVAKOLI STRUCTURED FINANCE: What do I think of money? You know, I’m glad you asked that question because this is all about money and whether or not Washington protected our money and what has happened to our money over the past few years.

Money was nothing more than something we human beings created in order to enhance our probability of survival. So money is a very important means of exchange.

You know, and back when we created money, the reason we did it is because, let’s say I was growing wheat. Well, I would have to exchange my wheat in the marketplace for various goods and services that I needed. And if somebody didn’t need wheat at the moment, it would be hard for me to barter my wheat for something else.

So we created money as a representation that I have this wheat behind it. I’ll give you this piece of paper or this coin and someone else will take that piece of paper or coin for your goods because they know that I have wheat backing my coins.

And we created money to make it easier for us to trade goods and to enhance our ability to get the things that we need to survive, to make life better for everyone. So money isn’t an evil thing. Money is actually a good thing that we humans created.

And that’s why it’s all the more important for our government to take a key responsibility in protecting the value of our money so that it’s accepted everywhere in exchange for goods and services and so that we, the population, can create that from the value that we’ve created.

LAMB: What’s been your own relationship to money in your life?

TAVAKOLI: My own relationship to money, the way I view it, may be different than a lot of other people. I’ve always just viewed it as a means of independence, and that may just be coming from being a woman and growing up in the United States. I viewed money as a way to provide security and freedom.

I was never all about accumulating vast quantities of goods. I wanted money so that I would have the freedom to do the things that I enjoy doing in life and to provide opportunities for the people in my life that are important.

LAMB: Where do you live?

TAVAKOLI: I live in Chicago. In the mid-west.

LAMB: How do you make your money?

TAVAKOLI: I make my money from intellectual capital. So I used to work more with my hands. Now I work more with my mind. I was a former chemical engineer and I worked in chemical companies and in an oil refinery to make a living.

Now I make my living primarily by analyzing things, figuring things out, mainly for large financial institutions, chiefly people that I worked for in the past, only people that I know and know well.

And I make it in the tongue-twisting products that brought the global economy to its knees. Things like credit derivatives, collateralized debt obligations, things that most Americans haven’t heard of, but these are the things that got into our financial markets and were abused and misused.

So the global financial economy now, some people say it had a heart attack and I say, no, it’s actually more like appendicitis where you have toxic assets leaking into the system and basically crippling it.

And what we are doing right now, instead of fixing the problem, is we are prescribing some very potent, addictive painkillers. And that’s not the way to go when the economy is having an appendix attack.

LAMB: What word would you use to describe the way you feel about what’s going on?

TAVAKOLI: I have some complicated feelings about what’s going on, Brian, because I’m sure that there are many people who believe that they are doing the right thing. But what is going on now is misguided and the policies that we’ve adopted will only make our pain and suffering drag out.

And it has the – what’s going on now is we are delaying fixing the problem. We haven’t created any transparency so we’re covering up the problem. And all of our policies seem designed to give comfort to the financial system and, in some cases, unwarranted comfort and undeserved comfort.

LAMB: Actually, that’s a fine answer but I was looking for a word like, you know, we hear the commentators use like, they hear like, ”I’m scared.” Are you scared? Should we be scared about what’s going on?

TAVAKOLI: We should be – we should be very worried. I don’t want to scare the American people. Let me first say, and this is a very important thing, that I don’t think has been stressed enough to the American people.

If you have money in a bank and you are underneath the FDIC threshold of $250,000 per individual, for a married couple that would be $250,000 each plus another $250,000 jointly for a total of $750,000, most Americans are underneath this limit, your deposits are just fine.

Your deposits would be just fine even if your bank went into receivership. Your deposits are fine. You don’t have to have a run on the bank. You will get your money. The FDIC is doing a very good job with that.

So, but most people are afraid and concerned because of the wealth effect. They have seen their net worth dramatically decline. Their 401(k) accounts, the value of their home, their job security, in some cases, or their job.

So yes, I think as a country we should take this very seriously and fear isn’t a very useful emotion. But if you are feeling that way you want to harness it in a constructive way. Write your congressmen, write your senators. Tell them how you feel about what’s going on.

Inform yourself. Read the papers. Take that energy and put it to some good use because we Americans are now at a critical phase in our democracy. Our democracy has been deluded by the effects of the actions that we’ve taken to try to get out of this financial crisis.

LAMB: By the way, do you think the $250,000 limit will be extended beyond the end of this year?

TAVAKOLI: I hope it will be. The old limit was $100,000 and it’s a big difference, isn’t it? And I think part of the reason of increasing the limit was that so people wouldn’t withdraw funds above the limit, but also to attract money that was fleeing from money market accounts because money market accounts started liquidating assets out of the fear that they may have toxic assets and people were taking money out of money market funds.

That money had to go somewhere. And it was a better idea to have that money go to the banks that needed deposits. And if more money was going to go to the banks, we needed to raise that limit, that guarantee limit.

So I hope that limit will be extended, but Americans should watch that. If you are above the $100,000 limit and, you know, you’re close to the $250,000 limit, you’ll want to watch that very carefully to see if those guarantees will be extended.

Even though it appears that the government is willing to just willy-nilly print money to prevent any bank from going into receivership, which I think is a galactically bad idea.

LAMB: This book ”Dear Mr. Buffet,” is which book for you? What’s the number?

TAVAKOLI: Well, if you count the second editions of my other books, it would be the fifth book. My first book was on credit derivatives and people have heard a lot about that these days. They’ve – and they’ve added to the risk in the system by providing leverage and providing opacity.

So a lot of bad guys pulled a lot of shenanigans using credit derivatives, which increased risk in the system and increased people’s ability to borrow in a hidden way so that there was a lot of debt in the system that was invisible.

And banks themselves were often running invisible hedge funds. The legacy investment banks were running invisible hedge funds, but so were our major banks and that includes JPMorgan, Citigroup, Bank of America, our largest banks.

So it added a lot of risk to the system, and people are in denial about their ability to manage those things and also collateralized debt obligations which are – include these packages of mortgage securities, some of which were overrated and over-priced the minute they came to market.

And if that wasn’t enough, investment banks were creating these things in their financial meth labs, knowingly selling things that they knew or should have known were overrated and over-priced. And it didn’t stop there, they went one better.

In 2007, when it was clear that this activity should be shut down because we had mortgage lenders failing throughout the country, instead of shutting down these financial meth labs, investment banks sped up.

They accelerated the bad deals they were bringing to market and these now weren’t just bad deals, many of them were just phony securitizations with no other purpose than to hide losses.

LAMB: Let me interrupt to ask you to do the simple thing of defining a lot of this language. Credit derivatives – who invented that term?

TAVAKOLI: I don’t know who invented the term. It’s been around for maybe 15 years. But credit derivatives didn’t start growing until the late ’90’s and in 2000. That’s when we saw really this huge growth spurt.

LAMB: Have you any idea who started it? -I mean is there a ...

TAVAKOLI: Well, JPMorgan Chase was in the forefront of pushing credit derivatives technology. And it wasn’t meant to be a bad thing, originally. Now a credit derivative, what is that?

Well, if you have a bond, let’s say, and somebody – you have the debt of someone, a government bond or a corporate bond you expect to get paid back par at maturity. And you have credit risks. You put money upfront, you expect to get your money back at the maturity of the bond. In between you get coupon payments.

But, let’s say you wanted to protect your investment in a bond and you were worried about the credit. You could buy credit protection, a credit derivative. It’s not a bond. It’s derived from a bond. So it’s a derivative, and it’s a credit derivative. You’re trying to protect your credit.

So you could say, I’ll pay you all of my coupon or part of my coupon to protect my money that I will get paid back at maturity. So it was an idea, originally, of hedging or transferring risk. It was meant to be a good thing. And in all candor banks created it because they wanted to get loan risk off their balance sheet.

But they had put loans on their balance sheet at prices that didn’t make sense. So they realized, if we could persuade, dazzle, and persuade the Fed that we could create this big pocket that has virtually zero risk called a super senior tranche. Then we don’t have to pay much of anything for that protection. And we can basically transfer most of the risk of these mispriced loans off of our balance sheet. That’s how it started.

LAMB: OK. You’ve said a lot of things that the average person is going – and I’ll consider myself in that ...

TAVAKOLI: Right.

LAMB: ... category – a super senior tranche? ...

TAVAKOLI: Right. It was supposed to be super safe.

LAMB: What’s a tranche?

TAVAKOLI: Tranche. Now if I take a package of mortgages and I put them all together in a pool I can create a little business, you could say, that’s going to pay cash out from all these mortgages that are paying their interest rate every month and their principal.

And so a tranche of this pool of mortgages will be – let’s say, Brian, you love risk. And you would say, look Janet, I don’t know if any of these mortgages will go into foreclosure. But I’m willing to take the risk of, let’s say, the first four percent of the mortgages in this pool, whoever they are, if they default I’ll take that risk but I want to get paid more. And I’ll say, OK, Brian, you have the riskiest tranche, called the equity tranche.

Someone else doesn’t like that much risk but they say, Brian took the first four percent of the mortgages to foreclose if any, I’ll take the next four to eight percent. And I want to get paid a little bit less than Brian but, you know, not nothing. I want to, you know, have a fair amount of risk. That’s the second tranche.

And so on up the line until you get to what was supposedly this super safe, super senior where basically they say we’re protected because all of these other guys, all of these other tranches are taking losses before I take a loss.

LAMB: So all these tranches, by the way, are not backed up by the Federal Deposit Insurance Corporation?

TAVAKOLI: Not at all, no. This risk was purely on the investor. Many of whom were sophisticated investors.

LAMB: What happened to the – as I was growing up, the simple process of going into a bank and getting a mortgage, paying them – I can remember when they were nine percent, 10 percent loans.

TAVAKOLI: Yes.

LAMB: And the bank just keeping that mortgage. Why did they have to go to this business of securitizing this?

TAVAKOLI: All right. Now, you know, Brian, you’ve hit the key problem on the head. And that is, if you had gone to a bank, a bank generally knows you. They know your – where you live. They, you know, maybe even knew people in your neighborhood.

They basically have an idea of whether or not your job was secure. They could verify your savings. You generally have your savings with the same bank that you got your mortgage from. So they knew who you were, your character, your credit, your capacity to pay. And that was a good idea.

When we had sound lending practices at banks packaging mortgages together was a really good idea because people would put 20 percent down. Their total debt was no more than 36 percent of their income.

We had a number of things that we looked for for a good solid mortgage loan. That’s prudent lending. We really need to get back to and we’re nowhere near that yet. But the reason that was a good idea is because it allowed you to buy a house.

You could borrow money. That’s called leverage, and you could pay for your house over time. People used to have parties when they paid off their mortgage. It was supposed to be a reason to celebrate. Not a reason to borrow more money and take more money out of your house.

It was a very good idea and those securitizations, those packages of loans were pretty safe stuff. It was a good idea, the housing market was stable. Now everyone in the mortgage business took the business very seriously because you wanted homeowners to succeed. You wanted them to be able to pay back.

To give somebody a mortgage loan that they can’t pay back is not doing them a favor. To allow everybody access to that kind of lending is not a good idea. You aren’t doing somebody a favor if you put them in a house overnight and they have to default on their mortgage. All that you’ve done is give them a mortgage loan. You haven’t helped them buy a house.

LAMB: So if you were to find that person or a group of people that decided at one point that this was a very quick way of making lots of money ...

TAVAKOLI: Yes.

LAMB: ... would you put your – what tail – what donkey would you put the tail on?

TAVAKOLI: You know, there are a lot of donkeys out there to put the tail on. There were a number of mortgage lenders that grew up across the country, largely unregulated. So you had mortgage lenders like AmeriFirst, like Countrywide, like New Century. Those are the larger ones.

But you have a number of smaller ones throughout the country. We’ve had hundreds fail. And these people didn’t necessarily know the borrowers. They were all about churning mortgages in order to earn fees.

Now we could have stopped this early on. But it was investment banks, not our traditional banking system, but investment banks. And by them I mean all five of them: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns who got involved in saying, we’ll package these up now instead of the banks and we’ll sell them to investors.

But, they were giving an incentive to mortgage lenders to say, look, we’ll give anybody a loan because we can earn fees and there won’t be very much scrutiny about what we’re doing and how we’re doing it.

So if you want – if you can’t afford the house, you know, you can get a mortgage on 80 percent of the value of the home and we’ll give you an additional loan to be able to buy the house. So basically people were buying homes with effectively no money down. And they were buying homes they couldn’t afford.

Now, in some cases, people were buying homes they could afford and they were slammed with risky mortgage products that they didn’t expect when closing occurred. So we had a combination of things.

One were people who saw they could exploit the system, mortgage brokers who basically wanted to earn fees. People who wanted to borrow and buy too much house that they knew they couldn’t afford hoping that housing prices would go up and bail them out.

And the third category, which is a very sad category, and those people who were actively mislead. Those loans were presented as if they were a gift. And they were really a Trojan Horse loan that people rode into bankruptcy. They rode to their financial ruin.

So people whose credit maybe was already shaky or whose financial situation was shaky basically thought, well, maybe I can make it, you know, mortgage brokers are telling me it’s OK. They’re telling me that my interest rate will stay low when the reality was it would pop up to the stratosphere and their principal balance, in some cases, could even increase.

So we had a combination of riskier mortgage products made to homeowners who were taking on too much debt in the first place. And that’s a formula for disaster. We destabilized our housing market.

LAMB: But as you know we can – and you tell me what you think. But we can – I could show you a video right now about both the Republicans and the Democrats saying over the last 20 years, we want everybody in a house.

People bragging about and politics the percentage of people in the United States that own their house, or at least are buying their house. Is there a culprit out there? Is there a group of people in politics or ...

TAVAKOLI: Yes.

LAMB: ... in investment banking? Can you name anybody that we – or I’m not sure you would even want to blame anybody but ...

TAVAKOLI: Well, this is a bipartisan ...

LAMB: How could this happen again?

TAVAKOLI: This is a bipartisan problem. You have people like Barney Frank and Chris Dodd who have been big proponents of this homeownership and big proponents of Fannie and Freddie lowering their lending standards. These are our big indirect mortgage lenders because they buy mortgages from people who have been the mortgage lenders.

And it has destabilized our housing market. If you deviate from prudent lending and you put too much leverage in the system, and you have individuals putting on too much debt, it’s a formula for failure. What happens is you get a bubble in prices and as those prices come down you see, as Warren Buffett might say, ”When the tide goes out you see who’s been swimming naked.”

And there are a lot of nudists in America right now. Unfortunately, their efforts were misguided. And if this was a way to buy votes, it’s a really bad way to do it because ...

LAMB: But, you know, if you look at the board of directors of Freddie and Fannie ...

TAVAKOLI: Yes.

LAMB: ...both Republicans from politics and Democrats ...

TAVAKOLI: Yes.

LAMB: ...from politics served on the board all through those years as the people running them were taking millions of dollars out. Now how did that happen?

TAVAKOLI: Well, there has been a lot of crony capitalism. And I think Americans need to pay attention. We have a financial oligarchy. This has been said in many places. And I completely agree with that. These people practically have Tim Geithner on speed dial. And I was hopeful that when somebody like Obama came in that there would be meaningful change. If anything the situation has gotten worse. But this is bipartisan. You’ll notice that President George Bush, when he was in office, he elevated Roland Arnall, who was the head of Ameriquest, that had been involved in alleged mortgage fraud, massive, sued by almost every state in the Union.

And he was elevated to the position of Ambassador to the Netherlands. The Netherlands didn’t even like it. There were articles in the Netherlands saying it was reprehensible because it sent a very bad public policy message.

Not only can you do things that are against the American interest and can help destabilize the housing market, a huge piece of our economy, but you can be rewarded with an ambassadorship. It was incredible.

And Congress approved it. So this is a bipartisan mish mash that we have of people whose interests are not serving the American people, primarily. They’re primarily serving and protecting the financial sector. And we’ve bailed out a lot of bad guys, a lot of bad guys.

A lot of people, and I heard, I mentioned Paul Volcker was talking in Toronto, and he said that, ”Well, people relied on models and this was a mathematical error.” And I’ve been a big critic of models over the years and I have to tell you, this was not a model issue; this was a management issue.

We had people who knew or should have known they were selling things that were value destroying securitizations and their sale provided money to mortgage lenders who were originating fraudulent loans, in some cases, and in other cases, loans that were brand new risky products that were overrated by complicit rating agencies.

And I knew this sitting in Chicago, and I didn’t say it after the fact. I said it in real time and, you know, I gave examples of, this deal should not close. This deal is ridiculous and has more red flags for fraud than anything I have ever seen. It’s a classic situation for fraud. This deal shouldn’t close. It’s going to crumble.

And I gave warning after warning about that and started speaking out about it in public. So there weren’t any outliers, like model outliers in mathematics, there were just a lot of outright liars, and we have not held people accountable for this. In fact, we’ve been bailing them out.

LAMB: Let me go over some of your own background. Where were you born?

TAVAKOLI: I was born in Chicago, but in my adult life I’ve lived in Iran for a year, in New York and London in the financial business, working primarily for investment banks, and some large banks.

LAMB: What part of Chicago?

TAVAKOLI: The south side of Chicago.

LAMB: Did you go to high school there?

TAVAKOLI: I did, yes.

LAMB: Where did you go to college?

TAVAKOLI: I went to college in Chicago, to an engineering school, Illinois Institute of Technology.

LAMB: And you got a chemical engineering degree?

TAVAKOLI: Chemical, yes.

LAMB: Why, what was your life like and why did you want to be a chemical engineer?

TAVAKOLI: I always liked math and I liked chemistry a lot, and my father had died when I was twelve years old, and I thought about, well medical school or something in the sciences, but with a four-year chemical engineering degree you can get a job and support yourself, and that was in the mid-’70s when we were just coming out of a recession.

So it was foremost in my mind that I wanted to be able to be self sufficient, but then I got married right out of college, moved to – worked as a chemical engineer, moved to Iran for a year, came back to the United States and worked my way through the graduate school of business at the University of Chicago.

Then I moved to New York for a number of years, more than 10 years and then to London, and worked in the financial services industries, so I know many of the key players who are involved in the mortgage meltdown. I knew them personally and still know many people who are involved now in what’s going on.

LAMB: You married an Iranian by the name of Tavakoli.

TAVAKOLI: That’s correct. That’s my ex-husband’s name.

LAMB: And where did you meet him?

TAVAKOLI: I met him in school, in engineering school.

LAMB: How long were you married?

TAVAKOLI: I was married for five years.

LAMB: And what did you learn about living in Iran?

TAVAKOLI: Well, you know ...

LAMB: And what year was it, I’m sorry.

TAVAKOLI: I lived in Iran before, during, after the Shah was overthrown, for that period of time, and I left Iran around three months after Khomeini returned, and for me, it was an eye opening experience to observe, why do people believe the things that they believe?

And I even challenged my own beliefs, not my beliefs, but I challenged the way that I look at the world and how that it can appear funny to other people. My ex-husband was born a Muslim, but he didn’t practice, none of his – his family was very secular, so they didn’t pray or weren’t religious, yet of course religion is a very important part of Iran as a whole.

And I remember when we were living in the United States, even something like our practices for burying our dead. There was a wake for one of the professors at the Illinois Institute of Technology, and I had a class to attend and I couldn’t attend the wake with my ex-husband. I went separately, but he came back from the wake white as a sheet, and he said, ”You didn’t tell me. You didn’t warn me about this.”

And I said, ”Warn you about what?” and he said, ”Janet, it was horrible. It was just horrible. His body was laying right there, and everybody went up to the body and was touching the body and talking about how wonderful he looked, and he didn’t look wonderful.” So for him it was a traumatic experience.

And something as - our simple customs can appear to an outsider to be traumatic, and he had lived in the United States for a number of years. He had gone to his under graduate in the United States and then was getting his Ph.D. when I met him. So it wasn’t as if he was new to the United States, it’s just that, even a simple custom can throw a curve ball to foreigners.

And when I looked at the Iran as a country I was mindful of that when I was viewing their customs and their practices. But I have to say that the thing I appreciated the most about coming back to the United States is our government, that we have three branches of government that are supposed to provide checks and balances.

We haven’t been doing a great job of that lately, but the concept of checks and balances is important. After you live in a country where you really don’t have a lot of legal recourse, you are pretty much at the whim of the executive branch of government in Iran, and that’s not a good place to be.

And as an American, I didn’t – I of course did not feel safe there and was not safe. I was caught in riots several times in Iran, and fortunately I was able to say, you know, I’m a Tavakoli. I’m married to an Iranian and people would pretty much leave me alone, but it wasn’t a safe situation.

LAMB: What was your maiden name?

TAVAKOLI: Hebenstreit, it was a German American name. I’m a German. I’m an American mutt, Irish-German mixture.

LAMB: And go back to the financial services business, what companies, can you name them - that you worked in for twenty years in both New York and London?

TAVAKOLI: Yes, I worked for a number of banks and investment banks including, Merrill Lynch, the former Paine Webber, which became UBS, for Goldman Sachs for a period of time, for Solomon Brothers – I was in Michael Lewis’ ”Liars Poker” training class. That was my first position on Wall Street, for Bear Stearns, Bank of America.

LAMB: Was there a time when you did this that you said to yourself, and I’d love you to tell us that, this is not right. This business is going off track here.

TAVAKOLI: Well, in any large complex financial business, where there’s a lot of money to be made, you’ll always have some jokers, and the idea was the system would punish people who went off the rails, and when I started in the business it was a much smaller business.

People knew each other. People that I started out with in the business - we all still pretty much know each other, and people would not pick up the phone of people who behaved badly. I remember reading the biography on Andre Meyer, one of the financiers at Lazard Freres, and somebody called him about somebody who had not behaved well in the financial business and they said, ”What do you think about him?” and he said, ”I don’t know him,” and they said, ”Of course you know him, you worked with him.”

And he said, ”I don’t know him!” And that was the way that the bad actors were dealt with, you just shunned them. And, you know, so we’ve always had that element in the financial services business and it’s never been very good about punishing people in the business.

But the past few years, and I start out my book with meeting Warren Buffett because it was just a good place to start, but the book isn’t really about Warren Buffett. It’s about the global meltdown, but I used him as a benchmark. His character, I talk about that a bit in our meeting and the way that he does business creates value.

What has happened in the past few years has destroyed value. It’s a whole way of being and living in the world that’s different, and I argue that creating value is a much healthier way to invest and a much healthier way to run the economy.

But when I met Warren in August of 2005, he had already had a bad experience with bad lending, with insane lending, I should say, and with the bankruptcy of a mobile home manufacturer called Oakwood, who issued loans that were packaged up by Credit Suisse First Boston and were later deemed to be value destroying securitizations.

Now that happened in 2002, so it’s not like the problems that we have are new. It’s that the problems that we have exploded and they were unchecked, and our government failed to regulate, and I also say in the book that contrary to popular belief that there was no one who could regulate credit derivatives, no one who could regulate the system, I’ll say well, actually I think there was.

That was the Securities and Exchange Commission. We also hear that most of the activity that went on was not illegal, and I’m here to say well, actually I’m going to raise my hand for that one and say, you might want to rethink whether or not this was illegal, because selling securitizations that you know are stuffed with loans that are going to implode and yet have a triple A rating on them when there’s substantial principal risk.

And if you saw that without explicitly explaining that to investors, and you knew it or should have known it, it seems to me you might be in violation of a few securities laws. And the SEC could have shut down these financial meth labs that provided the money to the mortgage lenders that kept the party going.

We could have nipped it in the bud by shutting off the money spigot, by stopping that kind of securitization activity, and we had reason to do it, and we had reason to know we needed to do it, with precedents like the one that Warren Buffett observed. And not only that, Warren Buffett wrote about it in his 2003 shareholder letter, which came out in April of 2004, and he posted it on his Web site.

Now, when the smartest investor, arguably the smartest investor in the history of mankind, puts out a warning like that in public, signs his name on a shareholder letter and puts it on his Web site, why do we the American people ignore it?

Why is our government ignoring it, and why are they making it easier for that activity to go on instead of harder, because many of the actions that our government took in the intervening years made it easier for people to do it, easier to get away with it, and then to cap it all, we’re bailing people out who should have been stopping this activity instead of, you know, accelerating the activity.

LAMB: So, the average person sits here and looks at this town, and sees that a lot of power has come back to this town from the financial world. Who – give us a tip on how you can learn to understand what they’re doing.

Take Tim Geithner for instance, he’s been in the news constantly. He’s the Secretary of the Treasury. He used to run the New York Federal Reserve Bank, most people want to know what that means.

TAVAKOLI: That was a very bad appointment.

LAMB: Why is that?

TAVAKOLI: Because Tim Geithner has been part of the problem and not part of the solution.

LAMB: As an individual?

TAVAKOLI: Yes, as an individual, he’s been very closely connected with people on Wall Street. You have Jamie Dimon as one of the – on the board of the New York Federal Reserve, Tim Geithner used to be ...

LAMB: Jamie Dimon runs JP Morgan?

TAVAKOLI: He runs JP Morgan Chase. He used be – I like Jamie, by the way, and I’ll get to that if we have time, but Tim Geithner was president of the New York Federal Reserve.

You had Hank Paulson, former CEO of Goldman Sachs, who was our Treasury Secretary mostly - before Tim Geithner, and Hank Paulson was the CEO of Goldman Sachs at the time that they were putting on these transactions with AIG that later became so problematic. And those contracts could have been negotiated so that AIG didn’t go under, but that didn’t happen.

Instead, everything that happened was very much to the financial advantage of his former employer Goldman Sachs. He was an interested man. You might recall what Thomas Paine said about interested men. He said that, ”History has shown us that we can not trust interested men.”

To just take their scenario as a given is very foolish. Congress should have questioned that. In fact, why are we having the CEO of a former investment bank in a position to make decisions that are to the advantage of his former investment bank?

LAMB: Let me give a contrary point, just for discussion purposes. You ask a man like Hank Paulson to come in because he really understands what’s really going on.

TAVAKOLI: Oh really?

LAMB: And then he takes it and turns it, I mean, if you have somebody you want sitting at your elbow saying, what’s really going on here? Hank goes, ”I know what’s really going on here. And this is what you’ve got to change.”

TAVAKOLI: Well, that is one argument, but this myth about Goldman Sachs being better than everyone else and the best and the brightest is similar to the AIG myth about being the best and the brightest. And we should question how these people came to be so exalted, came to be revered, as if they’re a different species of financial professionals.

LAMB: Well again, let me stop you. If you are over in Congress and you’re fundraising and you run a financial services committee and you get a tremendous amount of money, why, you know, how can, well, it’s obvious, what do you say to that? I mean, both sides – they give money to both sides.

TAVAKOLI: Yes. You say that we pretty much have a bought Congress because they know where their money is coming from, but that’s – we put people into Congress to protect our interests, but that isn’t how it’s been working out for us.

The taxpayer is footing the bill for a lot of malfeasance and Congress is not questioning the malfeasance that went on. You know, I wrote ”Dear Mr. Buffett” in even simpler English than I’m using today with no graphs, no charts because it’s easy to understand what went on here.

When you create a lot of bad loans, and it’s not just the housing market, but let’s use the housing market because that’s what most people can see. When you create a lot of bad loans in the housing market and then pass them off as if they’re not bad loans, obviously, there’s a fraud going on, and now you’ve destabilized the housing market, a large part of the U.S. economy.

And I’m here to say that this wasn’t an innocent mistake. It wasn’t a math error. It wasn’t a black swan. It was the result of Black Barts, like the Californian stagecoach robber who used to engage in bloodless robbery and get away with it.

LAMB: But there are a lot of people that were in this business in New York who are revered today. They gave a tremendous amount of money to Carnegie Hall, to Cornell Medical School. The president of the United States, Jerry Ford, went on the Citigroup board after that when Sandy Weill was running that show.

Bob Rubin was Secretary of the Treasury and he’s been in a couple of those companies, Goldman Sachs and Citi and all of that, and made a lot of money. I mean, we’ve all seen that. Shouldn’t we trust these people? They’ve been elected by the public. They’ve been, you know, in Bob Rubin’s case, he was approved by the United States’ Senate. Why wouldn’t these people be trusted?

TAVAKOLI: Well, you know, there are a lot of good people in finance, but what you have here are, as I say, interested men. And that’s why – I didn’t say persons of interest, although we may someday. I said interested men.

Let’s take the case of Bob Rubin. Bob Rubin was the Treasury Secretary under Bill Clinton. One of Bill Clinton’s last acts in office was to eliminate a restriction, and it used to be that you couldn’t lobby your old department for five years. Clinton got rid of that.

So when Enron was about to go under – you’ll recall it went bankrupt in December of 2001. That fall, Bob Rubin, who at the time was working for Citigroup, and Citigroup was a big creditor of Enron, he called the Treasury Department, and he asked a Treasury official if it wouldn’t be - to put pressure on the rating agencies not to downgrade Enron. Imagine that.

Now, what he did was not illegal because Bill Clinton had raised that restriction. However, in my opinion, it is extremely inappropriate. And, you know, Goldman keeps saying how we have so much integrity; we’re the best, the brightest and so on. Let me take that argument further.

Well first of all, that was just outright inappropriate even though it wasn’t illegal. And now, fortunately, the Treasury Department didn’t listen to that. They basically, told him to go away, and they didn’t pay any dignity to that.

But Enron went bankrupt the following December, as you’ll recall, and Citigroup was a creditor. Bob Robin, when he made that call, was an interested man. He didn’t have your interests in mind, the American taxpayers interest’s in mind, or my interests in mind. He had Citigroup’s interest in mind.

LAMB: How do you find people that don’t have the public’s interest in mind, then, to run these things? I mean – and how do you know what’s going on ...

TAVAKOLI: And who are competent because we’ve had, you know, a lot of incompetent people at the SEC who basically couldn’t find a credit derivative with a flashlight and a map. So, it’s not ...

LAMB: But why is that? Why can’t they find ...

TAVAKOLI: Well, I think they can, but a lot of people who get into these jobs are politically connected, you know, Cox was a former member of the House of Representatives who got out of the House of Representatives before the door hit him on the behind. You know, we’ve had a lot of those kinds of appointments in Washington.

LAMB: Why do you say that about him?

TAVAKOLI: Well, I’d rather not get up too far off the topic here, but ...

LAMB: The reason, I mean, the public is, basically, drowning in credit default swaps and derivatives and collateralized security ...

TAVAKOLI: And it’s a very simple – it’s really much simpler than that, isn’t it? It’s a lot of bad lending that was tolerated, and a lot of packaging of those bad loans and selling them with false labels that kept the party going. And they kept draining money out of mainstream America, and set us up for a huge fall. That’s not hard to understand.

Credit derivatives were just a way of making the problem even worse. It was sort of like throwing gasoline on the fire. But, you know, the fire, the way the fire was started, was very easy to understand.

LAMB: But go back. These people, Bob Rubin, and let’s take Hank Paulson one that’s, I don’t know ...

TAVAKOLI: Well, let’s continue on Bob Rubin…

LAMB: ... those two. They are now firmly located in institutions in New York and Washington that have a lot of respect in the political world. I mean, people never ever ...

TAVAKOLI: Well, Bob Rubin is no longer at Citigroup, do you realize?

LAMB: Oh, no. I’m not talking about the Council on Foreign Relations or the Johns Hopkins here in town.

TAVAKOLI: Let’s continue with the Goldman myth and with Bob Rubin for a second. After the Enron call, you know, now we move fast forward to the current problems that Citigroup had. Citigroup – probably the better solution, would have been to put Citigroup in receivership, which is, we have FDIC deposit insurance.

You put Citigroup into receivership, the shareholders are wiped out, and the people, the debt holders, the creditors of Citigroup, end up taking the loss. And instead we use public money to bail out Citigroup’s creditors.

Well, how did that happen? Well, that was because we started this whole TARP program under Hank Paulson, who at the time was Treasury Secretary, former CEO of Goldman Sachs. Bob Rubin was a former co-chair of Goldman Sachs.

Now, if you look at Wikipedia, you won’t find that fact on Wikipedia, oddly enough. I don’t know if that’s Wikipedia. That has nothing to do with anything, but I’m just saying that a lot of people aren’t aware of that fact.

So, Bob Rubin was co-chair of Goldman Sachs. These were interested men. Now, Bob Rubin is at Citigroup. Citigroup basically should – needs to go into receivership and had a lot of problems. That didn’t happen. Instead, it got $25 billion of TARP money in October and it didn’t end there.

In November we did another bailout of Citigroup where we gave it another $20 billion dollars, and guaranteed more than $300 billion in Citigroup’s assets, and notice what I said about assets and what could be on Citigroup’s balance sheet. And we just guaranteed it.

That means the U.S. taxpayer, the U.S. government, meaning you, and me and every other U.S. taxpayer, and it didn’t end there. Then, at the end of February, we had, what I call, a non-transparent or opaque bailout of Citigroup that most taxpayers don’t even know happened because our investment in Citigroup was in a form of what we call, preferred shares.

Instead, we agreed to convert it to common shares at a price that was favorable to Citigroup at an above market price. So that, again, was an additional backdoor bailout of Citigroup. It’s never-ending…

LAMB: But as you and I sit here today all these banks are telling us they’re making profits now, and they’re better than they expected and their stock is going up. I noticed a couple of these stocks have gone up.

TAVAKOLI: I’ll get to that in a minute. We are being lied to and I’ll explain how we are being lied to in a moment.

But getting back to Bob Rubin, we did all these bailouts at Citigroup. And Bob Rubin at the time, you know, that Citigroup needed its first bailout said that, ”Well, I didn’t know anything about CDOs.” He had a reputation for being the risk wizard, a risk wizard.

Well, look, if you are in finance and you haven’t been aware of the fastest growing structured financial product in the past few years in the form of collateralized debt obligations or CDOs and you are sitting on the board of Citigroup.

And you are going to say when Citigroup needs to go into receivership that, let’s bail it out, and by the way, I didn’t know what CDOs were, I have to say, what is the best and brightest about Goldman Sachs?

I don’t get it because, frankly, all you have to do is read the newspapers and stay up to speed.

LAMB: You know, a lot of these folks you’re talking about in New York City give a lot of money to charity. I want to go back to that for a moment. Does the media in New York lay off of them because they’re giving money to all those cultural institutions in New York?

TAVAKOLI: I don’t know why the media in New York is laying off of them. I don’t have the answer to that question.

LAMB: But have they in the past? Have they gotten away with doing all this and making all of this money and then giving it away and not being looked at closely?

TAVAKOLI: Well, they haven’t been looked at closely and they should be. And it could be the contributions. I don’t know. I don’t know why the media, though, would be impressed necessarily with charity contributions. So I don’t know if that’s it, or if the media needs access and they don’t want to irritate these people. I don’t know what the answer to that question.

LAMB: Well, the media in New York often serves on the same boards that these people that have given money serve on.

TAVAKOLI: But serving on a board doesn’t necessarily mean you’re compromised, but there certainly is something going on because the media isn’t nailing them. The ”New York Times” has done pieces on Bob Rubin completely bypassing the whole problem of interested man, and even being an interested man, he wasn’t interested enough to read the newspapers and find out about the fastest growing financial products that were sitting under his own nose.

LAMB: OK, go back to Tim Geithner. He’s there, now. He’s the Secretary of the Treasury-- by the way, Larry Summers, what do you think of him?

TAVAKOLI: Well, Larry Summers was one of the proponents of doing away with Glass-Steagall, and that was bipartisan, by the way. It wasn’t just Larry Summers. But we didn’t put any handcuffs in place to prevent the kind of thing that just happened here, so I don’t know what Larry Summers’ mindset is or everything about Larry Summers’ background ...

LAMB: But you – Glass-Steagall did what to what?

TAVAKOLI: Yes, I should explain that. Glass-Steagall basically allowed banks to get involved in what used to be called investment bank activity. What I mean by that? So instead of being and FDIC insured institution that takes in deposits from depositors and makes loans to the local community or do that on a big scale, now you could do things like rock and roll.

And start trading credit derivatives, start trading stocks, start doing the things that they did before the Depression that got us into trouble and led to the Great Depression.

So basically we said let’s get rid of Glass-Steagall and allow banks to act as if they’re Goldman Sachs or Bear Stearns and basically had those mini companies going on within the whole banking institution. The idea was that banks could make more money and that they would control the risk.

But the reality was that the OCC, the Fed and the SEC weren’t really doing much in the way of regulation and really didn’t understand a lot of these products.

LAMB: OK, let’s go back to the average person sitting here saying – and they’re not worth a lot of money and they’ve lost a lot in this process. Their 401(k)s are down.

TAVAKOLI: Yes.

LAMB: And they’re looking – is there – did Bob Rubin or Tim Geithner or Larry Summers or Hank Paulson do anything illegal?

TAVAKOLI: I don’t believe that any of those individuals did anything outright illegal because our Congress didn’t pass laws to prevent it from happening.

LAMB: But what I was getting at was if you’re in their shoes - they sit there and say, this is terrific, I made $100 million dollars last year. I’m now serving my government. I’m trying to save all this kind of stuff and this is my solution to the problem and they’ve just – they’re just living.

TAVAKOLI: Well you have to take a look at the underlying institutions that, you know, Hank Paulson, as an example was head of Goldman Sachs when Goldman Sachs’ alternative mortgage products was putting out some bad products. And this has been written about. Allan Sloan of ”Fortune” won a Loeb award for an article that talked about, you know, residential mortgage-backed securities packaged up by Goldman Sachs alternative mortgage products.

And I’m here to say that any financial professional worth their salt knew or should have known that a product like that was overrated and that the labels in no way represented the risk at the time they were sold.

LAMB: If President Obama called you to the Oval Office and gave you, I don’t care, a half hour or an hour and said, ”Tell me what I should do?” Give us an idea what you would do.

TAVAKOLI: Well, there is no magic bullet answer. At this point it’s gotten so far out of control that no one has a magic bullet answer. However, the things that we need to do are the things, you know, getting back to prudent finance, the kinds of prudent finance that Warren Buffett is involved in.

He has a mortgage lending unit and it’s doing fine because they’re prudent mortgages, 20 percent down, no more than 36 percent of your overall debt load when you take on the loan and so on. Now of course the housing market has been hurt because housing prices have gone down so, you know, people – the equity in people’s homes has been eroded. We still have too much debt and too much leverage in the housing market, but start there.

Any new loan, you know, enforce those restrictions. Certainly don’t exacerbate the problem by allowing this to go on.

LAMB: OK, let me ...

TAVAKOLI: with the banks ...

LAMB: ... OK, hang on a second, my neighborhood bank never had – if you went to my neighborhood bank right now the interest rate’s so low, you know, you might want to give them the money.

They’ve never taken a risk. They’ve given out mortgages. They’ve always – what is it about the neighborhood banks that don’t get into this kind of problem and it’s all these New York-based operations, New York-Washington connection?

TAVAKOLI: Yes, isn’t that interesting? There are a lot of sound banks. You know, we have them in Chicago as well. Northern Trust says, we’re ready willing and stable. They made sound loans. Your neighborhood bank made sound loans. It’s doable.

So we have to go after the bad guys. If we think this won’t happen again that’s just idle daydreaming. We’ve seen it happen again and again; the S&L crisis, Drexel Burnham, the manufactured housing loan market at the beginning of this century. At the end of last century, commercial financial services charge off credit card receivables, fraud after fraud after fraud after fraud.

LAMB: OK, you’re back – we’re running out of time. You’re in the Oval Office and I want your advice. Give me specifics of what I can do to save this situation.

TAVAKOLI: Well, looking at the banks now I, you know, would look at the stress tests with a jaundiced eye, but we may have to put more banks into receivership. We can’t keep bailing out the debt holders of the banks, just throw money – throwing money at the banks hasn’t helped.

LAMB: When does the stress test information going to be public?

TAVAKOLI: I don’t know exactly when it’s going to be public.

LAMB: And what does it mean?

TAVAKOLI: They’re trying to see which banks are sound and which aren’t sound, but there’s been a lot of lying going on. You hear people like, well, Jamie Dimon, as an example, saying, ”Only three percent of mortgage loans are bad.” That’s extremely disingenuous. Ninety-seven percent are fine, three percent are bad. Extremely disingenuous because, first of all, most of that three percent is what the problem has been.

If you look at the subprime loans in 2005, 2006, 2007, more than 37 percent of the loans from 2005, 2006, as of – it was March of last year, already 37 percent were delinquent, meaning more than 30 days late. And in the 2007 loans were going bad lickety split. If you look at the overall loan market, more than eight percent are more than 30 days late of mortgages. This is horrific.

LAMB: By the way, Jamie Dimon, I don’t have the quote in front of me, is saying today, this is on Thursday before the Sunday it airs, that he wants to give the government’s money back and he wished he’s never gotten involved with the government and wants to pay off that loan. What’s he doing this for?

TAVAKOLI: I don’t know why Jamie wants to give the money back so quickly because that money was meant to be a buffer for the banks. If I were in his shoes I would hold on to it. Now his motive and Goldman’s motive for wanting to pay back may be so that they get the government out of their hair and they can pay their people whatever they want.

But Jamie may have a problem in the future with credit card debt. It’s a scandal that banks are allowed to charge people 29.9 percent on credit cards in cases where people were paying single digits they found that to double. Banks are raising fees, raising interest rates on consumers while we, the American taxpayer, are giving them low borrowing costs.

We are subsidizing them. We have bailed them out and they are charging usurious rates on credit cards, so ...

LAMB: Does the public have any responsibility in this?

TAVAKOLI: Yes. The public of course always has responsibility. But do they have any power because we are being taxed, but we aren’t being represented well, so we have taxation without effective representation. When did that last happen and when did we get up in arms about it?

But the public has a responsibility to try to borrow prudently and to inform themselves, to the extent they can on what’s going on, to write their congressmen. But unfortunately they’re lobbyists of one, with very little - limited resources and power.

But to really get on their local congressmen and senators and let them know that they’re outraged and that they won’t vote for them. They’ll lobby against getting them back into power if they don’t take care of the public interest.

LAMB: When you’re not writing books what kind of clients do you represent?

TAVAKOLI: Mainly some of the kinds of people we’ve been talking about right here. When they get into trouble and start fighting with each other or when they have a hairy problem then that’s the kind of business that I get involved in.

LAMB: Give us an example. Can you name some of your clients?

TAVAKOLI: I don’t talk about my clients in public or name them, but the kinds of things, as an example, if they have a dispute over a securitization and they say, ”I was actively misled, let’s sit down and talk about what happened here.”

Then the best way is really to sit down in a room and say, OK, this may have been a little them; it’s a little bit you. Let’ see if we can come to a settlement or an agreement here.

LAMB: Are you being hired by these big name companies that you’ve been critical of here?

TAVAKOLI: Yes. Only big name companies. Another example is, let’s say, their risk on their trading book and they don’t know if their traders are making as much money as they expect, more money than they expect, or less money than they expect because the models are just a mishmash and they can’t really tell.

They’re bringing in revenue, but they don’t know if it’s quality revenue or risky revenue. I’ll get involved in situations like that.

LAMB: Where did this – and you can put any name you want to on it – greed come from?

TAVAKOLI: Where did the greed come from?

LAMB: Yes. Where did this – when did this happen? Has it always been thus, or ...

TAVAKOLI: Well about a million years ago when human beings evolved that’s when greed started.

LAMB: But is it worse now than it used to be?

TAVAKOLI: The greed is certainly allowed to remain unchecked and, you know, when you get some bad apples in they tend to draw more bad apples in and, you know, the reason this happened now and the way that it happened is these products exploded and hiring exploded.

So if you had a bad core group at one of these investment banks they would start funding hedge funds and other people and once you’ve had a group together it became like Hawala in the Middle East, the way of transferring money around so nobody can tell what’s going on.

Now you’ve got a bunch of people who are basically in on it with you. So, you know, you had a guy from Merrill Lynch who is on the board of Ownit mortgage lending in California - can hardly say that’s arm’s length and they were originating a lot of mortgages and the head of Dallas, the head of – the CEO of Ownit was saying, ”I get paid more for a no-documentation loan than for a documentation loan.”

And it’s a classic situation for fraud, and Merrill Lynch was also packaging up some of those assets, as were other investment banks that were lending to them. When they went under, as far as I’m concerned, it was game over at the end of 2006.

There was no deniability for CEOs anymore. They should have shut those activities down within their investment banks, and they didn’t because they knew that people wouldn’t understand what was going on. Most Americans wouldn’t understand. Most congressmen wouldn’t understand and they could get away with it. So they accelerated that activity.

LAMB: What are the chances that these big companies, these big New York-based companies or the political institution in this town will clean up their act?

TAVAKOLI: Well, so far they’ve gotten away with the largest Ponzi scheme in the history of the capital markets ...

LAMB: Gotten away with it?

TAVAKOLI: … It dwarfs. They’ve gotten away with it so far.

LAMB: Kept a lot of their own money?

TAVAKOLI: Yes. It dwarfs what Madoff did. So far, they’ve indicted two former hedge fund managers, one of whom I know, Ralph Cioffi from Bear Stearns. That’s chump change. That’s nothing and, you know, even that may be difficult to prove whether or not anything was done wrong with respect to those investors.

I don’t know what representations that they made directly. I wasn’t in the meeting room, but with respect to what was going on in the rest of the industry, I’m here to say that, you know, so far they have gotten away with a Ponzi scheme that has taken down our housing market, that has contaminated our municipal bond insurance business so that it’s harder for us to raise money for water pipes and things that we need to get done.

This has been a huge crime on the American economy and so far, people aren’t being held accountable and we’re bailing out a lot of bad guys no questions asked. In some cases, we have to recapitalize the financial system, but the money that we’ve thrown in has, you know, been like throwing water on sand because we really needed to put some of these institutions into receivership.

LAMB: Janet Tavakoli is based in Chicago. She has about five books you can buy. I assume you can still get them on - in the bookstores or on Amazon.

TAVAKOLI: Amazon is probably the best place, easiest place.

LAMB: And the current book is ”Dear Mr. Buffett,” Warren Buffett that is. Thank you very much for joining us.

END




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