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Janet Tavakoli is the president of Tavakoli Structured Finance, Inc., a Chicago-based consulting firm. She has had three books published on credit derivatives, structured finance, and the 2008 global financial crisis.
Janet is the daughter of a surgeon from Wisconsin and a nurse from Buffalo, New York. Her father died when she was 12. She grew up on the south side of Chicago and Oak Brook, Illinois, and received a bachelor's degree in chemical engineering from the Illinois Institute of Technology in 1975.
Just after graduating in 1975, she married an Iranian Ph.D. student and became Janet Tavakoli. The Tavakolis lived in Iran for over a year during the time the Shah was overthrown, leaving in 1979, three months after Ayatollah Khomeini returned. [1] [2] Janet then returned to the US, but her husband remained in Iran. They divorced after five years of marriage. Back in the US she worked as an engineer while studying at the University of Chicago Booth School of Business where she received an MBA in finance in 1981. [3]
Tavakoli has worked in finance since completing her M.B.A. in 1981. She has traded, structured, and sold derivatives and structured products in both New York and London. In addition, she has held senior positions in the global financial markets division at Westdeutsche Landesbank in London, the capital markets group for Bank One in Chicago, the Swap (finance) trading desk and mortgage-backed securities marketing for Merrill Lynch in New York, and MBS marketing to Japanese clients for PaineWebber (now UBS) in New York. She has also worked for Bear Stearns, Goldman Sachs, Salomon Brothers, and Bank of America. [4]
She taught "Derivatives: Futures, Forwards, Options and Swaps" at the University of Chicago Booth School of Business as adjunct associate professor of finance. [5]
Tavakoli started warning of dangers in the financial industry in the 1990s. Her book Credit derivatives: a guide to instruments and applications, published in 1998 warned about documentation risk and information asymmetry creating economic distortions. She has often criticized the International Swaps and Derivatives Association. [6] Her 2003 book Collateralized debt obligations and structured finance warned about bad ratings and corrupt structures. These CDOs caused the virtual bankruptcy of AIG during the financial crisis in September 2008 (after which AIG received a massive bailout at taxpayer expense). In 2011 she unofficially "revoked" the designation as Nationally Recognized Statistical Rating Organizations of the ten rating agencies having that status, on grounds that they do not deserve it. [7]
Tavakoli's book Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street (2009) uses her discussions with Warren Buffett on credit derivatives and structured finance as context for analyzing the global financial meltdown of 2008. The discussions began after Buffett invited her to lunch after receiving a copy of her book Credit Derivatives and Synthetic Structures (1998, 2001). [8] This book, along with her Collateralized Debt Obligations and Structured Finance: New Developments in Cash and Synthetic Securitization (2003, re-published as Structured Finance and Collateralized Debt Obligations: Developments in Cash and Synthetic Securitization in 2008), outlines flaws in the methodology for rating structured financial products.
She has also written articles for The Wall Street Journal , Financial Times , Business Week , and other financial publications. [5]
Her first novel, Archangels: Rise of the Jesuits was published in 2013. [9]
Tavakoli is an outspoken critic of the 2008 Troubled Asset Relief Program (TARP) for financial institutions. [10] She points out that many decisions made appear to favour companies with connections to government officials making the decisions. In particular, she criticizes the Federal Reserve Bank of New York, headed by Timothy Geithner at the time, for deciding to pay Goldman Sachs and other financial firms 100 cents on the dollar for billions of dollars of troubled AIG credit default swaps, [11] while other bond insurers have settled similar contracts for as little as ten cents on the dollar. [12] AIG had been trying to persuade the banks to settle for a discount of 40 cents on the dollar. [13]
Henry Paulson, the prime architect of the bailout, was CEO of Goldman Sachs at the time those CDS agreements were entered into. Geithner was later appointed Treasury Secretary by the Obama administration. [14]
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In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.
Structured finance is a sector of finance — specifically financial law — that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS). Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. Distinctively, CDO credit risk is typically assessed based on a probability of default (PD) derived from ratings on those bonds or assets.
An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized by a specified pool of underlying assets.
A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives. Structured products are not homogeneous — there are numerous varieties of derivatives and underlying assets — but they can be classified under the aside categories. Typically, a desk will employ a specialized "structurer" to design and manage its structured-product offering.
Edward Gerald Corrigan was an American banker who was the seventh President of the Federal Reserve Bank of New York and Vice-Chairman of the Federal Open Market Committee. Corrigan served as a partner and managing director in the Office of the Chairman at Goldman Sachs and was appointed chairman of GS Bank USA, the bank holding company of Goldman Sachs, in September 2008 until retiring in 2016. He was also a member of the Group of Thirty, an influential international body of leading financiers and academics.
An asset-backed securities index is a curated list of asset-backed security exposures that is used for performance bench-marking or trading.
A synthetic CDO is a variation of a CDO that generally uses credit default swaps and other derivatives to obtain its investment goals. As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage products, rather than a real mortgage security. The value and payment stream of a synthetic CDO is derived not from cash assets, like mortgages or credit card payments – as in the case of a regular or "cash" CDO—but from premiums paying for credit default swap "insurance" on the possibility of default of some defined set of "reference" securities—based on cash assets. The insurance-buying "counterparties" may own the "reference" securities and be managing the risk of their default, or may be speculators who've calculated that the securities will default.
This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.
Credit rating agencies (CRAs)—firms which rate debt instruments/securities according to the debtor's ability to pay lenders back—played a significant role at various stages in the American subprime mortgage crisis of 2007–2008 that led to the great recession of 2008–2009. The new, complex securities of "structured finance" used to finance subprime mortgages could not have been sold without ratings by the "Big Three" rating agencies—Moody's Investors Service, Standard & Poor's, and Fitch Ratings. A large section of the debt securities market—many money markets and pension funds—were restricted in their bylaws to holding only the safest securities—i.e. securities the rating agencies designated "triple-A". The pools of debt the agencies gave their highest ratings to included over three trillion dollars of loans to homebuyers with bad credit and undocumented incomes through 2007. Hundreds of billions of dollars' worth of these triple-A securities were downgraded to "junk" status by 2010, and the writedowns and losses came to over half a trillion dollars. This led "to the collapse or disappearance" in 2008–09 of three major investment banks, and the federal governments buying of $700 billion of bad debt from distressed financial institutions.
Timothy Franz Geithner is an American former central banker who served as the 75th United States Secretary of the Treasury under President Barack Obama from 2009 to 2013. He was the President of the Federal Reserve Bank of New York from 2003 to 2009, following service in the Clinton administration. Since March 2014, he has served as president and managing director of Warburg Pincus, a private equity firm headquartered in New York City.
The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader 2007–2008 financial crisis.
The Financial Crisis Inquiry Commission (FCIC) was a ten-member commission appointed by the leaders of the United States Congress with the goal of investigating the causes of the financial crisis of 2007–2008. The Commission has been nicknamed the Angelides Commission after the chairman, Phil Angelides. The commission has been compared to the Pecora Commission, which investigated the causes of the Great Depression in the 1930s, and has been nicknamed the New Pecora Commission. Analogies have also been made to the 9/11 Commission, which examined the September 11 attacks. The commission had the ability to subpoena documents and witnesses for testimony, a power that the Pecora Commission had but the 9/11 Commission did not. The first public hearing of the commission was held on January 13, 2010, with the presentation of testimony from various banking officials. Hearings continued during 2010 with "hundreds" of other persons in business, academia, and government testifying.
Magnetar Capital is a hedge fund based in Evanston, Illinois. The firm was founded in 2005 and invests in fixed-income, energy, quantitative, and event-driven strategies. The firm was actively involved in the collateralized debt obligation (CDO) market during the 2006–2007 period. In some articles critical of Magnetar Capital, the firm's arbitrage strategy for CDOs is described as the "Magnetar trade".
Inside Job is a 2010 American documentary film, directed by Charles Ferguson, about the late-2000s financial crisis. Ferguson, who began researching in 2008, said the film is about "the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption", amongst them conflicts of interest of academic research, which led to improved disclosure standards by the American Economic Association. In five parts, the film explores how changes in the policy environment and banking practices helped create the financial crisis.
Maiden Lane Transactions refers to three limited liability companies created by the Federal Reserve Bank of New York in 2008 as financial vehicles to facilitate transactions involving three entities: the former Bear Stearns company as the first entity, the lending division of the former American International Group (AIG) as the second, and the former AIG's credit default swap division as the third. The name Maiden Lane was taken from the street on the north side of the Federal Reserve Bank's Manhattan location.
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).
Goldman Sachs, an investment bank, has been the subject of controversies. The company has been criticized for lack of ethical standards, working with dictatorial regimes, close relationships with the U.S. federal government via a "revolving door" of former employees, and driving up prices of commodities through futures speculation. It has also been criticized by its employees for 100-hour work weeks, high levels of employee dissatisfaction among first-year analysts, abusive treatment by superiors, a lack of mental health resources, and extremely high levels of stress in the workplace leading to physical discomfort.
