CSPAN Interview: Janet Tavakoli on the Financial Crisis

Janet Tavakoli gives one of the most fair assessments of the financial crisis during her interview on CSPAN. She wrote her book on the topic, Dear Mr. Buffett, from the perspective of Warren Buffett’s style of investing that creates value, in contrast to the Wall Street financial institutions that used mortgage loans to generate fees but ultimate destroy value and crash the economy.

CDOs were overrated and overpriced the minute they came to market.

Best Quotes from Janet Tavakoli Interview

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

Money isn’t an evil thing, money is a good thing 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.

I’ve always viewed money as a means of independence.

Toxic assets are leaking into the system and crippling it. What we are doing right now instead of fixing the problem is we are prescribing potent painkillers.

What is going on right now is misguided. And the policies we’ve adopted will only make our pain and suffering drag out. We are delaying fixing the problem.

Fear isn’t a very useful emotion, but if you are feeling it you want to harness it in a very useful way.

The government is going to just print money to prevent any bank from going into receivership, which is a galaticaly bad idea.

Credit derivatives have added to the risk of the system by adding leverage and opacity. It increased risk in the system and invisible debt.

CDOs were overrated and overpriced the minute they came to market.

(A credit derivative)…not a bond, but derived from a bond. A credit derivative is trying to protect your credit. You pay part of your coupon to protect the principal, which gets paid back at maturity. So it was an idea originally of hedging or transferring risk. It was meant to be a good thing. Banks created it to get loan risks off our balance sheet.

When we had sound lending practices at banks, packaging mortgages together was a good idea because people put 20% down and their total debt was no more than 36% of their income. That was prudent lending and we need to get back to that.

These people didn’t know the borrowers; they were all about churning mortgages to earn fees.

(Sub-prime mortgages) were loans to homeowners who were taking on too much debt in the first place. And that’s a disaster and we 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.

(Regarding Fannie Mae and Freddie Mac fraud) There has been a lot of crony capitalism. We have a financial oligarchy. These people have Tim Geithner on speed dial. I was hopeful when someone like Obama came in, there would be meaningful change. If anything the situation has gotten worse. But this is bipartisan.

This is a bipartisan mishmash of interests that are not serving the American people but primarily serving and protecting the financial sector.

Paul Volcker said people relied on models and this was a mathematical error… This was not a model issues but 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 any large complex financial business, where there is money to be made, you’ll always have some jokers and the idea was the system will punish people who went off the rails.

The way he (Warren Buffett) does business creates value. What has happened in the past few years has destroyed value.

It’s not that the problems we have are new, but the problems we had exploded and they were unchecked and our government failed to regulate.

Tim Geithner was a very bad appointment because he has been part of the problem and not part of the solution. He’s been very closely connected with people on Wall Street.

You say we have a bought Congress because they know where their money is coming from. We put people into Congress to protect our interests but that isn’t how it’s been working out for us. The tax payers is footing the bill for a lot of malfeasance and Congress is not questioning the malfeasance that went on.

When you create a lot of bad loans… and pass them off as if they are not bad loans, obviously there is a lot of fraud going on and now you’ve destabilized the market and the US economy. This isn’t an innocent mistake, it wasn’t a math error, it wasn’t a black swan, it was the result of Black Barts, the California stage coach robber who used to engage in bloodless robbery.

The better solution would have been to put Citigroup into receivership. You have FDIC deposit insurance, the shareholders are wiped out, and the creditor (debt holders) of Citigroup end up taking the loss. Instead we used public money to bail out Citigroup’s creditors.

Greed has certainly been allowed to remain unchecked. When you get some bad apples in, you tend to draw more bad apples in.

Notes

Janet Tavakoli gives her insight into the financial system in the most fair and calm manner while making the issues and problems clear to the audience. This might be the best presentation I’ve seen on the financial crisis.

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