Janet Tavakoli — How to Spot a Fraud

THINKADVISOR: Why is it critical for financial advisors to perform a fraud analysis on whatever they’d like to invest in — or when doing any deal? 

JANET TAVAKOLI: You need to protect yourself. The Fed and the [Securities and Exchange Commission] aren’t doing their jobs, and the banks are financing a bunch of bad guys. You’re cruising for a bruising if you don’t take fraud into account and do a fraud analysis. Fraud is the most important thing to evaluate. When there’s fraud, there’s permanent value destruction in investments.…

THINK ADVISOR
Janet Tavakoli: How to Spot a Fraud

THINK ADVISOR interviews Janet Tavakoli

Janet Tavakoli — President Obama Might Ask Who Benefits from U.S. Debt Default

Bloomberg News' Yalman Onaran wrote an article on Monday about the disaster that would unfold if we don't raise the debt ceiling and the U.S. has a technical default by missing an interest payment on U.S. Treasuries. James Kochan's quote summed up my feelings: "Well, holy cripes!" It has never happened in modern history and would be a disaster greater than the September 2008 financial crisis. 

China and Japan combined own $2.4 trillion in U.S. Treasuries, and they are understandably upset with the U.S. about the possibility of a technical default.
Most of the financial press has focused on how awful a technical default would be, and who is upset. But our leaders might ask a different question. Who are the reprobates that are cheering for the possibility of a technical default on the U.S.? Who stands to gain? Who might be happy to set off this financial bomb?...

Follow the Money 

My reason for writing the 2010 commentary was to encourage Congress to ban credit derivatives on U.S. debt due to the potential for abuse. Perhaps no one is abusing this situation for financial gain. But while we're asking about the horrific consequences of not raising the debt ceiling--and possibly throwing the U.S. into a technical default--we should also ask who would benefit if this happened?

If you follow the money, you often find someone moving levers behind the scenes.

The Huffington Post
President Obama Might Ask Who Benefits from U.S. Debt Default
Janet Tavakoli | President, Tavakoli Structured Finance

Janet Tavakoli — Congressman Cummings, "AIG Can Crush You Like a Bug"

It's a serious matter to say a company is lying on its financial statements. But AIG told big lies in August 2007. (More on that later.) So big that I met with Jamie Dimon, Chairman and CEO of JPMorgan Chase, and called Warren Buffet, famed investor and Chairman and CEO of Berkshire Hathaway.

If you hold meetings and make calls like that, you better be very sure there is big trouble. I was sure. AIG didn't admit its problems when there was still time to avoid disaster. Instead, it pushed back on the truth. In September 2008, it needed a government bailout.

Capitalism Doesn't Reward Failure, But Crony Capitalism Does

AIG was in serious financial trouble, and its employees didn't deserve bonuses for 2007, much less 2008. That's how capitalism works when a company is in trouble. Capitalism doesn't reward failure.

U.S. taxpayers bailed out AIG and its counterparties (who didn't deserve bonuses, either). Employees earned huge partial bonuses anyway, and no one went to jail. Now, five years later, AIG's new CEO, Robert Benmosche, is acting like a big smug guy who got away with something, because AIG did.

Benmosche didn't like that the government criticized AIG for paying lavish "partial" bonuses to hundreds of employees. He said only 10 employees were behind the bad trades. But that's how capitalism works. If your problems are so severe that it damages the entire company, employees don't get paid. Ill-managed companies in deep financial trouble aren't supposed to pay lavish compensation.

It gets a lot worse and Ms.Tavakoli names names.

The Huffington Post Blogs
Congressman Cummings, "AIG Can Crush You Like a Bug"
Janet Tavakoli | President, Tavakoli Structured Finance

Janet Tavakoli — SEC Omitted Evidence Damaging to JPMorgan's Jamie Dimon

During his widely reported April 13, 2012, earnings call, Dimon not only misinformed the public, he dismissed credible prior news reports about huge credit derivatives positions and mounting losses in JPMorgan Chase's Chief Investment Office unit. He not only dismissed disturbing news, he didn't disclose the size of the losses already known to him, and the numbers were whopping. He reportedly knew of $700 million in losses and the losses were increasing.

Senate Investigation Showed JPMorgan Executives Misinformed the Public
The SEC is still investigating this case, but Senator Carl Levin (D-MI) and Senator Charles Grassley (R-IA) criticized the SEC for not sanctioning individual managers. Both are keen for enforcement for the way the bank communicated with investors.

The Huffington Post Blogs
SEC Omitted Evidence Damaging to JPMorgan's Jamie Dimon
Janet Tavakoli | President, Tavakoli Structured Finance

Janet Tavakoli — Who Do We Blame?

First Business News
Who Do We Blame?

Janet Tavakoli interviewed

Janet Tavakoli — Why POTUS Allowed Bailouts Without Indictments

Janet Tavakoli is the female Bill Black although she is an expert in structured finance rather than law and regulation. Another who saw it coming well in advance of the crash, she was way out front warning about the impending financial crisis. Not being an economist, like Bill she is not given credit for her foresight by economists.

Tavakoli Structured Finance
Why POTUS Allowed Bailouts Without Indictments
Janet Tavakoli

Janet Tavakoli on the closet Fed. Plus free book today, Feb 21.

The Fed has been engaging in closed door meetings to change rules for banks. It wasn't until Victoria McGrane and Jon Hilsenrath at the Wall Street Journal asked for the results of votes that the Fed posted them on its web site. Since June 2010, the Fed has held only two public meetings on the changes. But just on the topic of derivatives alone it held 14 meetings with JPMorgan Chase, 12 meetings with Deutsche Bank and Goldman Sachs, and 11 meetings with Bank of America, Barclays, Morgan Stanley and Wells Fargo.

How effective will the Fed's regulations be after it has taken so much input from banks that vigorously lobbied against the already impaired Dodd-Frank Act?

Without knowing more about the meetings, no one can say for sure, but based on the events since the September 2008 on-going financial crisis, I can take an educated guess. The banks will largely have their way in diffusing effective regulation. After all, they've been remarkably adept at preventing the enforcement of perfectly good laws and regulations already in place before during and after the bailouts.

Read the rest at The Huffington Post

With Trillions On the Table Nobody Plays Fair, and Everyone Plays for Keeps

by Janet Tavakoli
President, Tavakoli Structured Finance

Ms. Tavakoli concludes:

Since 2008, we've seen example after stunning international example of no-strings-attached socialization of losses and privatization of gains. Nothing has changed for the better, because big money interests like it this way, and they are the largest contributors to Congress. The lack of promised campaign finance reform has enabled the ongoing saga of what most of us would call deft theft of public funds.

Endnote:

Free for download today, Tuesday February 21. The New Robber Barons is a Kindle-only e-book compilation of my articles and commentaries from September 2008 to the present. Most of these after 2010 have appeared on The Huffington Post. The advantage of the e-book is that it includes the original reference links including links to some of my original public (non-client) analysis. This is unedited so that readers can see my original thought process and ultimate vindication when the truth was eventually revealed by Congressional investigations. In order to see the pattern, it is arranged chronologically by topic and includes material going back to the September 2008 crisis.Available in the U.S., UK, Germany, France, Italy, and Spain. You must own a kindle, or have installed the Kindle app for PC or Mac, to download it.

Janet Tavakoli on China

Grice provides a clue for the timing of China's collapse. Since 1990 around 18,000 officials have fled taking an average of around $7 million per flight. Special purpose credit derivatives (perhaps you prefer the term "discredited" derivatives) are a leading indicator for China's hard landing. I call these 'China chaos" derivatives, or "Chanos" derivatives.

If the rate of change of public officials fleeing the country, df/dt > x, where x is yet to be defined, or the acceleration in fleers, d2f/dt2 > y, where y has yet to be defined, or the rate of change of the average amount of loot dl/dt > z, where z is yet to be defined, then conditions of the Chanos Equilibrium have been violated and destabilization will occur.

Stated differently, when you see the absolute amount of embezzled wealth fleeing the country suddenly increase, or when you see a sudden increase in the absolute number of Chinese officials leaving the country on "holiday," or when you see an acceleration in the number of officials leaving the country in a stealthier way, you'll know China is sinking.

Read it at The Huffington Post

Chanos Crash: Timing China's Financial Meltdown

by Janet Tavakoli

Janet Tavakoli on crony capitalism

On Nov. 29, 2011, Bloomberg magazine's Richard Teitelbaum published an article revealing a secret meeting on July 21, 2008, with then secretary of the treasury and former Goldman Sachs CEO Hank Paulson, and around a dozen hedge-fund managers and Wall Street executives.

Five of the hedge fund managers were former Goldman Sachs employees. The meeting was held at the offices of the founder of hedge fund Eton Park Capital Management, Eric Mindich, a former 15-year employee of Goldman Sachs who rose to be the senior strategy officer of Goldman's executive office. He is also current chair of the asset managers' committee of the President's Working Group on Capital Markets.

Then Secretary Paulson asked the hedge fund managers what the market might think if he placed mortgage giants Fannie Mae and Freddie Mac into conservatorship, a move that would have wiped out value for the shareholders and possibly wiped out value for subordinated debt holders.According to the article, one hedge fund manager had a short position in these stocks when he walked into the meeting. He was shocked that Secretary Paulson blabbed specifics, and the hedge fund managers therefore believed the Treasury Department would implement the plan. Seven weeks later, it did.

The hedge fund manager called his lawyer at a break in the meeting, and his lawyer told him Paulson had divulged non-public material information. His lawyer advised him to stop trading in the shares of these companies immediately. Ironically, that meant the hedge fund manager could not cover his short positions, so he profited by riding the value of the shares all the way down to the bottom. If he hadn't been at the meeting, and if he had any doubts, he might have covered his short position earlier and made less money. One will never know, because Secretary Paulson tied the hedge fund manager's hands.

But the more interesting implication is for the other managers in attendance. If they didn't already have a short position in Fannie Mae and Freddie Mac, they now had non-public material information that would allow them to almost certainly profit mightily by initiating such a trade. They could even be more confident in shorting other financial institutions that would likely take a shellacking....

Meanwhile, then Secretary Paulson told the public a different story than he told the meeting attendees. According to Bloomberg's research, earlier that day, Paulson told the New York Times that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie's books and he expected the result of this would inspire confidence. The Times's articleappeared the following day. Any investor in the shares of Fannie and Freddie would be less likely to sell their shares in the face of this reassuring message.

There is no way of knowing whether the hedge fund managers initiated new trades as a result of this meeting, but the key issue is that then Secretary of the Treasury Paulson communicated non-public material information that could financially benefit the recipients at the public's expense.

Read the rest at The Huffington Post

Is Crony Capitalism Wrong?

by Janet Tavakoli

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001),Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

UPDATE: Crony Capitalism? Hank Paulson’s Extraordinary Meeting
by Jesse Eisinger
 at ProPublica, 

Janet Tavakoli — "Fraud As a Business Model"

There were many factors that contributed to our recent financial bubble: deregulation, cheap money from the Fed, failure to enforce remaining regulations, crony capitalism, hubris, speculation, leverage, and fraud among other problems. While fraud wasn't the only issue, it was and is a significant contributor to the credit bubble. Restraining fraud is a necessary but not sufficient condition for a sound financial system. Congressional investigations in recent years have put ample evidence of fraud in the public domain....

Read Janet Tavakoli's post at The Huffington Post, "Fraud As a Business Model"

Tavakoli cites Bill Black and Randy Wray of UMKC

Janet Tavakoli on Anarchy in America

Third World America 2011: Forget "Fast Tracking to Anarchy" We've Arrived

Along with Bill Black, Frank Partnoy, Elliot Spitzer and other people with expertise in financial crime, Janet Tavakoli has been writing about corruption at the root of the global financial crisis for some time. Here she turns her attention to the consequences on the middle class and poor, who have borne the brunt, while the perps were bailed out and have gone scott free.

The post is pretty dramatic. Scary, in fact.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures(1998, 2001), Collateralized Debt Obligations & Structured Finance (2003),Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).