Janet Tavakoli is president of Chicago-based consulting and expert witness firm Tavakoli Structured Finance. She has more than 20 years of experience in senior investment banking positions, trading, structuring, and marketing structured financial products and is an author of several books on those topics. She has also testified before the Federal Reserve Bank, the Comptroller of the Currency, and the Securities and Exchange Commission.
Harlan Levy: We've had the crisis of sub-prime mortgages and defaults by their unqualified borrowers, rating agencies that gave high marks to the worthless bundles of securities backed partly by those sub-prime mortgages, then the heavy losses by banks and investment banks that created and/or bought and/or sold those collateralized debt obligations and other complicated securities. What's happening in the aftermath?
Janet Tavakoli: High finance's criminogenic environment nearly brought the financial market to its knees. Yet the chief culprits skated, and Eric Holder has announced he's not investigating those responsible for the financial crisis. Yet thousands should have been indicted. Sarbanes-Oxley was completely ineffective. No senior bank officer has been held accountable for accounting fraud, signing misleading statements, or making misleading statements to stockholders.
Jamie Dimon keeping his seat as Chairman and CEO of JPMorgan (JPM) is one example. He tried to downplay the multi-billion dollar losses due to credit derivatives bets in the London Whale unit that reported directly to him. He also earned around $11 million as a bonus. Yet JPMorgan's financials had to be misstated, and losses were ultimately multiples of what Dimon originally claimed they would be. In real time, people were saying Dimon's original story was nonsense.
Jon Corzine, a major contributor and fundraiser for President Obama, former U.S. senator and former governor of New Jersey, former Chairman and CEO of Goldman Sachs (GS), and ex-CEO of now-bankrupt MF Global has not received a criminal indictment. Yet in 2011, $1.2 billion of customer money went missing. MF Global was not a bank. It was a commodity brokerage firm and was obligated by law to keep customer funds in a segregated custodial account at all times. MF Global apparently used customers' segregated funds to meet margin calls on Jon Corzine's proprietary trades and used segregated customer money to and repay credit lines. This is strictly prohibited by the Commodity Exchange Act. Jon Corzine has not been held accountable for this violation of federal law. This is the man President Obama called "Our Wall Street Guy."
H.L.: What parts of the stock market are affected?
J.T.: We bailed out a lot of bad guys and imposed no consequences. The Federal Reserve has been printing money like confetti. Goldman Sachs became a bank holding company. That's outrageous considering it was one of the chief architects of AIG's distress. It became a huge beneficiary of the no-investigation, no-questions-asked-money-giveaway known as the AIG bailout. We opened a huge money spigot to Goldman via margin calls on credit derivatives on suspect CDOs created and traded by Goldman.
There are many more examples, but this one sticks out for the bloody-minded arrogance of Goldman's officers and is remarkable since Hank Paulson, then Treasury Secretary, was a former Goldman Sachs Chairman and CEO.
The effect of the Fed's artificially low-cost funding for banks, bailouts, guarantees, purchasing of bad assets, and providing liquidity has been the creation of a bubble. The Fed has created a strong impression that some banks are too big to fail and their officers are too connected to jail. Investors get low to negative real rates on so-called risk-free assets, so money is flowing into riskier assets. That's why many dividend-paying stocks are trading at high P/E ratios.
H.L.: In light of the latest data on jobs, jobless claims, manufacturing, consumer confidence, and Gross Domestic Product growth, what's your opinion of the U.S. economy?
J.T.: New York is a boom town for all of the reasons cited above. Yet much of the country is in a recession. Jobs and consumer confidence are key. We've created such huge distortions, that relative asset values are distorted. You wouldn't know that growth was slower than expected if you used the stock market as your barometer.
H.L.: Do you see a continuing tepid recovery, a slump, or a robust recovery next year?
J.T.: I believe that the lack of sound leadership and lack of will to enforce laws has shaken confidence in the integrity of the U.S. financial system. Washington has engaged in a bipartisan betrayal of its responsibilities to its constituents. It seems most politicians believe their first duty is to get reelected and feather their own nests.
Part of the reason corporations are holding onto cash is lack of confidence that the Fed, Treasury, SEC, Congress, and so on will do the right thing. The financial system is distorted and risk is mispriced.
What does this mean for the recovery? Nothing good. The recovery is all about creating jobs, not just preserving jobs and bonuses for a connected few. For the rest of America, we're on our own. If we see growth it will be in spite of the dead weight we carry in Washington and the cash that has been diverted to the benefit of its cronies. If we don't recover, expect them to deflect blame. If we do recover, expect them to take credit for the hard work of entrepreneurs and others who led us out of this mess.
H.L.: What's the solution for the economy's problems?
J.T.: Our Congress only cares about reelection. Our Justice Department has become the Department of Jesters for those who are connected. The president has provided no moral suasion from his platform. So there will be no solutions from Washington unless they coincidentally serve the interests of the people who finance their campaigns. There will always be pockets of prosperity for companies that produce what people want and need. But the ship has tilted. Start telling your children that they should be crony capitalists (a perversion of capitalism) when they grow up, because being connected and contributing money to Congressional and presidential campaigns is the fastest way to become rich and invulnerable. Our Republic is crumbling.
H.L.: What do you think of the solutions presented so far?
J.T.: Until we have true reform and reverse the tide of paid-off self-interest, we'll have no solutions. We'll read a lot of spin and PR in the newspapers as more reporters at our largest newspapers -- I mean the Wall Street Journal, Financial Times, and New York Times -- come to understand that they will be better paid if they write the "right" stories.