Thursday, February 05, 2009

Janet Tavakoli

Mr. Happy is happy to report that he has found a clear-thinking financial executive.  Her name is Janet Tavakoli and her column appears in today's Financial Times. The full text is worth reading, and you can do so by clicking here, but for those of you short on time, here's an excerpt:

George Soros in his recent Financial Times article was correct that credit derivatives created issues, but he missed the most glaring problem.

US investment banks were not the victims of bear raids; they were fundamentally unsound. Investment banks and hedge funds turned financial risk into financial crack with leverage. The risky overrated debt had no upside and lots of downside. Leverage in the form of massive borrowing and credit derivatives made the fall swift, painful and often fatal for equity investors in investment banks and hedge funds.

Pundits trying to inflate their own bubbles of self-credit put the blame on unsound models. But such fools for randomness are a distraction from the key issue: malfeasance.

Financiers and structured finance professionals were aware of the negative potential of risky loans. Yet they took it even further. The risky tranches - those that any investment banker worth their salt knew were write-offs - were used to create other packages that their buddies "managed" in one fund, while shorting in their hedge funds.

The problem was not the models' failure to capture probability outliers but the industry's failure to rein in the liars.