Life and Death on Wall Street?

Janet Tavakoli sent me Nomi Prins' review of her new book, Decisions: Life and Death on Wall Street:

Janet Tavakoli is a born storyteller with an incredible tale to tell. In her captivating memoir, Decisions: Life and Death on Wall Street, she takes us on a brisk journey from the depravity of 1980s Wall Street to the ramifications of the systemic recklessness that crushed the global economy. Her compelling narrative sweeps through her warnings about the dangers of certain bank products in her path-breaking books, speeches before the Federal Reserve, and in talks with Jaime Dimon.

She probes the moral complexity behind the lives, suicides and murders of international bankers mired in greed and inner conflict. Some of the people that touched her Wall Street career reflect broken elements of humanity. The burden of choosing money and power over values and humility translates to a loss for us all.

To truly understand the stakes of the global financial game, you must know its building blocks; the characters, testosterone, and egos, as well as the esoteric products designed to squeeze investors, manipulate rules, and favor power-players. You had to be there, and you had to be paying attention. Janet was. That’s what makes her memoir so scary. In Decisions, she breaks the hard stuff down with humor and requisite anger. As a side note, her international banking life eerily paralleled my own - from New York to London to New York to alerting the public about the risky nature of the political-financial complex.

Her six chapters flow along various decisions, as the title suggests. In Chapter 1 “Decisions, Decisions”, Janet opens with an account of the laddish trading floor mentality of 1980s Wall Street. In 1988, she was Head of Mortgage Backed Securities Marketing for Merrill Lynch. Those types of securities would be at the epicenter of the financial crisis thirty years later.

Each morning she would broadcast a trade idea over the ‘squawk box.‘ Then came the stripper booked for a “final-on-the-job-stag party.” That incident, one repeated on many trading floors during those days, spurred Janet to squawk, not about mortgage spreads, but about decorum. Merrill ended trading floor nudity and her bosses ended her time in their department. Her bold stand would catapult her to “a front row seat during the biggest financial crisis in world history.” Reading Decisions, you’ll see why this latest financial crisis was decades in the making.

In Chapter 2 “Decision to Escalate”, Janet chronicles her work with Edson Mitchell and Bill Broeksmit, who hired her to run Merrill’s lucrative asset swap desk after the stripper incident. Bill and Janet shared Chicago roots and MBAs from the University of Chicago. Janet became wary of the serious credit problems lurking beneath asset swap deals, many of which involved fraud. The rating agencies were as oblivious then, as they were thirty years later. Transparency was important to Janet. She and Bill “agreed to clearly disclose the risks—including [her] reservations about “phony” ratings.” Many Merrill customers with high-risk appetites didn’t care. They got burned when the underlying bonds defaulted. Rinse. Repeat.

During that time, Janet penned a thriller, Archangels: Rise of the Jesuits, eventually published in late 2012. It probed the suspicious death of shady Italian banker Roberto Calvi. In June 1982, Calvi was found hanged from scaffolding under London’s Blackfriars Bridge. Ruled a suicide, the case re-merged in 2002 when modern forensics determined Calvi was murdered. Neither Bill nor Janet bought the suicide story; though Bill joked he’d never hang himself.

Janet and I both moved to London in the 1990s, I left Lehman Brothers in New York for Bear Stearns in London in 1993 to run their financial analytics and structured transactions (F.A.S.T.) group. Those were heady days for young American bankers. We all wanted to be in London where the action was. Edson Mitchell and Bill Broeksmit wound up working for Deutsche Bank in London in the mid 1990s.

In 1997, Edson asked Janet to join him at Deutsche Bank given her expertise in structured trades and credit derivatives. The credit derivatives market was an embryonic $1 trillion. By its 2007 peak, it was $62 trillion. She declined. Edson died three years later in a plane crash.

In Chapter 3, “A Way of Life”, Janet describes her personal epiphany and public alerts about credit derivatives and the major financial deregulation that would impact us all. In 1998, she wrote the first trade book warning of those risks, Credit Derivatives: Instruments and Applications. A year later, on November 12, 1999, the Clinton Administration passed the Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act that had separated deposit taking from speculation at banks. In 2000, President Clinton signed the Commodity Futures Modernization Act that prevented over-the-counter derivatives (like credit derivatives) from being regulated as futures or securities. His Working Group included former Treasury Secretary and former co-chair of Goldman Sachs, Robert Rubin, Treasury Secretary Larry Summers, and Federal Reserve Chairman Alan Greenspan.

With Glass-Steagall gone, banks had the green light to gamble with their customers’ FDIC-insured deposits and enter investment-banking territory through mergers. They “used their massive balance sheets to trade derivatives and take huge risks.” Our money became their seed money to burn.

Once the inevitable fallout from this government subsidized casino unleashed the financial crisis of 2008, bank apologists, turned star financial journalists like Andrew Ross Sorkin would say the repeal of Glass Steagall had nothing to do with the crisis, since the banks that failed, Bear Stearns and Lehman Brothers were investment banks, not commercial banks that acquired investment banks. That argument missed the entire make-up of the post-Glass Steagall financial system. Investment banks like Lehman Brothers, Bear Stearns and Goldman Sachs had to over-leverage their smaller balance sheets to compete with the conglomerate banks like Citigroup and JPM Chase. These mega banks in turn funded their investment bank competitors who concocted and traded toxic assets. They supplied credit lines for Countrywide’s subprime loan issuance. Everyone could bet on the same things in different ways.

While Janet’s 2003 book, Collateralized Debt Obligations & Structured Finance explained the architecture and risks of CDOs and credit derivatives, her 1998 book became an opportunists’ guide. One type of credit derivatives trade, a ‘big short’ that profited when CDOs plummeted in price, gained notoriety when Michael Lewis wrote a book by that name. Michael Burry, the man Lewis chronicled, ultimately testified before the Financial Crisis Inquiry Commission that, among other things, he read Janet’s 1998 book before trading. Lewis wrote of the aftermath, Janet’s analysis contributed to the main event. Taxpayers took the hit.

As the securitization and CDO markets exploded in the 2000s, credit derivatives linked to CDOs stuffed with subprime-loans became financial time bombs. Janet was one of a few voices with in-depth knowledge of the structured credit markets, sounding alarms. Her voice, and those of other skeptics (myself included) were increasingly “marginalized” by a media and political-financial system promoting the belief that defaulting loans stuffed into highly leveraged, non-transparent, widely-distributed assets wrapped in derivatives were no problem.

In early June 2010, Phil Angelides, Chairman of the Financial Crisis Inquiry Commission (FCIC) questioned former Citigroup CEO Chuck Prince and Robert Rubin (who became Vice-Chairman of Citigroup after leaving the Clinton administration. ) They denied knowing Citigroup had troubles until the fall of 2007. Incredulously, Janet listened as Angelides accepted their denial even though Citigroup was hurting in the first quarter of 2007 due to their $200 million credit line to Bear Stearns whose hedge funds had imploded.

So many lies linger. According to Janet, “One of the most unattractive lies of the 2008 financial crisis was that investment bank Goldman Sachs would not have failed and did not need a bailout.” But then-Treasury Secretary and former Goldman-Sachs Chairman and CEO, Hank Paulson rejected an investment bid in AIG from China Investment Corporation while AIG owed Goldman Sachs and its partners billions of dollars on credit derivatives wrapping defaulting CDOs. That enabled him to arrange an AIG bailout to help Goldman Sachs recoup its money at US taxpayers’ expense.

Goldman Sachs claimed it was merely an intermediary in those deals. Janet exposed a different story – presenting a list of CDOs against which AIG wrote credit derivatives protection. Underwriters of such deals are legally obligated to perform appropriate due diligence and disclose risks. Goldman Sachs had been underwriter or co-underwriter on the largest chunk of them, an active, not intermediary role. Some deals were inked while Paulson was CEO.

In Chapter 4 “Irreversible Decision,” Janet circles back to Deutsche Bank and her old boss, Bill. The SEC was investigating allegations that Deutsche Bank didn’t disclose $12 billion of credit derivatives losses from 2007-2010. In a 2011 presentation, Bill said the allegations had no merit. Meanwhile, Deutsche Bank faced investigations into frauds including LIBOR manipulation, helping hedge funds dodge taxes, and suspect valuation of credit derivatives.

Janet reveals the dramatic outcome of those investigations in Chapter 5, “Systemic Breakdown.” On January 26, 2014, Bill Broeksmit, 58, hung himself in his home in London’s Evelyn Gardens (the block where I first lived when I moved to London for Bear Stearns.) She was shocked by the method. Bill had made clear his “aversion to death by hanging.” Those decades in finance had crushed him.

Six months later, a Senate Subcommittee cited Deutsche Bank and Barclays Bank in a report about structured financial products abuse. Broeksmit’s email on synthetic nonrecourse prime broker facilities was Exhibit 26. Banks had placed a large chunk of their balance sheets at risk, flouting regulations, and enabling a tax scheme. From 2000 to 2013, the subcommittee reported hedge funds may have avoided $6 billion in taxes through structured trades with banks.

Finally, in Chapter 6, “Washington’s Decision: “A Bargain,”” Janet reminds us that September 2015 marks the seventh anniversary of the financial crisis. She calls Paulson and Rubin financial wrecking balls for their role in the crisis and cover-up.

She ends Decisions on the ominous note that “the government tried to hide the real beneficiaries of the bailout policies – Wall Street elites – behind a mythical idea of a “crisis of confidence” if we prosecuted, arrested, and imprisoned crooks. “

The real crisis of confidence though, is due to the clique of inculpable political and financial leaders. Alternatively, she writes, “If we indicted fraudsters, raised interest rates, and broke up too-big-to-fail banks, people would have more confidence in our government and in the financial system..”

Instead, we get Ben Bernanke espousing the "moral courage" it took to use taxpayers’ money and issue debt against our future to subsidize Wall Street over the real economy, allegedly for our benefit. Big banks are bigger. Wealth inequality is greater. Economic stability has declined. The bad guys got away with it. Read Janet’s illuminating book to see how and to grasp the enormity of what we are up against.

I thank Janet Tavakoli for sending me Nomi Prins' review and look forward to reading her book. My own thinking on the subject is the origins of the 2008 crisis can be traced back to the Clinton Administration and how Summers, Rubin and Greenspan ignored the dire warning of Brooksley Born, the then chairperson of the CFTC. 

Amazingly, Bill Clinton is revered in the U.S. as one of the best presidents ever, but the damage his administration ended up doing to the economy (along with George W. who continued deregulating Wall Street) is unprecedented. And now Hillary Clinton and Jeb Bush are prepping up for the 2016 elections, which tells me the status quo will continue as they too will pander to their Wall Street masters. U.S. politics is hopelessly corrupt and George Carlin was dead on: "It's called the American dream because you have to be asleep to believe it."

But there is something else that people don't understand, something the Greek finance minister Yanis Varoufakis discussed in his book, The Global Minotaur. The entire world economy is geared on recycling America's debt back into Wall Street. Far from being a negative, America's power grows along with its debt. Current account surpluses in Germany, Japan and elsewhere are allowed as long as the profits are funneled right back into Wall Street. 

"It's all bullshit and it's bad for you!" as Carlin rightly noted a long time ago. This is why I worry about inequality growing by leaps and bounds as more people retire penniless in the United States of Pension Poverty. 

U.S. and Canadian pensions also fell victim to the hubris on Wall Street. I wrote about my experience at PSP Investments and the Caisse in my comment on CPPIB's struggle with bold investment bets:

As far as organizational issues, I can tell you from my experience working at the Caisse and PSP Investments, big funds mean big egos. There are plenty of arrogant jerks working at these funds, foolishly believing they're "king shit" because they hold a chair. Trust me, once you lose your chair, nobody gives a damn about you unless of course you invest huge sums in a fund and plan your exit strategy while the folks at the Auditor General of Canada are snoozing at the wheel (what a scandal!).

Now, I don't know Don Raymond and don't think he has a huge ego (even if he is an ex Goldman alumnus, he's not a "big, swinging dick"). But his bias on quantitative investing was ridiculous to the point where you still can't apply to CPPIB's Public Markets unless you program C++ and are a derivatives and econometrics expert with a MSc in Finance and a CFA (a bunch of credentials that look good but mean nothing when it comes to making money in these markets).

I have an MA in Economics from McGill. During my undergrad years, I did my minor in mathematics at that same university. I also took honors history of economic thought and honors econometrics courses with Robin Rowley who taught us how to critically examine a lot of the quantitative nonsense being published in respected economic journals. Rowley graduated from the London School of Economics (LSE) at the same time as David Hendry, one of the best and most respected econometricians in the world who is equally skeptical on a lot of nonsense being published out there.

At McGill, I was also fortunate to take courses in comparative economic systems with Alan Fenichel and underground economics with Tom Naylor, the combative economist who taught us what is really going on in the world and to ignore the neoclassical garbage our other professors were teaching us. I also took and audited courses in political philosophy with Charles Taylor, a world-renowned philosopher (and the only professor who gave me intellectual orgasms in each and every class).

All this to say, I'm against the Don Raymond school of thought and the tyranny of quants and think a lot of Canada's large public pension funds are too busy hiring quants programming a lot of malakies (Greek word for wankers) and not enough thinkers from diverse backgrounds who can fundamentally and critically analyze what is going on in the global economy.

In the summer of 2006, right before I was wrongfully dismissed by PSP Investments, I did some research on the U.S. housing bubble and looked at the issuance of CDOs (collateralized debt obligations), including CDOs-squared and CDOs-cubed. I showed my findings to PSP's senior management and in particular, I showed them one chart on CDO issuance that scared the hell out of me (click on image below):

But the 'quant experts' shrugged it off and kept doing what they were doing, like using PSP's AAA balance sheet to sell credit default swaps (CDS) and buy as much asset backed commercial paper (ABCP) as the National Bank and Deutsche Bank were selling them. That didn't end well for PSP and exacerbated their huge losses in fiscal year 2009. It was even worse for the Caisse but that ABCP scandal is being covered up by Quebec's media. 

Unfortunately, Gordon Fyfe, the former president of PSP, didn't listen to my dire warnings back in 2006, but that's fine because even though PSP lost billions in FY 2009, Mr. Fyfe and his senior managers still collected hefty payouts that year and in the following years trouncing their bogus private market benchmarks. Interestingly, the Auditor General of Canada ignored PSP's tricky balancing act in its report slamming public pensions, but all is good in Canada where we have "world class pension governance" as long as the pension plutocrats make off like bandits.

You'll forgive my cynical sarcasm but sometimes I think to myself I should write my own book and title it "Pension Phonies." I've seen the good, bad and downright ugly in the pension industry and continue to write about it even though what I really want is to get back to work and stop blogging altogether. Unfortunately, Canada's 'powerful pension titans' are not helping me in this regard but that's alright, as long as I'm healthy, nothing else really matters.

In her book, Janet discusses banker suicides and I can tell you what my dad, a psychiatrist with over 40 years of clinical experience, keeps telling me: "Depression is very common in society. Almost 10% of the population will suffer from it at one point in their life and it doesn't matter who they are or how rich they are. In most cases, it's easily treatable but you have to recognize symptoms and get the care you need."

This means that there are people right now working at Goldman, JP Morgan, the Caisse, PSP, Ontario Teachers and pretty much everywhere who are depressed and are probably trying to cope as best as they can. Luckily depression can easily be treated with proper care and medication but there are unfortunately cases of people who take their own lives because they can't cope with their depression. It has nothing to do with working in high finance, although the stress of these jobs is a silent killer.

Below, PBS Frontline presents The Warning. Take the time to watch the story of Brooksley Born because it will go down in history as the biggest monumental failure in regulating Wall Street.