Janet Tavakoli sniffs out secrets and lies like detection spaniels catch the scent of bumblebee nests. With the gutsy risk consultant, however, sharp research ferrets out facts.
Years ago Tavakoli resolved to “stand up to slick bullies spouting false narratives.” Indeed, the founder and president of Tavakoli Structured Research has made good on that vow whether the knaves she confronts preside on Wall Street or in Washington.
In her new book, “Decisions: Life & Death on Wall Street” (Lyons McNamara), Tavakoli debunks the post-financial crisis “nothing-to-see-here” myth and links the shocking suicides of three high-level financiers to the pressures of Wall Street’s “low moral tone” that corrupted the global financial landscape, she says, and led them to despair.
The Chicago-born derivatives expert, 61, wants financial-crisis fraudsters indicted, interest rates raised and too-big-to-fail banks broken up. In an interview with ThinkAdvisor, she argues that another disastrous global meltdown is on the way.
Tavakoli predicted the thrift-industry blow-up, the demise of Enron and that excessive leverage and structured products’ misratings would lead to a worldwide final crisis. She also discovered that American International Group (AIG) falsified its accounting figures, a deed that ultimately led to a government bailout.
In “Life & Death on Wall Street,” Tavakoli ties the pitch-black side of financial engineering to human loss: the suicides by hanging of three international financial executives in 2009, 2013 and 2014.
They were David B. Kellermann, 41, acting CFO of Freddie Mac; Pierre Wauthier, 53, CFO of Zurich Insurance; and Bill Broeksmit, 58, head of portfolio risk optimization before retiring from Deutsche Bank.
In 1988, Tavakoli, running mortgage-based securities marketing at Merrill Lynch in New York City, took to the squawk box to broadcast firmwide her objection to stark-naked strippers strutting on Merrill’s trading floor hired to entertain celebrating traders. She was immediately “Merrill Lynched,” as she puts it, and dispatched to a different department. Appointed head of the asset swap desk, she would forge an exciting new career path.
Her 30-plus years in complex finance — at Merrill, Westdeutsche Landesbank, Bank One, PaineWebber, Goldman Sachs and Bear Stearns — include senior positions in investment banking, trading, and structuring and marketing structured products. In 2003, she founded her own consulting company.
Before bursting on the financial services scene, Tavakoli, in the 1970s, was a chemical engineer in Iran before and after the Islamic Republic takeover. Amid “Death to America!” chanting in the streets, in 1979 she fled the country and her Iranian then-husband with a suitcase and $1,000.
Born of that life chapter was a book, “Unveiled Threat: A Personal Experience of Fundamentalist Islam and the Roots of Terrorism” (Lyons McNamara), released last year. Tavakoli’s numerous financial books include “Dear Mr. Buffett: What an Investor Learns 1,269 Miles Away from Wall Street” (John Wiley 2009).
ThinkAdvisor spoke with the Chicago-based consultant about what she says — and what she doesn’t say — in her new memoir. Here are highlights from that conversation:
ThinkAdvisor: What’s your assessment of the global financial situation?
Janet Tavakoli: It’s like watching a Wall Street horror film serial, “Invasion of the Moral Banker-Snatchers.” The voices of reason are being co-opted. Instead of doing the hard work of managing operational risk at the banks, it’s like a bunch of guys who haven’t paid their taxes in five years telling you they’re great financial managers. We’ve corrupted the system so much and made it so easy for people to report numbers in a way that makes them look good, that the basic work of running a bank isn’t getting done.
What’s taking place instead?
[Bankers] can’t create added value doing the real business of banking, so they’re engaging in financial engineering to pick up nickels in front of a steamroller. What could happen?
This is going to come back to bite us in a very bad way. It’s happening in Europe, and it’s going to explode [here]. If you’re a financial engineer and find that something doesn’t work, people get mad at you because you’re exposing that they’re covering up a problem. So it’s easier to cover up and not suffer the ill effects because regulators are also covering up for you.
Weren’t lessons learned from the financial crisis?
The global system made the collective decision that we’re going to pretend the banks weren’t really in deep trouble, that they were a lot better off than they were; and we’ll just put make-up over this sucker. By not leveling with the American people that way, we could continue to get transfusions from the Fed and not call them that. This let people of weak character slide to their lowest level.
What impact did that have?
We created a system of balance-sheet abuse and people under pressure to produce phony numbers to justify high bonuses, which are still being paid and have never been limited.
Are we vulnerable, then, to another financial crisis?
Absolutely. The decisions that were made along the way have [generated] an out-of-control system with huge price distortion and no real price discovery. We’ve covered up the problems by injecting massive amounts of cash into the system and kept interest rates ridiculously, artificially low, and created a huge bond bubble. That has flowed over into the equity markets, where people are raising cash to buy back stock and inflating the market. We created a global narrative about the ongoing financial crisis that dodges reality and shirks responsibility for outcomes that have tragic human consequences.
You write of three of such tragedies: the hanging suicides of financial executives David B. Kellerman, Pierre Wauthier and Bill Broeksmit. Why do you think they killed themselves?
I believe they realized they would suffer consequences [for their financial misdeeds] or they were boxed into untenable situations. When they first got involved, they all knew they would be putting themselves at future career risk. That’s one of the risks you take when you “go along to get along.” But at some point you have to say, “I won’t do it” and walk away.
But these men chose to continue down the path.
Yes. They each got to a place where, instead of walking away, they put a rope around their own necks. But all of them were, ostensibly, success stories. They could have lived comfortably the rest of their lives if they walked away from their jobs — and yet they didn’t.
Why do you suppose all three chose hanging instead of, say, pill overdose?
When people hang themselves, an element of shame seems to be attached. These men must have been deeply humiliated.
That’s part of it. So much of your identify gets rolled up in what your peers think of you. And then you start to believe your own BS. This is connected to the decisions that were made to allow the fuzzy thinking about finance. People are under pressure to do things and think, “If I’m exposed, I won’t be the big hero that everyone thinks I am.” Others believe, “The integrity of the numbers doesn’t matter — I’m a good guy.” But some think, “I’m fudging the numbers; and if I’m exposed, I’ll be humiliated — and I can’t live with that.”
What about Broeksmit? He was senior risk officer and then head of portfolio risk optimization at Deutsche Bank before he retired in 2008. You worked under him at on the interest-rate swap desk at Merrill Lynch.
In the end, Bill wasn’t doing things that he could be proud of. He had a lot of reasons to be anxious. He was involved in a slippery tax trade and realized that regulators were going to look at him for [having a role] in what was a tax-avoidance or a tax-evasion trade. His work was part of the evidence that was being examined. Deutsche Bank had already been under investigation.