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Financial Planning > Tax Planning

Janet Tavakoli: Sequel to Wall Street Horror Show Is Coming

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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.

Was Bill the one who made the decision about the tax trade?

His fingerprints were all over it, and that’s the one [regulators] chose to bring forward. But he probably wasn’t the guy who approved the trade. To me, it looked pretty much like he was going to end up being a scapegoat.

What about the suicides of Pierre Wauthier, CFO of Zurich Insurance, and David Kellerman, acting CFO of Freddie Mac?

Both Kellermann and Wauthier were caught in a vice. They weren’t senior enough to insulate themselves from consequences. They had both worked hard for status and respect; consequently, a large part of their identity was no longer under their control and was at serious risk.

What else do you know about Wauthier?

He was under a lot of pressure, according to his suicide notes and his widow. The notes said he was demoralized by the new management’s tone.

And Kellermann, who hanged himself in his basement?

He also was worried and under scrutiny — and was going to get a big bonus. At Freddie Mac, there was a tremendous amount of tension to report numbers and cover up issues. The Federal Housing Finance Agency (FHFA) had been pressing Freddie Mac not to disclose to shareholders the costs of President Obama’s housing recovery plan — that is, not in the way that Freddie Mac wanted this information disclosed in its financial reports. Kellerman obviously was under undue pressure, and he couldn’t deal with it.

Jamie Dimon, then CEO-chairman of JPMorgan Chase, was distracted and upset when you met with him in March 2009, you write. You thought he was having a nervous breakdown and that “if he keeps this up, he’ll blow his brains out.”

Yes, he looked like a guy who was falling apart. He was worried about losing his power and control, and the numbers he was going to be able to report. It was the day that the House passed a bill to tax bankers’ bonuses, which would control what he could pay his adoring staff. That’s how he maintains power within the bank. But Dimon doesn’t appear to be someone who would commit suicide.

Right. His attitude is: “As long as I have the illusion of being great, then I am. I don’t have to care what anybody else thinks. They can just fine me, and we’ll pay it.” It’s all a game.

How worried was he about the financial crisis when you met with him that day?

He wasn’t so much concerned about the soundness of the global banking system; it was more about him and his ability to stay in power. He was beside himself because if the bank couldn’t report the numbers that would make the shareholders happy, he thought he would lose [his job as] CEO and chairman. He was a wreck because the position and power he enjoyed was in serious jeopardy.

Fortune Magazine of April 1, 2015, put Dimon on its “World’s 50 Greatest Leaders” list, stating: “It’s hard not to admire [Wall Street’s] rough-hewn raja.”

Oh, my goodness! If that’s the greatest, we’re in huge trouble! Jamie Dimon doesn’t have a proven track record of success at JPMorgan.  He’s not a raja. He’s a bum who should be thrown out of the dugout. The reality is “Throw the bum out!” We had a near-fatal collapse that would have taken JPMorgan down along with everyone else. Instead of having practiced great risk management, he [is facing] numerous lawsuits against the firm; he had a crummy merger with Bear Stearns, where the paperwork wasn’t in order; and of course, the Fed took a lot of liabilities away from JPMorgan in a $29 billion deal [for the Bear Stearns acquisition]. Everyone is acting today like all of that was just a bad dream.

Dimon’s troubles continued after the financial crisis, didn’t they?

Yes. We saw slovenly management at JPMorgan, evidenced by the London Whale [trader] derivatives debacle in 2012 [with $6 billion-plus in losses]. Clearly, [JPM] was not implementing best practices. The London Whale reported directly to Dimon. But concurrent with that fiasco, Dimon was in the press big-time claiming that JPMorgan was very well managed and that risk was well controlled. The realty was very different. Where’s the evidence that he was a great manager? It doesn’t exist unless you make up a pack of lies.

What do you think is Dimon’s current frame of mind?

It’s fascinating that he’s fully recovered now that he feels he won’t bear the consequences of his management lapses and contribution to systemic risk. But he would become a nervous wreck again if it became clear to him that he isn’t as above it as he seems to think he is.

Deutsche Bank also has had continuing problems since the financial crisis. In July 2014, about six months after Broeksmit’s death, the U.S. Senate Subcommittee found that the bank conducted the tax-avoidance scheme in which Broeksmit was deeply involved.

There’s a litany of things going on at Deutsche Bank, and at all large banks around the world: currency trading fraud, [London Interbank Offered Rate] manipulation, and gold and commodities manipulation. Last year Deutsche Bank was fined the equivalent of more than $7 million because of improper reporting.

They weren’t reporting [this] properly for more than six years! It’s something you’d expect to see on “Hogan’s Heroes.” It’s hilariously bad. They had reported more than 29,000 transactions the wrong way: swap sales were recorded as buys. Also, in July 2014, the Federal Reserve Bank of New York found what it said amounted to “a systemic breakdown” in a number of areas at Deutsche Bank, including regulatory reporting. How does it happen that after the financial crisis, [a bank doesn’t] know what [they’re] doing in an entire unit? Deutsche Bank is the third largest bank in Europe. But they’ve got lazy, slovenly management. Its balance sheet remains highly leveraged.

“Investors and taxpayers were on their own before the 2008 financial crisis and are still on their own because Wall Street had its way with the USA,” you write. Are investors still on their own?

Yes. Look at the [Securities and Exchange Commission] not prosecuting securities fraud before, during and after the financial crisis. [SEC Chairwoman] Mary Jo White is [former SEC Chairman] Christopher Cox in a skirt. She isn’t conducting meaningful investigations; a lot of them are very cosmetic. Same thing with [Federal Reserve Board Chair] Janet Yellen: The new sheriff is just like the old sheriff [Ben Bernanke].

Are the rating agencies any better now than they were during the meltdown?

Oh, God, no! I ignore them completely. There’s ample evidence that all three knowingly and willfully had been complicit in misrating securities. The SEC should have revoked their designations. But they were codified into the financial system; and when it came out that they’d been engaged in fraud, people didn’t know what to do. They had nothing to replace them.

In view of what you’ve said here, what can financial advisors do to help protect their clients’ assets?

The sound principles of finance will serve you well in the long run. Avoid things that are in the massive global price distortion that has been created by mad men like [European Central Bank President Mario] Draghi, who’s printing money like crazy, and by people like Janet Yellen, printing money like crazy, not tightening up, and pretending that the reason interest rates are so low is that Americans are saving too much — that savers are being punished with low rates to encourage them to spend. That isn’t true. People feel as if they have less security and less disposable income.  So that’s another huge global lie along the lines of nobody knew that housing prices could fall.

And to sum up your thoughts?

We live in a world of topsy-turvydom, where we’re [denying] reality. It’s like somebody showing up and telling you they’re just fine, but they have a needle in their arm with a transfusion from taxpayers. They’re not fine.

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