Decisions: Life and Death on Wall Street by Janet M. Tavakoli: My Review

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. 

The Fed’s Employment-Taper Myth, Big Six Bank Stocks, and Downgrades

There is a prevailing, politically expedient myth that the Fed’s bond purchase programs are somehow akin to job fairs; as if there’s an economic umbilical cord stretching from a mortgage-backed security lying on the Fed’s books to a decent job becoming available in the heart of America. Yet, since the Fed began its unprecedented zero-interest rate and multi-trillion dollar bond-buying policies - the real beneficiaries have been the Big Six banks (that hold more than $500 billion of assets): JPM Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.

The Big Six banks’ stock prices have outperformed the Dow’s rise by more than double, since early 2009. Moreover, low to zero percent interest rates on citizens’ savings accounts have catalyzed depositors, pensions, and mutual funds to buy more stocks to make up for low returns on bonds and money market instruments, further buoying the stock market.

Quantitative Easing ‘QE’ entails buying bonds, not creating jobs

No matter how many articles and politicians claim the Fed is buying Treasury and mortgage-backed securities (MBS) to help the a) economy or b)  unemployed, it isn’t true.

According to the Economic Policy Institute “the unemployment rate is vastly understating weakness in today’s labor market.” True, the official unemployment rate  (called ‘U-3’ on the Bureau of Labor Statistics reports) has inched downward from a high of 10% in early 2009 to 7%. But, that’s because people have dropped out of the hunt for jobs. The number of these ‘ workers’ as EPI calls them, has risen with the stock market’s rise; that’s not a sign of a healthier employment situation.

If those workers were still ‘participating’ in the employment-seeking crowd, the adjusted U-3 unemployment rate would have hovered between 10 and 11.8% since early 2009. It is currently at 10.3%. In other words, it’s still pretty damn high.

And that’s a more conservative estimate of unemployment than places like John Williams’ Shadowstats computes, which pegs the unemployment rate at Great Depression levels of just below 23%.

(The BLS’s estimate of the U-6 unemployment rate, which includes people who have briefly stopped looking (short-term discouraged or marginally attached workers) or found part-time rather than full time jobs, is at 13.2%. It has declined along with the official U-3 estimate, but does not account for the “missing” 5.7 million workers, either. Plus, the BLS long-term jobless figures have remained steady around 4 million people.)

Happy Hundredth Birthday Fed! (Bank to the bankers, not the people)

As I explore in greater detail in my upcoming book, All the Presidents’ Bankers, the Fed wasn’t created in the wake of the Panic of 1907 to help people find jobs. It was created to provide bankers a backstop to the pitfalls of risky bets gone wrong, and propel the US to a financial superpower position competitive with major European banks via supporting the US dollar.

As per its official summary in the Federal Reserve Act of 1913 (approaching its century anniversary on December 23, 2013), the Federal Reserve was formed to “provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Besides, if the Fed really wanted to make a dent in unemployment today, it could have spent the nearly $1.4 trillion it used to buy MBS to create 14 million jobs paying $100K or 28 million jobs paying $50k, or funded the small businesses that the big banks are not. Equating QE with employment illogically equates offering the biggest banks a  dumping ground for their securities with middle and lower class prosperity.

QE is ongoing because the Big Six still hold crappy mortgages and like trading

According to the latest New York Fed's quarterly trends report; the Big Six banks’ annualized trading income, as a percentage of trading assets, is higher than pre-crisis levels, whereas non-trading non-interest income as a percentage of total assets is lower. That means banks are making more money out of trading post-crisis than pre-crisis relative to other businesses.

In addition, total non-performing loans, as a percent of total loans, is 4.75% (from a 2009 high of 7.25%) for the Big Six. This figure remains more than double pre-crisis levels, and more than double that of the rest of the industry (i.e. the smaller banks).

Nearly 10% of the residential mortgage loans of the Big Six banks are non-performing. This is not very different from the 11% highs in 2009 (compared to smaller banks whose ratios are 3.5% vs. 6% in 2009). In other words, the Big Six banks still hold near record high levels of bad mortgages, and in higher concentrations than smaller banks. That’s why the Fed isn’t tapering, not because it’s waiting for a magic unemployment rate.

QE Propels Big Six Bank Stock Prices

Since the financial crisis, the Fed has amassed a $3.88 trillion book of securities, or quintupled the size of its pre-crisis book. As of December 2013, the Fed owns $1.44 trillion MBS, many purchased from its largest member banks, the ones engaged in settlements and litigations over the integrity of similar securities and loans within them.

Since the Fed announced QE3, a $40 billion extension asset purchases per month (over the then-prevailing limit of $45 billion) on September 13, 2012,

the Dow has jumped 19%. BUT meanwhile - the Big Six bank stocks are up on average 53.5% (JPM Chase is up 43%, Bank of America 74%, Goldman 42%, Citigroup 57%, Morgan Stanley 77% and Wells Fargo 27%.)

Since its March 2009 lows, the Dow is up 142%. BUT - the Big Six bank stocks are up on average 324% or more than twice the level of the Dow. (JPM Chase is up 258%, BofA 396%, Goldman 122%, Citigroup 499% (accounting for its 10 to 1 reverse stock split in March 2011 - it was trading close to a buck on March 6, 2009) Morgan Stanley 80%, and Wells 408%.) Yes, they were near death, but you can’t argue the Fed’s policy helped the broad economy as opposed to mega-disproportionally helping the banks. These numbers don’t lie. And help from the Fed won’t stop with a new Chair.

Yellen to the (bank) rescue?

In her statement to Obama on October 9, 2013, Janet Yellen said “thank you for giving me this opportunity to continue serving the Federal Reserve and carrying out its important work on behalf of the American people.”

A month later, she told the Senate Banking Committee, “It could be costly to fail to provide accommodation [to the market],” underscoring her support for quantitative easing and zero-interest rate monetary policy (and Big Six bank stock prices).

In its latest FOMC meeting release, the Fed reiterated, “the Committee decided to await more evidence that progress [in the economy] will be sustained before adjusting the pace of its purchases.” It says the same thing every month, with slightly different wording. Every time the market wobbles on ‘taper’ fears, it jumps back, because professionals know the Fed will keep on buying bonds, because that’s what the Big Six banks need it to do. To analyze taper-time, look at the banks’ mortgage book, not the unemployment rate.

Resolution Plans and Downgrading for the Wrong Reasons

On November 14, Moody’s downgraded 3 of the Big Six banks - Goldman, JPM Chase, and Morgan Stanley - and also Bank of New York a notch each because “there’s less likelihood in the future that these banks will be helped by the government” in a financial emergency. Moody’s has the downgrade right, but for the wrong reasons.

The big banks had to present ‘living wills” as the media calls them, or Dodd-Frank Title II required resolution strategies. They amount to the big banks selling whatever crap they own in an emergency and dumping whatever remains of their firms on the FDIC. 

I examined the plans submitted to the Fed on October 30.  They aren’t long. The ones for JPM Chase and Goldman Sachs, for instance, tally 31 pages each, of which 30 pages discuss their businesses and just one page - resolution strategy.

The FDIC basically would get the toxic stuff unsellable by the ‘troubled’ bank and place it in a newly established ‘bridge bank’ before the ‘troubled’ bank finds another buyer or declares bankruptcy. Which is exactly what happened with IndyMac and other banks that were ‘taken over’ by the FDIC and then resold to private equity and other firms.

If all else fails, each firm would undergo bankruptcy proceedings, in an “orderly” manner and “with minimum systemic disruption” and “without losses to taxpayers.”  Or so the process is characterized by JPM Chase and the others.

Goldman Sachs also waited until page 31 of 31 to present its main resolution idea, consisting of  “recapitalizing our two major broker-dealers, one in the U.S. and one in the U.K., and several other material entities, through the forgiveness of intercompany indebtedness...” This amounts to massaging inter-company numbers if things go haywire.

But banks oozing eloquences like “orderly market” or ‘minimum-disruption” bankruptcy and the reality being so, are two different things. Lehman Brothers tried most of these methods and still catalyzed a widespread economic meltdown. Bear Stearns didn’t declare bankruptcy, but the Fed and Treasury still conspired to guarantee its assets in a sale to JPM Chase. Technically, politicians and bankers argued no taxpayer money was used in that scenario because the guarantee wasn’t part of the TARP funds, but it was a government guarantee all the same so the distinctions amounts to splitting political hairs.

There is simply NOTHING NEW in these plans, no safety shield for the world. The problem remains that the FDIC can’t handle a systemic banking collapse, which is a threat that the Big Six banks, in all their insured-deposit-holding-glory still pose.

If all of the banks implode on the back of still existing co-dependent chains of derivatives or toxic assets or whatever the next calamity delivers, even if the Treasury Department doesn’t get Congress to pony up funds to purchase preferred shares in the big banks, and even if the FDIC creates bridge banks to take over trillions of dollars of bad assets - which it can’t afford to do, the Fed would simply enter QE-Turbo Mode.

It doesn’t matter if bankers and politicians don’t consider this a ‘taxpayer-backed’ bailout as per the lofty aspirations of a tepid Dodd-Frank Act. Because whatever subsidies are offered in that case, we will all still be screwed, and we will all pay in some manner. The Fed’s balance sheet and Treasury debt would bloat further. The cycle would continue.

My Statement Regarding Greg Smith's Goldman Resignation

Today, I have received dozens of media requests and hundreds of emails regarding former Goldman Sachs executive, Greg Smith's gutsy, and internationally resonating, public resignation.

I applaud Smith's decision to bring the nature of Goldman's profit-making strategies to the forefront of the global population's discourse, as so many others have been doing through books, investigative journalism, and the Occupy movements over the past decade since my book, Other People's Money, was written after I resigned from Goldman. It would be great if Smith's illuminations would serve as the turning point around which serious examination and re-regulation of the banking system framework would transpire.

The inherent conflict of interest that firms such as Goldman possess through enjoying the multiple roles of 'market-maker,' 'securities creator' and 'client-advisor' foster an environment rife with systemic risk. The trading revenue portion of Goldman's profits, as well as its derivatives vs. assets ratio, is the highest amongst the American bank holding companies. And yet, in the fall of 2008, the Federal Reserve approved Goldman Sachs (along with Morgan Stanley) to alter its moniker from investment bank to bank holding company, thereby allowing it to gain access to federal subsidies and potential ongoing support.

In this regard, the firm's practices should remain under intense scrutiny by the general public and legislators. I would hope that the message behind Smith's resignation will not be obfuscated by debates over the extent to which the firm's clients are either supported or exploited, but instead, serve as a powerful call to foster a more-strictly delineated and less reckless financial system.