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. 

Presidents, Bankers, the Neo-Cold War and the World Bank

 At first glance, the neo-Cold War between the US and its post WWII European Allies vs. Russia over the Ukraine, and the stonewalling of Greece by the Troika might appear to have little in common. Yet both are manifestations of a political-military-financial power play that began during the first Cold War. Behind the bravado of today’s sanctions and austerity measures lies the decision-making alliance that private bankers enjoy in conjunction with government and multinational entries like NATO and the World Bank.

It is President Obama’s foreign policy to back the Ukraine against Russia; in 1958, it was the Eisenhower Doctrine that protected Lebanon from a Soviet threat. For President Truman, the Marshall Plan arose partly to guard Greece (and other US allies) from Communism, but it also had lasting economic implications. The alignment of political leaders and key bankers was more personal back then, but the implications were similar to the present day. US military might protected its major trading partners, which in turn, did business with US banks. One power reinforced the other. Today, the ECB’s QE program funds swanky Frankfurt headquarters and prioritizes Germany's super-bank, Deutschebank and its bond investors above Greece’s future.

These actions, then and now, have roots in the American ideology of melding military, political and financial power that flourished in the haze of World War II.  It’s not fair to pin this triple-power stance on one man, or even one bank; yet one man and one bank signified that power in all of its dimensions, including the use of political enemy creation to achieve financial goals. That man was John McCloy, ‘Chairman of the Establishment’ as his biographer, Kai Bird, characterized him. The relationship between McCloy and Truman cemented a set of public-private practices that strengthened private US banks globally at the expense of weaker, potentially Soviet (now Russian) leaning countries.

John McCloy and the World Bank Twist

In 1947, President Truman selected then-partner at a Rockefeller law firm, John McCloy, to be the second president of the World Bank (or International Bank of Reconstruction and Development) that would provide financial aid to developing nations after WWII. McCloy demanded the ability to unilaterally restructure the nascent World Bank—absent Congressional debate –such that its bonds would be sold through Wall Street banks.

That linkage altered the future of global financial relationships, by  transforming the World Bank into a securities vending machine for private banks that would profit from distributing these bonds globally, while augmenting World Bank aid with private loans.

World Bank, IMF and other multinational entity decisions about aid vs. austerity or any other ‘reform’ requirements including opening border to private banks, would be controlled by the capital markets. Big private global banks arrange, underwrite and distribute World Bank bonds. Small banks in Greece did not. Financial assistance terms were established to follow a similar hierarchy.

During the Cold War, the World Bank provided funds for countries that leaned toward capitalism versus communism.  Political allies of the United States got better treatment (and still do). The Nations that private bankers coveted for speculative and lending purposes saw their debt loads increase substantially and their industries privatized.  Equally, the bankers decided which bonds they could sell to augment public aid funds, which meant they would have control over which countries the World Bank would support.  The World Bank did more to expand US banking globally than any treaty or entity that came before it.

The Marshall Plan and Eisenhower’s Rise

Another pillar of global reconstructive and foreign policy efforts, the Marshall Plan, would provide further a ide to “friendly” countries in the early years of the Cold War.  Truman unveiled the Marshall Plan in the spring of 1947. He presented it as a way to counter the threat of Communism, warning that Europe was disintegrating economically, and Truman feared Greece and Turkey would fall victim to Communist control. America’s new enemy was not Germany nor the Nazis but Communism and its associated countries.

Under the Marshall Plan, Congress approved $13 billion to aid Europe’s fight against Communism, and also to bolster prime trading partners for American industries and banks. As a result, more currencies became available for conversion into US dollars. The Marshall Plan wasn’t just about helping allies: but about spreading dollar domination.

Chase (now JPM Chase) Chairman, Winthrop Aldrich enthusiastically supported the Marshall Plan. To big banks, lending to developing nations and fighting Communism amounted to the same thing. Plus, the Marshall Plan effectively gave each major US bank its own European country to play in. From 1948 to 1952, Chase amassed the most deals in Europe, nearly $1 billion, followed by National City Bank (now Citigroup). 

Eisenhower, NATO & Bankers

In 1952, General Dwight D. Eisenhower was commander of the North Atlantic Treaty Organization (NATO), the new military alliance established between the United States, Canada, and leading Western European powers to deter Soviet expansion, and promote European political integration. NATO blended military, political, and economic power behind the mantra, “an armed attack against one or more of [the allied countries] shall be considered an attack against them all.”.  In practice, what held for military support, held for opening borders to dollar based trade and private banking business, too.

In the spring of 1952 Aldrich traveled to Europe with an entourage of power brokers to persuade Eisenhower to run for president on the Republican ticket. Upon election victory, Ike’s banker sphere of appointees included his secretary of war, Thomas Gates, who would later chair the Morgan Guaranty Bank (now JPM Chase), Aldrich who became Ike’s ambassador to Great Britain, and John McCloy, who would spend the Eisenhower years as chairman of the Chase National Bank (now JPM Chase) assuming Aldrich’s role.

Beside the Marshall Plan, the Truman and Eisenhower doctrines extended US military and economic support to nations that adopted US ideology and that were military allies. Overseas offices of major US banks subsequently swelled to accommodate all the private loan demand that accompanied government support.  

In 1956, W. Randolph Burgess, former National City Bank Vice President, left his Treasury Department post to become the US ambassador to NATO. By that time, the luster of NATO was fading. By 1963, Burgess noted that “the shine of postwar NATO was getting a little dull.” Stronger European countries felt less threatened by Soviet aggression and this made them less pliable to US policies. In addition, their European  banks began spreading their wings globally again. The financial end of the cold war was preceding the diplomatic end by decades.

The International Bank Race

US bankers sought to compete with strengthening European banks by opening more offices overseas and by fighting to eliminate New Deal regulatory restrictions so they could grow domestically and use their size as a broader lending springboard.

Fast forward sixty years later to today , and those seeds of political-military-financial partnerships against the threat of the Soviet Union (now Russia) have sprouted to support US banks and dollar, and US monetary and fiscal policy supremacy the world over.

Much has happened in between; mass deregulation of international banking, technological advancements in trading, and the use of the World Bank (and the IMF and various central banks) to subsidize bank led speculation by submitting weak countries to austerity measures or ‘bailouts’, thereby prioritizing payments to bondholder clients of mega-banks over economic stability. The Big Six banks in the US, a subset of the 30 G-SIBs (global systemically important banks) enjoy a magnitude of government, central bank and multinational entity support that would have been unimaginable back then.

Whether it’s a $17 billion bailout package for the Ukraine. or a $270 billion one for Greece, or Obama doing a 180 on Cuba to keep Russia out, the costs of power alignments are greater than ever for the smaller, weaker countries. Their economic coffers have been pried open by the Western super-powers still calling the political, military and financial shots and again using threats of Russian ‘aggression’ to camouflage expansionary intents.

Under Obama, the US is resurrecting the Cold War and invigorating NATO by promoting the threat notion, just as Truman and Eisenhower did.  Financial supremacy and currency dominance remain central to this strategy. But this time, there’s a more dangerous difference – a level of financial opposition that could become military opposition if sufficiently provoked. The counter-movement from a currency and financial perspective is comparatively small. But it’s growing.  The global position of super-powers and super-banks remains at play in this newly sanctioned financial Cold War.  

For more on historical foundations for present decisions, read: All the Presidents’ Bankers: The Hidden Alliances that Drive American Power (out now in paperback). Also, please watch my interview with Max Keiser. 

The Volatility / Quantitative Easing Dance of Doom

The battle between the ‘haves’ and ‘have-nots’ of global financial policy is escalating to the point where the ‘haves’ might start to sweat – a tiny little. This phase of heightened volatility in the markets is a harbinger of the inevitable meltdown that will follow the grand plastering-over of a systemically fraudulent global financial system. It’s like a sputtering gas tank signaling an approach to ‘empty’.

Obscene amounts of central bank liquidity applauded by government leaders that have protected the political-financial establishment with failed oversight and lack of foresight, have coalesced to form one of the most unequal, unstable economic environments in modern history. The ongoing availability of cheap capital for big bank solvency, growth and leverage purposes, as well as stock and bond market propulsion has fostered a false sense of economic security that bears little resemblance to most personal realities.

We are entering the seventh year of US initiated zero-interest-rate policy. Biblically, Joseph only gathered wheat for seven years before seven years of famine. Quantitative easing, or central bank bond buying from banks and the governments that sustain them, has enjoyed its longest period of existence ever. If these policies were about fortifying economic conditions from the ground up, fostering equality as a force for future stability, they would have worked by now. We would have moved on from them sooner.

But they aren’t. Never were. Never will be. They were designed to aid big banks and capital markets, to provide cover to feeble leadership. They are policies of capital creation, dispersion and global reallocation.  The markets have acted accordingly. 

What began with the US Federal Reserve became a global phenomenon of subsidizing the financial system and its largest players.  Most real people - that don’t run hedge funds or big banks or leverage other peoples’ money in esoteric derivatives trades - have their own meager fortunes at risk. They don’t have the power of ECB head, Mario Draghi to issue the 'buy' order from atop the ECB mountain. Nor do they reap the benefits.

Retail sales are down because people have no extra money and can’t take on excess debt through credit cards forever. They aren’t governments or central banks that can print when they want to, or big private banks that can summon such assistance at will.

Federal Reserve Chair, Janet Yellen recently chastised these bankers. This, while the Fed has become their largest client and the world’s biggest hedge fund.  While she wags her finger, the Fed is paying JPM Chase to manage the $1.7 trillion portfolio of mortgage related assets that it purchased from the largest banks. In other words, somewhere along the line, the public is both paying to buy nefarious assets from the big banks at full value, thereby supporting an artificially higher price and demand for these and similar assets, and paying the nation’s largest bank for managing them on behalf of the Fed. Yellen says things like “poor values may undermine bank safety” and all of a sudden she’s on an anti-bank rampage?  What about the fact that just six banks control 97% of all trading assets in the US banking system and 95% of derivatives? Or that 30 banks control 40% of lending and 52% of assets worldwide?

Think about the twilight zone squared logic of this. Yellen’s predecessors, Alan Greenspan and Ben Bernanke, enabled the path of the US banking system to become more concentrated in the hands the Big Six banks, which have legacy connections to the Big Six banks that drove the country to disaster during the 1929 Crash, and have been at the forefront of the nexus of political-financial power policies for more than a century. Yellen had a seat at the Clinton administration banking deregulation table when Glass-Steagall was summarily dismantled thereby enabling big banks to become bigger and more complex and risky. Those commercial banks that didn’t hook up with investment banks back then, got their chance in the wake of the financial crisis of 2008. They also concocted 75% of the toxic assets that were spread globally and the associated leverage behind them in the lead up to 2008.

Rather than show meaningful initiative to engender safety in the financial system (which if she had, or wanted to, would have rendered her a non-viable candidate for her position), she reprimanded the banks while providing them cheap capital. That’s like egging people with a tendency toward excess on as they gorge on multi-course gourmet dinners, making disparaging comments about their girth, and being dubbed their coach for The Biggest Loser while serving them the next course. Political theatre is its own end.

This latest rise of market volatility, however, is foreshadowing the real end of global QE as a proxy bond investor packaged for political purposes as necessary to combat deflation, increase liquidity, or whatever the reason-du-jour providing the QE program legitimacy beyond its true function of providing cheap capital to the private banking system, is.

The reason that the artificial resuscitation of the entire global financial system has worked as long as it has is due to the collaboration of major governments, central banks, and powerful private banks behind it. These three pillars of power have been mutually reinforcing.  Since early 2009, the bond and stock market have soared on the back of external capital from the central banks supported by the elite government leaders of the countries with the largest banks.

Just this year, 23 central banks have cut rates due to ‘sluggish growth’ – as if this cheap money has helped main populations anywhere. In the process their currencies will weaken. The US may have a strong dollar on the back of having had the largest and first QE / ZIRP program which is why  (behind the banks’ need) there’s no particular reason – yet - for the Fed to raise rates. Plus, the labor situation is barely improving even if the headline unemployment figures based on low job-market participation and poorly paying jobs appears better. Also, the ‘lower demand’ for oil amidst higher production (and some big commodity trading desks slamming oil prices and blaming Saudi Arabia) has made inflation (outside of the cost of living and the stock market) look tame enough to make rates hikes unnecessary.  But the big market players think (or say, anyway) that rate hikes could happen soon. This uncertainty begets higher volatility.

Meanwhile, the Euro is tanking against the dollar because Mario Draghi's ECB is on a QE roll, buying covered bonds from the likes of Deutschebank, ING, and BNP while pummeling Greece for not wanting to further crucify its population in order to repay funds that had egregious terms to begin with. Their ‘bailout’ had nothing to do with helping Greece attain a stronger economy and everything to do with validating speculators and the banks that sold them bonds. The IMF even sort of admitted this. But the Troika has made plutocratic finance a blood sport.

All this is fodder for triple digit market swings. Somewhere in the madness, lies the notion that this particular policy of speculation subsidization for the upper banking class can’t last forever. There are only so many entities that can buy so many bonds and filter so much cheap capital into the system for so long. At some point the ECB program will run its stated course. Rates around the world will head to zero or somewhat negative. And then what?  There will be no more powder in the QE / ZIRP global keg. That’s when it gets really bad.

Meanwhile, the rising volatility we will face this year (to the downside) in the financial markets, will signal this unraveling. The best course for mere individuals is to reduce their exposure to the insanity.  “Know when to hold ‘em, know when to fold ‘em, know when to walk away” as the lyrics to the old gambling song go. Because rest assured, the big boys are going to be on the financial life rafts first…economic Titanic style. That volatility – it’s the iceberg finally looming.