Interview with Janet Tavakoli of Takvoly Structured Finance: Accounting Not a Useful Tool for Estimating Risk Exposure
Transcript:
>> want to show you how a few financial stocks are doing today. citigroup, bank of america, wachovia are up. what about investment banking stocks? they are also up. goldman sachs is up. merrill lynch’ s up. j.p. morgan cases up. in the past two weeks, the kdd bank index is up in the past few weeks. — kbw bank index is up. it is up 4.5%. investors have expressed some optimism that the worst is behind these financials. there are a few individuals who know more about this complex world then janet, with over 18 years of trading, structuring and selling. she has also been the manager of two fortune 500 companies. she joins us from chicago. welcome back. the market says that maybe things are getting better. are they? >> i hope they’ re getting better. as you know, i have been one of the biggest critics of some of the hidden risks popping up. the reason it has been happening is because accounting is insufficient. they are telling you very much about the actual exposure and the actual risk. we saw the market decline last week. that was mainly due to confusion and speculation. it was not due to any hard facts. this week, the market is improving because oil prices are down. we see people taking constructive steps. like hank paulson who says maybe we shouldn’ t freeze the rates on adjustable rate mortgages, to ive homeowners a chance to pay down as mortgages. — he says we should freeze the rates. i do not know if they will be able to accomplish it. in order to do it, they would have to declare a state of mortgage emergency in order to do that. technically he does not have the authority to do with. >> when you hear something like what we’ re hearing, the rescue and freezing a mortgage rates, and transferring people into fixed-rate loans, somebody is going to take it on that, right? >> yes, they are. i think the right people will take the hit if you freeze the mortgage rate — you would be passing on any potential future lack of increase to the investors and invest more banks — and investment banks. this ended up being the largest steam in the history of the capital markets. the mortgage mess. asically, there were lent money by secure kaisers, who were buying the loans — securitize rs, who were buying these loans. it may not have an obvious at first. there came a point when a lot of mortgage lenders started dropping like flies. then it was clear that the high dividends they were paying, and the high fees they were expecting, they basically were not possible on the mortgages they were underwriting. without the borrowing from new investors, who were pouring money into the system, the mortgage lenders would not have been able to stay in business. there came a point when investment banks wanted to put that bad loans back to the mortgage lenders who were not able to honor the puts. there was a break-even point when people should have started pulling the plug on these deals. that began happening in 2006, n it was clear that these mortgage lenders were pretty shaky. >> the thing about that is that there will be someone at the end of it. somebody at the end of it gets left holding the bag. who is that’ s going to be? >> banks, investment banks, and investors overall. they’ re taking the hits on these products. in the old days, investment banks would underwrite the entire deal. people got a little bit greedy. instead of underwriting the deal, they ended up keeping more and more of the risk, either on their own balance sheets in related bank entities, in related contents. they have a lot of residual risk. here’ s the problem. the children went out into the forest and play with matches. the overseers, the managers and regulators were not paying close attention. now we have a lot of people that got burned. e do not want to reward the behavior of people who ended up getting hurt. >> that is the moral hazard. how much risk is still left on the bank’ s books? wit e talk about things like synthetic cdos — how much more will we see? >> is not clear. in the third quarter, when people were directly estimate exposure they had, they waffled. the problem with accounting is that there are some of the options in the way that you can legitimately account for these things. it is basically fog. you can do transactions like total returns wops with no recourse — you can do total return swaps, nd show a reduction in exposure. the reality is that peace might get put back to you. you do not have recourse for the hedge funds. if they see mark to market they do not like, the only recourse to have is for the as a debate in the first place. — the asset you gave in the first place. the reality is that you still have a significant amount of exposure that may come back to you. it will not show up in accounting statements. >> i wanted done a slightly different issue. without naming names, will any of the big publicly traded bond insurance companies fail? >> yes, i believe they will. unless they get somebody was not paying attention to give them huge capital injections, which is probably not in their interest — >> we have seen that. we saw it with the FDIC, it cut the investment from the French company. >> yes, they did. i was not thinking f them when i made that statement. >> you’ re talking about the bigger ones. >> i am. it is in our interest to fix the situation. here’ s one instance. it will allow some of the larger insurers to raise capital to maintain AAA ratings. there is at least one of the largest AAA answer is that i think basically does not have a clue. they have been running around market like a chicken with their heads cut off. they never had a proper model in the first place. now, after the fact, they’ asking any questions. it suggests that they had no idea what they were underwriting in the first place. some that they were injuring are now trading at 70 cents on the dollar. they’ re counting on those two trade around par — to trade around par. we have had bids on some of those products just 10 cents on the dollar. t is pretty bad. >> always a pleasure to speak with the. thank you very much. have a great weekend. we’ ll continue our discussion on this and talk about that plan from the u.s. government that may keep some subprime borrowers of love. stick around. — subprime borrowers of afloat.
Tags: Collateralized Debt Obligation (CDO), Mortgage Backed Securities, Mortgage Implosion, Mortgage Interest Rate Projections, Mortgage News, Subprime Implosion, Subprime Mortgage Industry
