Janet Tavakoli is the president of Tavakoli Structured Finance, and has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business.  Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (2008), and Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (2009).


Arianna Huffington’s new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:

“Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care—the costs of which continue to escalate.  But, as their debt rises, they find it harder to keep up with their payments.  When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties…”
Third World America,  P. 77.

Our mediocre grammar school and high school educational system continues its downward slide.  The Great Recession is squeezing school budgets.  We are failing our children, our most important resource of all.

In 2009, the American Society of Civil Engineers gave the nation’s infrastructure a near failing D rating:

“Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid.  Go to the sink, and your tap water may be coming to you through pipes built during the Civil War.  Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges.  The evidence of decay is all around us.” P. 95.

The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country’s infrastructure.

Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill.  GM is among those companies, yet it took almost a half billion dollars in bailout loans.  Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.

Banks (not Fannie and Freddie) Crippled the Housing Market

Fannie and Freddie do not make loans.   They purchase mortgage loans and earn fees for guaranteeing payments on the loans.  According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance.  In the first half of 2010, they accounted for around 64% of new issuance.  They were forced to pick up the slack and buy more when Wall Street’s private label securitization Ponzi scheme blew up.

Fannie and Freddie are Wall Street’s dumping ground.  They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.

Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony “AAA” rated mortgage-backed securities from banks, not counting loans that didn’t meet their stated requirements.  Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.

Top subprime lenders included Wells Fargo;  Countrywide, purchased by Bank of America; Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase.  Most of the rest depended on massive loans from Wall Street.  Many of these lenders were sued by states for fraud and paid billions in settlements.

According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).

The above doesn’t even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses.  Yet, Arianna notes how America imploded while bankers soared:

“Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how ‘markets have an inherent and inevitable tendency—probably rooted in human nature—to go to excess, both on the upside and the downside.’  This from the man who, as Bill Clinton’s Treasury secretary, was vociferous in opposing the regulation of derivatives—a key factor in the current economic crisis—and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron—a debtor of Citigroup.”  P. 150.

Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior “risk wizard” counselor at Citigroup, member of the President’s Advisory Committee for Trade Negotiations, and member of the SEC’s Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.

Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.

Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail

Instead of apologizing for screwing up, the banks demanded the Great Bailout.  At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion.  Unemployment and the losses are now shockingly worse.  What was merely a recession escalated into the Great Recession.

How big are the actual losses?   No one knows.

After destroying the value of major banks, banks used their enormous political influence—funded with taxpayer dollars—to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don’t have to recognize losses until they sell the assets.

According to William K Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.

This time Congress gave us the Great Cover-up.  Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he’s witnessed this third-world corruption before, and this time it’s in English.

Banks Stall the Recovery and Prolong the Great Recession

Unemployment marched upward, delinquencies soared, and banks stalled foreclosures.  The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.

Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars.  Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans.  The markets aren’t recovering, because banks own colossal chunks of mystery-meat assets.

It’s a black hole of debt.  If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery.  When Japan did this, it stalled its economy for twenty years, and it still hasn’t recovered.

Voters Must Demand the Solution

Voters must demand that Congress uncovers and publicized facts and prosecutes the financial system’s massive multi-year frauds.  This will mean thousands of felony prosecutions, enforcement actions, and civil actions.

Congress completely failed in genuine regulation and enforcement.  It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more.  It will have to break-up the Too Big to Fail financial institutions.

CEOs of our Systemically Dangerous Institutions (SDI’s) fail to manage them, because no one is capable of doing it.  Like a morbidly obese junk food addict, banks won’t even get on a scale.  Our banks refuse to properly measure (account for) the problem.

Third World America, elegantly summarizes the way forward.  Arianna Huffington names the culprits and gives a roadmap for solutions.  The rest is up to us.  We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other.  Citizens must demand a clean-up of corruption and a foundation for healthy growth.

Third World America will be published September 7 and is available here.

Category: Books

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “How to Thwart the Assassins of the American Dream”

  1. Pure-Water says:

    All true, but you’re dreaming if you think these “solutions” are going to bring back good paying middle-class jobs. Only way that will happen is with a gold standard, because that will force a balance in trade.

  2. in this regard, peep may well to understand Grove’s message, in part, excerpted here: “…My point isn’t that Intel was brilliant. The company was founded at a time when it was easier to scale domestically. For one thing, China wasn’t yet open for business. More importantly, the U.S. had not yet forgotten that scaling was crucial to its economic future.

    How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. It’s not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.”

    I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry…”

    as an aside, peep will do well understanding that “Blinder” is aptly named..

  3. Dow says:

    For some reason, Americans got this idea that everything they want should be for free as it long as it was just for each of them personally but if it was for somebody else, well surely, that somebody else should pay for it. So it should really come as no surprise that chasing cheap goods made overseas by cheap labor created an exodus of good paying jobs at home. What did everyone expect?

    Manufacturing jobs are gone. The manufacturing equipment is gone. The suppliers are gone.

    And now everyone acts surprised.

  4. FrancoisT says:

    As long as there are no perp walks for those who wreck the economy and fraudulently pocket mega bonuses while on the taxpayer dole, there won’t be a recovery. It’s a simple matter of fairness, the essential ingredient of trust.

    There cannot be a recovery without trust, since one can’t do business without it.

    And if there is one element of our social fabric that is in dire short supply nowadays, it is trust.

    You can trust me on that one. :-)

  5. magnets says:

    Well, the book “Getting Back To The American Dream” is full priced on Amazon.com and the book discusses the author’s opinion concerning the failures and the possibilities.

    The book talks about the Minerva Medica project as the first solution for getting us out of this mess.