Wealthy Patriots Wage Class War

A strange thing happened in Chicago on Thursday, December 8. An audience of well-heeled professionals, a mixture of Democrats and Republicans, packed a room at the Drake Hotel to hear Robert Shiller, a Yale professor, give a presentation on the housing market. A few members of the audience were in the top 1%, and the balance of the audience was probably in the top 2%-5%. At the end of the presentation, there was a bi-partisan revolt.

The Chicago Mercantile Exchange (CME) and the Chicago Council on Global Affairs (CCGA) jointly sponsored the presentation. I’m a donor to CCGA’s president’s circle. Professor Shiller, deemed one of the country’s foremost housing authorities, proposed a futures index for hedging and a new type of mortgage loan product along with some historical filler. In the context of our recent housing debacle, he never once uttered the word “fraud.”

Fraud “Blind Spot”

Shiller’s speech was 2 ½ years after I appeared on C-Span talking about the many aspects of widespread interconnected mortgage fraud that damaged the global financial markets. I summarized fraud’s significant role in the 2008 financial crisis in a book called Dear Mr. Buffett.

Shiller’s speech was months after Congressional investigations showed how Wall Street firms provided financing for fraudulent loan activity of a number of different loan originators by creating fraudulent securitizations.

His speech was also months after widespread reports of robo-signing of affidavits and other types of foreclosure fraud. Banks showed up in court with fraudulent documents, which is fraud on the courts.

The Yale professor’s speech was just four days after 60 Minutes blew open widespread loan origination fraud at Countrywide (video below). The firm created fraudulent documents. Separately it was reported that in Countrywide’s Chicago office, 90% of loan applications were altered and income was sometimes inflated by Countrywide employees, not by borrowers. Countrywide settled a well-publicized fraud lawsuit for $8.3 billion with several states including Illinois.

Shiller’s talk was the day after former Illinois Governor Rod Blagojevich was sentenced to 14 years in prison after his corruption conviction.

Shiller spoke on the same day that Jon Corzine, former CEO of bankrupt firm MF Global (former Democratic Governor of New Jersey, former Democratic Senator from New Jersey and former CEO of Goldman Sachs), testified before Congress that he had no intention to break the rules but he just doesn’t know what happened to an estimated $600 million to $1.2 billion of customers’ assets. Customers’ money disappeared from segregated accounts that should have been intact but were not. See also: “Jon Corzine Dodges the Fraud Question,” Huffington Post, December 9, 2011.

Audience Calls for Integrity

Michael Moskow, current vice-chairman and senior fellow on the global economy at CCGA and former head of the Chicago Federal Reserve, stood at the podium as Robert Shiller took questions from an upset audience. One attendee noted in an email to me that questioners were professionals, “not the Occupy Wall Street crowd who were accused of inciting ‘class warfare’ at the podium.”

During the brief Q&A two men, one a former long-term Wall Street professional, asked questions about how we move forward when there is so little confidence. They cited the lack of integrity in the global financial markets.

After that, I asked how one creates a futures index (as Shiller proposed) in which one can have confidence without acknowledging the existence of fraud and vigorously prosecuting fraud. There was fraud by loan originators, fraudulent securitizations, and even fraud in the residential mortgage backed securities (RMBS) that backed a different hedging instrument, the ABX index.

The first time the word “fraud” was uttered that evening was when I posed my question.

Shiller himself never used “fraud.” The most he would say in his so-called response was “some people aren’t very nice.” Really? It sounded rehearsed, and it struck most people in the audience as a shameful cop-out. If this is what economists are teaching students at universities, students should demand a refund of their tuition. Kindergarten children are given better warnings about strangers with candy.

“Countrywide Broke the Law. Homeowners Did Not.”

Even worse Shiller, intentionally or otherwise, distorted my meaning. He claimed borrowers inflated income, without citing a source. Some of that occurred, but that wasn’t what I referred to in my question. I corrected Shiller. I had clearly referred to instances where Countrywide altered documents and put in higher income amounts so that the mortgage loans would be approved for people that could not afford them. [Illinois Attorney General Lisa Madigan stated: “Countrywide broke the law. Homeowners did not.”] Moreover, Shiller completely dodged the issue of fraudulent securitizations and foreclosure fraud.

CCGA and Academia Need to Get Their Crimes Straight

As if in a continuation of his answer to my question, Shiller mentioned he had spoken with a cab driver (apparently the source of all man-on-the-street information for academics) and the cab driver had no savings, only debt. Robert Shiller and Michael Moscow, the retired head of the Chicago Fed, appeared smug to me about this anonymous struggling working man’s plight.

They seemed to be promulgating what Elizabeth Warren calls the “myth of the immoral debtor.” Yet being in debt or even going bankrupt is not a crime in the United States. Loan originators’ submission of fraudulent documents is a crime. Securities fraud is a crime. Foreclosure fraud is a crime.

Afterwards, several people came to me and to the other questioners. Much of the audience complained to CCGA’s conference organizers. All were disappointed in Professor Shiller. A male CPA in the audience later contacted me via my website and wrote that he was glad I had put the question to Shiller: “though I have a great deal of respect for him, I was disappointed in his ‘response’ (if you could call it that).”

One woman who earned a Ph.D. in history found Shiller’s response to me “incoherent:”

I was with my husband, brother, and his wife. I chatted with the stranger next to me and at least two people escaping at the same time [leaving after the speech]. No one could believe what a huge “fail” the evening had been…the failure of our political and expert classes to address the core issues…have alienated even those working in the financial industry–right up into the rung below the top of the food chain…this feels like the Ancien Régime’s last days.

Class Warfare

Alumni of the Federal Reserve, corrupt politicians, and willfully blind academics would be correct to say that evening was a case of “class warfare.” Well-heeled U.S. patriots declared war on the lack of class demonstrated by their financial peers.

“Prosecuting Wall Street” – CBS’s 60 Minutes, December 4, 2011

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli 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 (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

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About Janet Tavakoli 34 Articles

Affiliation: Tavakoli Structured Finance, Inc.

Janet Tavakoli is the founder and president of Tavakoli Structured Finance, Inc. (TSF), a Chicago based consulting firm providing expert experience and knowledge about maximizing value in the capital markets in the face of complexity and uncertainty. TSF provides consulting services to financial institutions, institutional investors, and hedge funds.

Ms. Tavakoli was years ahead of the financial industry predicting lax underwriting and misrating of structured financial products would result in the collapse of the global credit bubble. She also predicted the collapse of the thrift industry, Long Term Capital Management, and First Alliance Mortgage prompting Business Week to profile her as "The Cassandra of Credit Derivatives." [2008].

Ms. Tavakoli pointed out grave flaws in the methodology for rating structured financial products in her books, Structured Finance & Collateralized Debt Obligations (2003, 2008), and Credit Derivatives (1998, 2001). She wrote the first letter the SEC posted in February 2007 in response to its proposed rules for the credit rating agencies; she made the case that the NRSRO designation for the rating agencies should be revoked for structured financial products.

Ms. Tavakoli is frequently published and quoted in financial journals including The Wall Street Journal, The Financial Times, Business Week, Fortune, Global Risk Review, RISK, IDD, Chicago Tribune, Los Angeles Times, LIPPER HedgeWorld, Asset Securitization Report, Journal of Structured Finance, Investor Dealers' Digest, International Securitization Report, Bloomberg News, Bloomberg Magazine, Credit, Derivatives Week, TheStreet.com, Finance World, and others.

Frequent television appearances include CNN, CNBC, BNN, CBS Evening News, Bloomberg TV, First Business Morning News, Fox, ABC, and BBC.

Tavakoli is a former adjunct associate professor of finance at Chicago Booth (the University of Chicago's Graduate School of Business) where she taught "Derivatives: Futures, Forwards, Options and Swaps".

Janet Tavakoli is the former Executive Director, Head of Financial Engineering in the Global Financial Markets Division at Westdeutsche Landesbank in London. She headed market risk management for the capital markets group for Bank One in Chicago. Tavakoli headed the asset swap trading desk at Merrill Lynch in New York, headed mortgage backed securities marketing for Merrill Lynch in New York, and headed mortgage backed securities marketing to Japanese clients for PaineWebber in New York. She also worked for Bear Stearns heading marketing for quantitative research.

She is the author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008), and Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley, 2009).

During her career, she has been registered and licensed with the SFA, NASD, ASE, CBOE, NYSE, PSE and the NFA and has passed the series 7, 63 and 3 qualifying exams.

Ms. Tavakoli has a B.S. in Chemical Engineering from Illinois Institute of Technology and an MBA in Finance from University of Chicago Graduate School of Business.

Visit: Tavakoli Structured Finance

1 Comment on Wealthy Patriots Wage Class War

  1. This is a distortion of the Schiller presentation. He is an economist, NOT a politician. He was making a very, very important point about the utter lack of meaningful financial innovation. What Janet Takavoli dismisses as “historical filler” was in fact a serious and important message from Robert Shiller – namely, that the politics of the country are not helping us build meaningful solutions to a recession/depression. He pointed to successful innovations over the centuries that were forged in times of economic distress; those innovations have since become part of the Western world’s economic culture. When Janet stood up to ask her question, it seemed that her main goal was to promote her company in front of that particular audience. Fact of the matter is, few people there were interested in hearing Shiller’s thoughts on economics and finance. They wanted him to explain why there haven’t been any fraud prosecutions to date. I was embarrased for and disappointed by the audience.

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