Finding the culprits of the crisis

Derivatives expert Janet Tavakoli takes a hard look at what — and who — caused the financial crisis.

Why haven’t the apparently guilty been punished?

We haven’t seen the felony indictments that these people richly deserve because our regulators and investigators are captive — and Congress, more than ever, has been lobbied, courted and bought off by Wall Street. More than any time in the past, you’ve seen these big-money interests protected by Congress.

Is there an alternative to bailouts, such as those of the financial crisis?

Yes. Troubled financial entities should be restructured, old shareholders should be wiped out and we should return Glass-Steagall.

What should have been done in the case of, say, AIG?

Bankruptcy declared, and then [the government] says: “We’ll back-stop your contracts for now, but we’re going to investigate all those fraudulent credit derivative contracts and ‘claw’ money ‘back’ from your counterparties — like Goldman Sachs and Credit Suisse — if need be.” So there’s a controlled demolition. You’re not just handing money out with no consequences.

And that is indeed what you maintain we did?

Yes. Today the Fed is saying taxpayers made money on the assets that it bought on those CDOs. That’s a lie. Taxpayers are owed tens of billions of dollars that went out the door of AIG before the bankruptcy. So with sleight-of-hand and half-truths and innuendo, the Fed is lying to the American people. It’s part of the cover-up.

“Unless we change direction,” you write, “we’ll have another crisis by 2015. Congress made all the wrong moves to guarantee it.” Please elaborate.

Congress has been keeping interest rates very low, basically to subsidize the banking industry. We’ve never seen domination over Washington in the way we’re seeing it now nor the Fed willing to keep interest rates low so long to subsidize the banks.

People aren’t earning enough on investments of low risk to keep pace with inflation, which is being underreported because the [Consumer Price Index] doesn’t include many things we use on a daily basis that are increasing in price. Inflation is the great destroyer of wealth. We’re getting sleight-of-hand on the part of people who know better.

How would you characterize the overall state of the economy?

I see “strangulation.” Even though we have some new household formations, the number of foreclosures and big inventory overhang show that the bad past practices have not yet been resolved. And even though there has been some improvement in the jobs figures, many people have not gotten back to the stable income level they had before the crisis.

What about new regulation? Will the Dodd-Frank Act accomplish anything?

No. It will accomplish as much as [the] Sarbanes-Oxley [Act] did, which appears to be nothing. The bank lobbying groups were all over Congress to water down regulation, and they succeeded. The game is to act as if even a weak regulation is a big deal to get through. And if Congress does manage to get it through, the banks effectively swoon. It’s just theater. What should be done, as I said, is return [the] Glass-Steagall [Act]. But we are so far from that.

What does all this signal to financial advisors?

When MF Global can go in front of Congress and say, “We had controls in place, but I don’t know where the [approximately $1 billion in customer money] went,” nobody should be leaving extra cash in trading accounts with any of the major brokerage firms, such as Goldman Sachs or Merrill Lynch.

Really! That seems extreme.

After we’ve gone through a major financial crisis and everyone is claiming that nobody is to blame, advisors have to be more clever and say, “I’m not leaving money in any account in which I don’t completely understand the finances of the entities where the money is.” They have to safeguard assets. That is part of their responsibility today.

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