Who REALLY Caused The Financial Meltdown... and who tried to stop it

[Greg Richards]

At the Annual Meeting, Buffett said that everyone thought that housing prices would always go up, implying that was the reason for all of the bad lending. But Tavakoli says it isn't that benign.

Quote from Greg Richards:

Borrowers have responsibility, and many people still have too much debt and too little equity in their homes. Add to that a mountain of credit card debt combined with the 2005 bankruptcy law changes (making it harder to clear credit card debt), and many people won’t see daylight in their lifetimes. Yes, they could have been more responsible (but see below).

Tavakoli talks about personal responsibility in her book DEAR MR. BUFFET, and here’s one example:

“Suppose there is an unemployed man with no source of other income other than his representation that he is a successful Internet day trader. Up until now, he has not been very successful at anything. He has a poor credit history, and he wants to buy a home he could not previously afford. Fortunately, he says he has a flair for gambling—I mean—day trading, on the Internet. He does not wish to provide documents verifying his success because the key to his successful formula is that is must remain confidential. Furthermore, he does not want to make a down payment on a home since his capital is tied up in his successful Internet day trading strategy, which he says is more profitable than the housing bubble—I mean housing investment. Why tie up money in a down payment when he can use that money to gamble—I mean—increase his fortune?”

“Fortunately, a mortgage broker, who is completely objective, since his income depends solely on the fees he generates by making mortgage loans, is willing to overlook the absence of documentation. The Internet day trader can state his income, and that is good enough for the mortgage broker. The mortgage lender helpfully informs the day trader that there have been mortgages made to people who apparently cannot afford them other than the fact that they are willing to state an income which suggests they can make the payments—so climb on board.”

But she also talks about predatory lending and illegal deceptive practices. She maintains most of our woes could have been nipped in the bud if the SEC had shut down phony securitizations at investment banks, because the imploded private mortgage lenders got their money supply from investment banks to keep the fee generation train running. The rating agencies were complicit. Not to mention lax sophisticated investors, monoline bond insurers and other culprits. Combine value destroying securitizations that can only go down in value with excessive leverage, and you create a bubble followed by a financial nightmare.

Given the extraordinary allegations in her book DEAR MR. BUFFETT, it is remarkable that Warren Buffett invited her to sign copies at the Annual Meeting on May 2 (its on her web site). But her documentation and notes are bullet-proof.

She documents everything and gives example after example and names deals. She looked at all of Merrill’s 2007 CDOs and all of them were compromised at the “AAA” rated level, around $32 billion in notional amount. All of the I-banks were involved to greater or lesser degrees, including Goldman Sachs Alternative Mortgage Products with residential mortgage backed securities.

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[Greg Richards]

Quote from stock777:

I read her book, a little bit silly in the constant references to the old fart Buffet, but otherwise she knows her stuff

Respectfully disagree. I believe this review from the late Greg Newton on Seeking Alpha is on the mark: http://seekingalpha.com/article/113943-no-mere-buffett-a-14-course-menu

NO MERE BUFFETT, A 14-COURSE MENU

Dear Mr. Buffett
What an Investor Learns 1269 Miles from Wall Street
by Janet Tavakoli
Wiley 2009 $24.95 (list) Hardcover

Chicago derivatives consultant Janet Tavakoli is a rare jewel in the financial markets. Arguably best known for weighty textbooks with such alluring titles as ‘Structured Finance & Collateralized Debt Obligations,’ she has a nice sideline in delivering uniquely pungent commentary on credit-related conundra in venues including her own website, US Securities and Exchange Commission comment filings, and on-the-record in the allegedly grown-up media where “people familiar with the matter” usually lurk.

Most remarkably, she deserves as much acclaim as anybody, and much more than most claimants, for calling both the cliff-edge and the depth of the ravine into which global capital markets have tumbled.

But another Buffett hagiography? Is anything left to be said about Avuncular of Omaha, the genial great white with a penchant for apparently ignoring his own epithets (especially that one about “financial weapons of mass destruction”)? Just in the last few months we’ve had ‘The Snowball,’ Alice Schroeder’s near 1000-page authorized doorstop; Roger Lowenstein’s ‘Buffett: The Making of an American Capitalist;’ and ‘Pilgrimage to Warren Buffett’s Omaha,’ Jeff Matthews’ dispatches from the Berkshire Hathaway annual meeting. Among plenty of others.

But this book is much more than mere make-weight for Barnes & Noble’s Buffettophilia section. It is just as much the first of what will doubtless be dozens of books telling the story behind the global dodgy asset securitization scam, which Tavakoli, noting the first breathless Madoff Meltdown headlines, recently characterized as the real “largest Ponzi scheme in the history of the capital markets.”

"IT'S GREAT TO HAVE AN OPEN MIND, BUT DON'T LEAVE IT SO OPEN THAT YOUR BRAINS FALL OUT"

A long-time Buffett fan and Berkshire Hathaway shareholder, Tavakoli builds her plot around a fitful correspondence that turned into an afternoon in Omaha where her low expectations — “If Warren had simply avoided overt rudeness, it would have been an upgrade from most finance professionals” she had dealt with — were dashed on the rocks of mutual respect and a shared thesis, in the dog days of late summer 2005, that the world had strapped itself into a handbasket headed straight to financial hell.

The narrative lives up to the book’s title as Tavakoli holds her personal portfolio decisions to Buffett’s standards, contrasting his philosophy and behavior with those of a long roll-call of Icaruses on such topics as transparency, complexity (or relative lack thereof), risk comprehension (and tolerance), leverage (in both its overt and covert forms) and that little something that mostly comes across as, for want of a better word, honesty.

She even indulges a little Buffett-like do-as-I-say, not-as-I-do: “I run a hedge fund. My strategy? It’s proprietary...but you are not entitled to that much information,” setting up familiar arguments about the impact of fees, liquidity, the fragility of genius and various other demerits of the ‘asset class’ now well down the road toward a well-deserved bout with humility.

So far, so Buffett. But the book’s real strength is the sub-plot that emerges as Tavakoli tugs vigorously at the seemingly disparate threads of the current financial crisis, naming names, citing cases and leaving no schmuck — whether investment bank, credit rating agency, monoline insurer, mortgage brokers, regulators and their ilk — unspared. Based on more than 20 years in the derivatives arena, and having served time at Salomon Bros, Bear Stearns and Goldman Sachs, she knows that of what and who she speaks.

‘Dear Mr Buffett’ is, like its author, strongly, often harshly, and, more than rarely, tartly, opinionated. The attitude is, however, well-supported by the facts; should anyone ever display the slightest interest in criminalizing the criminals who led us down this path, a prosecutor could do worse than ordering up copies for the grand jury.

One thing the world is not going to run out any time soon is books on subprime credit-turned-global financial meltdown. But it’s doubtful that many, or any, will so closely match the ripping yarn of financial upset with concepts that any — and perhaps every — investor can apply to their own financial security. This book was already at the printer when the Madoff Maelstrom broke, but it’s highly doubtful that anybody who absorbs the message of ‘Dear Mr Buffett’ will ever need confront that kind of mayhem.

http://www.amazon.com/Dear-Mr-Buffe...bs_sr_1?ie=UTF8&s=books&qid=1241483645&sr=8-1

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[mind]

... that reps and dems are equally responsible. it was
the bipartisan assumption that living on credit can last.
iraq. funny freddie. shrinking saving rate balanced by
real estate and stock gains. easy money by greenspan,
bailing the sp out of ever flu ...

get over it. a system has ended. a bipartisan system.