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ProPublica Asserts “First” on CDO Manager Shenanigans When Bloomberg, Mason/Rosner, and This Blog Have Prior Reports

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It’s often the travail of a blogger, and small media generally, to have its story picked up by bigger fry without acknowledgment. But it’s one thing when a writer suspects having made a contribution to another’s story (there is, after all, the possibility of parallel inquiries bearing fruit on different timetables); quite another to have firm grounds for knowing a journalist was aware of your work.

I’m of two minds in writing this post. ProPublica has gone to some lengths to publicize CDO abuses, which we have long considered to be central to the crisis, yet not to have gotten sufficient attention because, well, CDOs are hard. Complexity, opacity and leverage, branded as “innovation,” have served the financIal services industry well, often to the detriment of customers and taxpayers. Yet many accounts of the crisis, in classic drunk under the streetlight fashion, have tended to focus on phenomena that are comparatively easy to understand. So we and ProPublica are on the same side in this process, that of trying to unearth bad practices in the hopes of supporting other efforts to curb them.

But we are puzzled at how chary ProPublica is in giving credit to aligned efforts. This wouldn’t be so troublesome were they not making bold claims about their own work. Their latest release is on CDO managers, a topic which has come under increasing focus. Note the section we have highlighted from their latest piece:

A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged.

“First time” is a strong claim. It can be read as referring narrowly to a the particular study commissioned by ProPublica. But the problem is that there are prior efforts, with real analytical underpinnings, that have covered this terrain.

Consider this section from a May 2007 paper by Joe Mason and Josh Rosner, “Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptionsm” an article we have pointed to repeatedly:

Without investors willing to purchase the last classes of securities – typically, about 10 percent of the securities sold – the prior classes bear the risk. If the prior classes are not willing to bear the risk, the other 90 percent of the mortgage pool cannot be funded, that is, the mortgage originator cannot sell the loans. Hence, the last classes of securities are providing about 10:1 leverage for the structure of RMBS, so that every dollar of lower-tranche RMBS supports about $10 of higher-tranche RMBS.

Specific types of CDOs have arisen that specialize in holding such risky classes of securities have become popular in recent years, providing a great deal of funding for lower-tranche RMBS at that 10:1 leverage ratio…. the 90 percent of the RMBS structure above the lower-tier (junior) tranches cannot be sold until those 10 percent lower-tier (junior) tranches are sold. Because the 90 percent of higher-tier (senior) securities in an RMBS cannot be sold without selling the 10 percent of lower-tier (junior) securities first, even a small decline in CDO funding of mezzanine RMBS investments relative to the total RMBS market can have a large effect on RMBS funding, and therefore consumer mortgage funding…

This early work admittedly does not provide a percentage estimate of RMBS sold to CDOs, but the flip side is that Mason and Rosner had found the dead body in the room, that CDOs were keeping the subprime market going and would be a crucial point of failure, BEFORE the CDO market had started to implode.

And in May of this year, Jody Shenn of Bloomberg came up more spadework on the role of CDO managers, focusing on three CDOs, Neo, 888, and Octonian underwritten by Merrill and managed by Harding, headed by Wing Chau. Harding was a de facto captive CDO manager of Merrill but was presented as independent. Note that ProPublica focuses on these same two deals in its account:

Neo CDO Ltd. was a complex construction. More than 40 percent of its holdings were slices of collateralized debt obligations sold by Merrill, according to Moody’s Investors Service and data compiled by Bloomberg. Many of those were CDOs made up of other CDOs backed by bonds linked to home loans. About one-sixth of Neo was invested in junk-rated debt….

Managers such as Chau were at the center of a financial machine that pumped out more than $200 billion of mortgage- linked CDOs in the months before the subprime crisis spread. They picked the securities that went into CDOs and held themselves out as independent agents. Now potential conflicts of interest and questions about what banks disclosed have drawn regulators’ attention….About two-thirds of his [Chau's] business came from Merrill, according to Bloomberg data.

Shenn’s article also discusses, with data, the troubling relationship between Merrill and Citigroup CDOs, in what appears to be mutual backscratching masked by complicit managers like Harding, another focus of the ProPublica story.

As we alluded at the outset, ProPublica cannot claim to be unaware of the work on CDO managers that Tom Adams has published on this blog. He had lunch with Jake Bernstein and Jesse Eisinger in April, the week after publishing a post entitled “The Myth of Insatiable Investor Demand.” The piece was in response to the testimony of Citigroup officials before the FCIC as they tried to excuse their failures by blaming continued investor demand for the CDOs. Despite the common perception in the mainstream media and the insistence of the Citi executives, third party investors were not demanding more CDOs. In reality much of the demand came from other CDOs the banks were creating and from the banks themselves. As a result, the meme of “investor demand” was an illusion, the same one noticed by Mason and Rosner in 2007, and the banks and CDO managers were clearly to blame for failing to police for deflating market well before it ultimately collapsed.

Not surprisingly, the lunch conversation included considerable discussion of the dubious role of CDO managers.

While we are pleased to see the depth of reporting that Pro Publica has dedicated to issues that we have long felt were poorly understood by regulators, law makers and the investing public, we are troubled by not simply a lack of attribution, but an effort to deny (the “first time” claim) the substantial efforts others have made on this topic. We’ve also found evidence of other patterns of collusion and market manipulation not covered in ProPublica’s piece. This matters because those reading ProPublic’s assertion of the definitiveness of its work might be dissuaded from looking for other reports on this topic.

We are hopeful that even though Goldman has settled with the SEC on the Abacus transaction, the ProPublica article, which is detailed and written to engage lay readers, will bring renewed interest among the mainstream media, regulators, lawmakers and even private litigants on the problematic practices of the banks and CDO managers. These are issues near and dear to our hearts. As we wrote,

[R]iskier and riskier loans were being originated at effectively lower costs for issuers with little outside feedback. In one big happy family among the mortgage issuers, CDO managers and CDO investors, there would have been little motivation to worry about increasing risk or wider spreads. They were all keen to keep the great fee machine rolling.

We remain puzzled as to why ProPublica seems loath to acknowledge aligned efforts, particularly when we are working towards the same objective. We commented on it regarding ProPublica’s Magnetar story, where they were presumably in the awkward position of having invested substantial effort in a story, then to have an independent party beat them to the punch by six weeks, and unearth critical details (the structure of the deals and most important, their systemic impact) which were absent from their investigation. We we far from the only parties to notice a repeat; we received sympathetic e-mails from journalists and readers, the funniest being from John C. Halasz, “You’ve been, er, retro-scooped once again.”

Giving credit to people who have made a contribution to your efforts is the norm in academia and blogging. Why are journalists, particularly ones with established reputations, so reluctant to do the same?

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37 comments

  1. jbmoore

    Attribution is the decent and ethical thing to do in any sort of publishing. Those who don’t attribute published work done by others are either lazy, selfish, unethical, ignorant, or all of the above. But desperate times lead to desperate measures. Perhaps ProPublica is going broke and this is symptom. It’s either that, or they have hired some unprofessional staff. Quality will win out in the long run assuming you live longer and write longer than the bad apples they’ve hired. Surely their editors will take note if the ProPublica has any class at all.

  2. Francois T

    “Why are journalists, particularly ones with established reputations, so reluctant to do the same?”

    Because they are, well, journalists! How many bloggers have seen their work duly and timely acknowledged by journalists?

    I’d say a tiny minority.

    1. attempter

      Yes, I too thought that question sort of answers itself.

      Many MSM outlets actually have a formal policy against crediting bloggers, and I’m sure many more have such an informal policy.

    2. liberal

      Newspaper/magazine journalism isn’t set up for acknowledging the work of others. The only thing they do is say “as first reported in (this other newspaper) X…”

      In short, they don’t do footnotes.

  3. yoganmahew

    Indeed, Michael Lewis in The Big Short also exposes much of this, which I was relatively easily able to understand based on this blog, the links from it and Econned.

    Even the amounts were relatively well known (the retained amounts of CDOs either on balance sheet or in SIVs less new stuff that was originated but not distributed).

    It’s all rather bemusing, at times, the way that something one has been banging on about suddenly gets legs when the whales deign to notice it. By which time, of course, it is too late to do anything sensible about it.

  4. Jack

    So was this not Tom they were quoting?

    ” “All these banks for years were spawning trading partners,” says a former executive from Financial Guaranty Insurance Company, a major insurer of the CDO market. “You don’t have a trading partner? Create one.” “

  5. Jim the Skeptic

    At least they didn’t claim “Exclusive coverage”.

    We gave a local broadcaster permission to record from our microwave feed. While we were airing the state legislature live they recorded and made notes for about an hour. Then they ran promos that they would have “Exclusive coverage” on their local news program. Both stations were within the loop surrounding the city.

    So it could be worse!

  6. charles

    You have to consider that such ‘media’is supposedly funded
    by independents, so this may explain some of the ‘hairblowing’, assuming the funders do not read the blogs.
    Crediting nevertheless never hurts.

  7. MichaelC

    You’re much too polite.

    The missing attribution(s) is appalling by itself, coming from an organization that touts itself as an independent public sprited MSM alternative. That doesn’t smell right.

    But, touting it as ‘a first’ is also a tacit admission that someone important (other MSM competitors?, themselves?) dropped the ball on this important story, one that clearly should have been widely explored by news organizations during the fin reg negotiations. The ‘first’ claim provides the NYT, and others, nice cover for that failing by perpetuating the scoop myth in their coverage of the Pro Publica piece.

    FWIW Tom’s reporting here provided enough detail to explore some of the linkages between the managers/ deals /the firms with a few google searches and some spare time. Hard to understand why an organization with a dedicated investigaive staff didn’t piece this story together sooner.

    My reaction to the first Pro Publica piece was that they were staking their claim to a “Law & Order – CDO Unit” franchise. Thay msy have been late to the game but they do good work, and this show is going to run for a very long time. If it’s built on the backs of lowly bloggers, who’ll notice.

    Especially when they know the bloggers sincerely want the story to be told.

  8. Norman

    Just my take, ProPublica reaches a different audience than does NC, but it doesn’t excuse the fact that they didn’t give credit where credit is due. As they say, s–t happens, besides, perhaps what is more important, is where do we go from here? I really just don’t like the idea that we have to bend over & take it because of some unwritten law that says we have to.

  9. Gary Anderson

    Am I understanding this article correctly, that Pro Publica is saying there was no intentional scam in the selling of CDO’s? Pretty funny.

    CDO selling to unsuspecting investors was the outlet for the scam that was established through Basel 2 in 1998 permitting off balance sheet Enron type banking. Enroners went to jail and banksters got rich from doing the same thing.

    Basel 2 and the ability to write insurance on the purchase of crap loans was enabled by the 90 to 8 repeal of Glass-Steagall. Phil Gramm set this whole ponzi up! He was given the task by the central banks.

  10. readerOfTeaLeaves

    …the work on CDO managers that Tom Adams has published on this blog. … “The Myth of Insatiable Investor Demand.”… in response to the testimony of Citigroup officials before the FCIC as they tried to excuse their failures by blaming continued investor demand for the CDOs. Despite the common perception in the mainstream media and the insistence of the Citi executives, third party investors were not demanding more CDOs. In reality much of the demand came from other CDOs the banks were creating and from the banks themselves. As a result, the meme of “investor demand” was an illusion, the same one noticed by Mason and Rosner in 2007…

    Interesting timing on ProPublica’s part.
    The FCIC holds hearings this Wednesday, 1 Sept on“Too Big To Fail”. I look forward to any post-hearing analysis provided at NC, and hope that it will be as informative as Adams’ unpacking of Citi exec perfidy last spring.

    ProPublica would be prudent to remedy their failure to acknowledge the fine work here; they damage their own credibility by failing to cite (and provide links) to NC.

    1. Deus-DJ

      Propublica missed the entire real story by barely mentioning the real story: that banks gave 20% of the riskiest tranches to hedge funds. This is by far the most important thing in the entire piece but they barely mention it. Nowhere in the article did I see Magnetar mentioned.

  11. anon

    My sympathies, Yves. When I read the ProPublica story last week, I, too, wondered why they failed to mention others’ work on this topic and especially why they were strongly hinting that they were first (aka, thus far, the only) to cover this. As you say, it leads many of their readers to not seach for other sources and makes it more difficult to work together to combat these problems (and we need to work together if we have any hope of making any progress).

    It makes no sense to me since ProPublica’s lack of attribution completely undermines their claim of thoroughness (which they also tout in the article). If one fails to find the work of others, especially relatively easy-to-locate sources such as Bloomberg and NC, it shows that one was either incompetent or didn’t bother to look. To me, that unnecessarily puts the whole article under a cloud of suspicion.

    It’s not merely a matter of not “doing footnotes” as another poster suggested. In solid work, one discusses (or at least mentions) other important supporting work in the body of the article, not in the footnotes. It is an integral part of the article and shows that the author has at least a passing understanding of the topic at hand. Footnotes generally serve the same purpose as links in online articles or provide information about relatively tangential aspects of the topic one is discussing. It would generally be considered shoddy and unprofessional to hide important work that goes to the heart of the topic of the article in footnotes without any mention in the article itself.

    1. Deus-DJ

      It’s not just ProPublica…apparently famous MMTers like Randall Wray seemed unaware of Yves’ work in this area. I’m a grad student at UMKC and he sent a link to the Propublica report to all the students and fellow profs, and I responded both to him and the entire list econ graduate students of the lack of insight it gave with respect to hedge funds like Magnetar….which is a very important thing to miss. I then told them to read Yves’ book, lol.

  12. john c. halasz

    A response from CJR:

    “Thanks Sally, Larry, John, and Harry:

    I think John hit on my view with this sentence: “There is an element of petty rivalry involved, but they are broadly on the same side of the public interest in exposing this matter of momentous public consequence,” etc.

    PP doesn’t claim to be the first to report on the creation of fake CDO markets. Its claim is specific enough; it’s about the *extent* to which specific institutions bought their own product, a point Yves acknowledges in her post on this. And a breathtaking extent it is.

    Whether PP could have done more to acknowledge previous work on the subject is a fair question, though it does nod to the WSJ work as well as Lewis’s.

    I hope everyone doesn’t get bogged down in fights about credit and just keeps digging.

    Sally, far from hurting anybody, it’s an important advance in the public’s understanding. And in the end, readers come first.

    Posted by Dean Starkman on Mon 30 Aug 2010 at 12:22 PM”

  13. Michael M Thomas

    With all due respect to Dean Starkman, I think the issue of credit is a meaningful one. In my thirty years of journalism, including the twenty-odd during which I wrote a weekly column on getting and spending for the NY Observer, one dubious aspect of Fourth Estate behavior struck me almost above all others: the refusal of journalists, especially those with MSM franchises to protect (which I think is a not insignificant part of the problem), to give where due – usually for being first – to other writers and reporters. Due credit is about the only way attention can be focused on real talents working outside the incestuous mainstream. These often include business writers like Yves who, unlike many employed with bylines by the NYT and others, actually understand the arithmetic of deals and trades (which is where the devil does his most lucrative filigree work). Mediocrity of the trade-school variety is generally loath to accord recognition, let alone give a hand up to competition that, blessed with a similarly bully pulpit, might outshine it.
    But I think there is a larger point that Dean Starkman unintentionally makes. He deplores the expense of energy in “fights about credit,” but I have yet to see such fights started by those who owe credit as opposed to those to whom credit is owed.
    In my NYO years I bent over backward to give credit to anyone who had even remotely or indirectly preceded me on a given subject,to anyone who got the ball rolling before I did. It was a lonely place. Not once was I given credit where I had done the lead work.
    If ever a profession has lived up to Franklin’s admonition that if we do not hang together we shall assuredly hang separately it has been journalism. If I may repeat one of my proudest NYO coinages, a great problem today is that journalists are mainly concerned with dining WITH people they should mainly be concerned with dining ON.

  14. Johnson

    Credit is important ironically for Propublica, which demands it constantly. The recent story on CDO’s did little but prove what everyone else already had proven already, albeit in different ways.
    People see Propublica as an underdog (wealthy as it is) so they like to praise the organization and give it the benefit of the doubt.
    But it’s not really an underdog anymore

  15. Tom Stone

    Yves, ProPublica is a legitimate organization. You,on the other hand are a Blogger, A Woman, Blonde,and very good looking. Bloggers are by definition illegitimate, being an attractive blonde (and very bright) woman might be OK if you were a TV anchor but it is simply unacceptable if you wish to be considered a serious writer. I hope this clears things up.

  16. anon

    john c. halasz says:
    August 30, 2010 at 1:55 pm

    john, as a fan of Econned as well as NC and other blogs, I appreciate your incisive comment at CJR as well as your posting Dean Starkman’s reply here. That reply seems like a non-responsive response (aka a misdirect) to me.

    “PP doesn’t claim to be the first to report on the creation of fake CDO markets. Its claim is specific enough; it’s about the *extent* to which specific institutions bought their own product,”

    While technically true, it is misleading. I read the PP article and was left with the impression that PP was claiming to be the first to write about the methods used by Merrill, Citibank, and other institutions to trade the worst parts of their CDOs amongst themselves in order to keep the money flowing (i.e., continue to inflate the housing and credit bubbles after they would have otherwise burst). If I would have read the article as if it were a technical document, I may not have had that impression but the article’s language and tone suggested that it was written for the general public (and should be read that way), not as a technical document that one needed to parse carefully in order to ascertain its meaning. Further, how can one write about the extent of a problem without identifying that the problem exists? To claim that PP was only writing about the extent of the problem but not the problem itself is disingenous.

    “Whether PP could have done more to acknowledge previous work on the subject is a fair question, though it does nod to the WSJ work as well as Lewis’s.”

    Here Starkman uses the same chatty language that the PP authors used. Yes, the PP article gave “a nod” to one WSJ article. It mentioned it in passing. Here’s the entirety of what the PP article said about Lewis’s book: “(Chau would later earn a measure of notoriety for a cameo appearance in Michael Lewis’ bestseller “The Big Short [8],” where he is depicted as a cheerfully feckless “go-to buyer” for Merrill Lynch’s CDO machine.)” It’s better than no acknowlegement at all but it’s far from giving proper credit for prior work. Worse, it’s throwaway attributions to the WSJ and Lewis left the impression that the authors were reaching out to attribute all prior work, regardless of how tangential, on the topic of the banks’ purchase of each other’s or their own CDO “assets” or their heavy-handed tactics with “independent” managers. And Starkman never really addresses – much less answers – the “fair question” of whether the PP article “could have done more to acknowledge previous work on the subject.”

    “I hope everyone doesn’t get bogged down in fights about credit and just keeps digging.”

    I hope so, too. The easiest and fastest way to make sure that doesn’t happen is for PP to add an addendum to their article acknowleging the prior work done by others! How difficult is that?

    “far from hurting anybody, it’s an important advance in the public’s understanding. And in the end, readers come first.”

    I think the PP article hurts readers by giving them the impression that if they’ve read the PP article and the WSJ article (and perhaps The Big Short if they wanted to learn a tiny bit more about Chau’s role as a “cheerfully feckless” buyer), they’ve exhausted the available material. It keeps PP readers away from other sources that they could use to learn more about the topic and sites where they could meet others who are interested in this problem. It makes me doubt the PP authors’ honesty and competence. If they failed to discover other sources (that were important and easy to discover), what else did they fail to discover? Was it material to the story? Might the readers have a completely different impression of what occurred if they’d learned about those things? Alternatively, if they knew about these other sources but failed to acknowledge them, what else did they learn but fail to acknowlege? Was that information material to the story? How can I trust the authors when they either failed to discover or failed to disclose important prior work?

    1. john c. halasz

      Ya, I left the Stackman comment without without remark, for others to judge. But obviously he’d truncated the point of my comment.

      Having tooled around on google yesterday a bit on this issue, it looks like pride of place/priority on the Magnetar issue might belong to Janet Tavakoli, who claims a) that Magnetar type structures had been covered in her 2003 textbook/handbook on structured finance and had, in fact, been used before, though not in the mortgage “space” and b) that she had been contacted by agents or principals of Magnetar to consult on the matter, but had decided to decline to participate. Also some bits and pieces of the story were reported in the WSJ in 2007. That does nothing to take away though from the force and clarity of Yves et alia’s efforts in the matter. Now Tavakoli might have her own “proprietary” interests here and have her own media profile and her own horn to toot. But that doesn’t detract from the main point: that the various factions reporting on this story, regardless of their “proprietary” interests, professional faction, or ideological differences do need to “network”,- (yes, that’s nowadays a verb),- to deepen the forensic investigation of what has happened and bring it to the attention of the general public,- which, to hazard a guess, understands its been vastly swindled, but hasn’t a clue why,- in the face of the extend-and-pretend, business-as-usual status quo PTB. Otherwise the FinReG reform and the deliberate long stagnation policy will be the “last word” and not the beginning of the end of the beginning. CJR, as a kind of public ombudsman, could play a role there. But, alas, the sublime complacency of Starkman’s response, based on polishing his journalistic ego-ideal as undoubted advocate of the public interest, rather than of the professional faction, is disheartening.

  17. abstmarketwatcher

    Tavakoli is constantly claiming she deserves credit. Her claims often don’t stand up. This is one of those cases. She’s the CDO expert, or so she says. So why was it people who weren’t in that market who got the goods on Magnetar? She was silent till others started writing about it, then she chimes in and says she deserves recognition WITHOUT ADDING ANYTHING TO THE STORY.

    Her finding something in her 2003 book that she can say relates to Magnetar? That’s really stretching it. There was not market for credit default swaps on asset backed securities in 2003. Yes, there were hybrid structures, but Tavakoli’s book describes standard structures in use in the corporate CDO market. A similarity between a MARKET structure in Tavakoi’s book hardly gives her a special claim. It basically says any CDO market participant as of the writing of her book would have known of a hybrid (part cash, part synthetic) CDO using credit default swaps on corporate assets.

  18. NCyourspineis fine

    John,

    Ah, Tavakoli. (and kudos for your comments at CJR. I couldn’t disagree with anything you said, except the unfortunate phrasing relating to journalistic rivalry, which Dean jumped on), which brings us back to Ms T.

    Perhaps this is unfair, but it’s hard to take her too seriously (which is the point of any comparison to her). It seems to me, Ms T simply aspires to John Hull’s position as the go to (textbook) source on anything Credit Derivative, like that guy, what’s his name? (Frank something), that any respectable risk manager in the 90s aspired to be published in his textbooks at Wiley&sons.

    And that’s it.

    So its a small matter (except to Yves, and her fans, or to anyone with a working brain cell) to equate NC to Ms T. That fame grabbing Yves is no better, or worse than that nice, presentable Ms T. Ignore her (Yves) Slap her (team) down. They do want to sell a book after all. No matter that its better researched, more cogently presented and more exhaustively attributed , (and also published earlier) than any piece you can expect out of an NPR affiliated effort.

    Except, it really is no small matter, since NC’s made life uncomfortable for PP or any news org that really should have read the book and covered it sooner.

    Since we’re free to speak our minds here, in my view PP has no option, if they’re ethical, but to acknowlege the work of the “freelance, indepentent” reporting that contributed to their story.

    Perhaps if they(PP,MSM) had, fin reg would look a little more serious. Perhaps if they had reached out to the NC team (or through them, to their informed readership) earlier we wouldn’t be wasting our grey cells on a debate about who was first. Instead we might be destroying them, wondering out loud, everywhere, WTF the SEC/DOJ have been doing for the last 3 years.

    Frankly, it gets my Irish up, that the informed audience here gives any credence to the argument that the underdog (NC) should give an inch to MSM bullying, doubly so by attempting to score an easy win by conflating NC’s ambitions with Ms T’s.

    Apologies to Ms T in advance if she perceives this as an unjustified ad hominem attack. It’s neither unjustified, nor ad hominem.

    It’s substantive in that she has not added any detail publicly, (i.e. for free) that ccould be independently verified , or refuted.

    As to the softer , talking head appearances, I’m always left titalated but unsatified. Satisfy me with some substance and I’ll out myself and publically apoligize to you.

    1. john c. halasz

      As to Tavakoli, I’m agnostic. I haven’t read her love letter book to Warren Buffet, and have only seen a few media clips and articles by her. (Appearing ob CNBC is utterly pointless, but she did acquit herself reasonably among heavyweights on BNN). My guess is she’s not a systematic thinker and she adheres to a petit bourgeois apple pie capitalist ideology. But this link, for example, is not all that bad:

      http://www.huffingtonpost.com/janet-tavakoli/how-to-thwart-the-assassi_b_682538.html

      But the issue here was and is not mere priority. It’s rather fair and accurate attribution. Since obviously the quality of work done and its scope means more than mere priority. And since collaboration between workers in the field, -(did you miss my point about different professional factions and their sometimes dysfunctional, sometimes too, er, cozy interactions?)- in building up the scope and quality of continuing investigation, (since the “story” is not as yet fully unfolded), is enabled by such attribution, regardless of differences in narrow interests or broader POVs, rather than being derailed by petty internecine disputes. It’s an “open source” model of investigation and hence involves inevitably a measure of agonal competition in its motivation, but the broader aim is to bring matters out into the open from their complicated and often nefarious obscurity into an informed public sphere and deliberations and contestations on the public interest. Since the “Public Enlightenment” faction is only a small minority facing a vast sea of ignorance and obfuscation, the collaborative aspect needs to be maintained. (CJR seems remarkably complacent on that point). There will be differences in quality, scope, and systematic rigor in various contributions,- because, of course, various contributors would have different core competences and functions, aside from differences in broad POVs,- and there will be inevitably gross simplifications occurring in attempting to convey devilishly complex matters to a broader public. But that’s why I emphasize maintaining a focus on the broader systematic and institutional context, since not only are there many moving parts and complicated interrelations between them and deeper rooted and longer acting sources of the crisis than just what appears on the quotidian surface of its unfolding, but only with that focus can it be made plain publicly how much of the official policy on the part of the incumbent PTB going forward is actually intent on maintaining a long stagnation, rather than fostering any real restructuring, reform and recovery. (Yves’ book is distinguished especially from its competitors by her effort to convey the broader systemic and historical context in terms accessible to lay readers).Because endless attitudizing about fraud and sociopathy, substituting gratuitous moralizing for actual functional explqnation, doesn’t amount to effective criticism, and the cynical pleasures of schadenfreude or the satisfactions of narrowly self-righteous polemics to compensate for bleak despair and widespread desperation does little to bring effective clarity to the issues.

      There is, of course, always a tendency of contributors to toot their own horns, and highlight their own competencies and obsessions. William Black, for example, always goes on about “control fraud” and “liar’s loans”. But “stated income loans” were not the only dubious and defective “product” in the mortgage “space”, to be sure, and much of the “fraud” that occurred was AFAICT actually not illegal, but, in fact, aided and abetted by official policy and deregulation/regulatory laxity. In short, the institutional context was too broad and operated between too many markets, agents and firms and institutions to be explainable in his narrow institutional and legalistic terms. The “fraud” that occurred is far more systematic and ideologically embedded. (Has Black even read the classic Vol. 3 account of “fictitious capital”?) Dean Baker, on the other hand, likes to go on about the housing bubble and the failure of the mainstream economics profession to recognize it, because, er, he was among the very first to publicly call it and because he has a “working families” ideological orientation. Dean’s a good guy, but AFAIK not an especially original or unconventional economist. But surely he must know that it wasn’t just a matter of a housing bubble, but a much broader credit bubble involving MEW based consumption demand and PE LBOs and much else. And surely he must know that the bubble wasn’t in housing, but in underlying land rents, even if an ancillary construction bubble was enchained. What the economists should be explaining is the deeper structural issue of just how and why so much implicit embedded leverage built up in the “system”, such that billions of dollars were being supported by little more than a dime and a whistle.

      My view of the genesis of the crisis has all along been that the mounting trade deficit, with its corresponding de-industrialization, has been a key causal node in the formation of the generalized credit bubble. And that, in turn, is rooted primarily in the restructuring of corporate rents by globalizing MNCs, to which Wall St. is joined at the hip like a Siamese-twin colossus bestriding the world, to take advantage of currency, labor, tax, and regulatory arbitrage, such that, even in the context of global crisis, residual asset “values” can be snapped up for a dime and a whistle. How long such a regime can last, (not least since it actually depends on a manipulation of laws and regulations, not least those “respecting” IP), is anyone’s guess. But the policy of OECD stagnation to further its restructuring agenda, while shifting its investment aims toward the actually growing “developing” world seems evident to me. But then what do I know? I’m just a marginal “outsider” on the lunatic fringe.

  19. Janet Tavakoli

    I agree with Dean Starkman that raising public awareness is important.

    When it comes to CDOs, my work speaks for itself. Yves contacted me (not using her real name, Susan Webber, and not identifying herself as a consultant. At the time, the web didn’t reveal that information, either. I did not know of this blog at the time, and did not recognize the pseudonym.) when she was looking for background on Magnetar and she was writing her book.

    This is her email:

    I’m a fan of your work and always enjoy your candor on less than savory practices on Wall Street. I see you spoke to the Wall Street Journal about Magnetar last year.

    I am doing a  a big think book on the crisis, and may also wind up doing some related articles (not op eds, but more detailed journalistic treatment of some of the issues that are too detailed to fit the bigger sweep of the book).

    I imagine you are very busy, but I hoped I could get you for  a few minutes on Magnetar in particular, and if you had time, on some of the other CDO so-called relative value plays. If so, please let me know what dates and times might suit you.

    Cheers,

    Yves

    I was tied up and couldn’t help, and referred her to my body of work.

    As a matter of fact, my 2003 book did out the structure later employed by hedge funds, and I was contacted about using it for MBS. The book was also unique in that I stated these structures posed risk to investors and the ratings were incorrect. I also debunked superseniors in that book.

    The first page of the preface of that book brings up fraud, and that is unique to professional books in structured finance (or at least unique for years). I gave many examples of misleading ratings and structures that disadvantage investors. It was the only reference at the time for how CDSs were used to game the system.

    The Sept. 2008 edition brings readers up to date. There were many flawed structures and the “Magnetar” structure (which isn’t Magentar’s) is just one of many of the gamed structures employed. I also explained how it was a massive Ponzi scheme.

    In between, I wrote professional articles debunking ratings, games with CDOs, invisible hedge funds within banks, and more. Regarding ratings and CDOs, I started Joe Mason on this course in 2003, when I met him at a Fed conference in Chicago. Up until then, he was unaware. I also spoke to the financial press and wrote about it when I could.

    I’ve also spoken about misratings in public forums, including to the IMF in 2005, a partial clip is still on my web site.

    In my book on the crisis, DEAR MR. BUFFETT (Wiley, January 2009), I called the CDO games “hawala,” wrote about the massive Ponzi scheme with many interconnected players. Ponzi schemes are of course, illegal. I’ve also spoken out publicly about the fraud. My position is reflected in a clip on my web site.

    The main reason that a timeline of information is helpful is to establish that professionals knew or should have known that what they were doing was incorrect and securities were created and sold in ways that materially misled investors. Moreover, accounting losses that should have been taken by financial institutions were not taken, and this went on for years.

    Establishing a time line of available information that refutes the distorted dialogue one hears at Congressional hearings serves to keep regulators, finance professionals that participated in scams, rating agencies, and more on the hook for their actions (and inaction).

    My expertise includes CDSs and CDOs, and encompasses other derivatives. My web site’s “press” section includes the information I put in the public domain. Recent comments include problems in sovereign CDSs, and commodities. I’m currently looking at issues with CMBS, foreign exchange trading, and sovereign credit default swaps.

    1. john c. halasz

      “Recent comments include problems in sovereign CDSs, and commodities. I’m currently looking at issues with CMBS, foreign exchange trading, and sovereign credit default swaps.”

      Links?

    2. Skippy

      Ref: When it comes to CDOs, my work speaks for itself. Yves contacted me (not using her real name, Susan Webber, and not identifying herself as a consultant. At the time, the web didn’t reveal that information, either. I did not know of this blog at the time, and did not recognize the pseudonym.) when she was looking for background on Magnetar and she was writing her book.

      Skippy here…Janet if you would humor me for a moment…I would like to point out that almost two years ago I under took the endeavor of researching Yves / Susan’s back ground and found it quite easy ie: educational background, work history, her time in Australia (Fairfax articles {one of which I gave her grief over..eh Yves…Goldman *Sacks* is a good buy), to whit she hides nothing and your ability to search such easily available information is not cause to cry foul play or nefarious acts.

      In fact your use of personal e-mails is (I would submit to the NC crowd) indicative of a diminished position aka lashing out for the purpose of retaining credibility in a playing field approaching redundancy? You could have sorted this out incognito via direct contact with Yves and to the benefit of both you and Yves, and to all of us little people…eh.

      Skippy…you seem to be protecting your brand for monetary reasons…cough expert testimony…do I need to do a bit research there on a P/L bias case by case?

      PS. Janet were all in the cannibals pot but, that doesn’t mean we need to baste each other…eh.

  20. Janet Tavakoli

    From: Yves Smith [mailto:yves@nakedcapitalism.com]
    Sent: Tuesday, August 11, 2009 11:40 PM
    To: info@tavakolistructuredfinance.com
    Subject: Media inquiry of sorts

    Janet,

    I’m a fan of your work and always enjoy your candor on less than savory practices on Wall Street.

    I see you spoke to the Wall Street Journal about Magnetar last year.

    I am doing a  a big think book on the crisis, and may also wind up doing some related articles (not op eds, but more detailed journalistic treatment of some of the issues that are too detailed to fit the bigger sweep of the book).

    I imagine you are very busy, but I hoped I could get you for  a few minutes on Magnetar in particular, and if you had time, on some of the other CDO so-called relative value plays. If so, please let me know what dates and times might suit you.

    Cheers,

    Yves

  21. Janet Tavakoli

    In response to an email I just received, yes, the 2003 book specifically details the conflict of interest between CDO managers and investor in CDO structures, including the “Magnetar” structure. It also explains why the ratings in such structures do not reflect the risk.

    Moreover, I give specific examples of similar CDO issues where the investment bank retained part of the residual excess spread, including a deal (CSFB’s York Funding) involving “sophisticated” investors that was settled out of court.

    There are a lot of ways the system was gamed, and the above are just a few of the examples I gave. The 2008 updated edition includes even more. I tried to choose the most useful examples, because comprehensive coverage would require an encyclopedia.

    1. Yves Smith Post author

      I must note several items:

      !. Of all the people I reached out to for help on the Magnetar story, you were the only one who faIled to provide substantive assistance.

      2. Having been alerted that I was on to Magnetar, you further did not use the opportunity, either by speaking with me or via independent efforts, to advance the public’s understanding of their highly destructive activities. My contact to you was shortly before I submitted my draft. My book did not come out more than six months later, in March 2010; ProPublica’s report was in April.

      3. I have not read any of your books.

      4. Your comment on my use of my nom de blog appears to imply I was engaging in some sort of ruse in contacting you. I told you the basis for my inquiry, and I am far better known by my nom de blog than my real name. Had you been concerned about competitive issues (and anyone interested in CDOs might conceivable be a competitor or a potential client) you could easily have found the name of my consulting firm from this blog. It has been clearly displayed since its inception. From that you could have found my real name (as journalists and conference organizers routinely do) and ascertained the nature of my consulting practice, which is not at all in the same space as yours. There were also, contrary to your assertion, references on the Web specifically mentioning both my nom de blog and my real name because I had been making conference and media appearances since April 2008.

      4. Your message above implies that you referred by e-mail to your 2003 book in your reply. No such thing happened. In fact, you referred me to your more recent book, which was irrelevant to my query. Per your message to me:

      From: Yves Smith
      Date: August 25, 2009 9:01:02 PM EDT
      To: “Janet Tavakoli”
      Subject: Re: Yves: Harry Markopolos and “Buffett, Tavakoli Flag Ponzi Scheme Bigger Than Madoff’s” Bloomberg News

      Janet,

      Thanks so much for writing. Yes, I have the CDS/CDO issue in the draft (now in copy edit) with particular names mentioned. Thanks for making sure I did not miss it.

      Cheers,

      Yves

      On Aug 25, 2009, at 7:36 PM, Janet Tavakoli wrote:

      Harry Markopolos is now warning about credit derivatives: http://www.businessinsider.com/harry-markopolos-cds-fraud-will-make-madoff-look-small-time-2009-8

      I agree with him and explained the details of the Ponzi scheme in my new book Dear Mr. Buffett:

      “Buffett, Tavakoli Flag Ponzi Scheme Bigger Than Madoff’s”: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.OzozJQwrjQ – Bloomberg News –March 5, 2009

      There are / have been a number of CDS related lawsuits over the years. Most involve information asymmetry.

      Current lawsuits often revolve around protection buyers “doubling up” in the same CDO.

      Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors.

  22. Skippy

    RE: Tavakoli Structured Finance ® (TSF®) provides expert experience and knowledge about maximizing value in the capital markets in the face of complexity and uncertainty. Clients include financial institutions, institutional investors, and corporations with a focus on corporate finance and structured finance.

    http://www.tavakolistructuredfinance.com/

    Skippy here. My personal favorite ie: Definition of Structured Finance: sheltering corporations from operating liabilities.

    Skippy….duality…nuff said.

  23. Valdis Krebs

    The financial meltdown was an interconnected mess. With much hidden data/information it is hard to put a picture together of “what happened.”

    I find that visualization helps the common person [non-financial expert] get a better grasp of what happened. I have “connected the dots”, visually, for several clients trying to get a better understanding of who is involved and how. An simple example is shown here…

    http://orgnet.com/meltdown.html

    IMHO we need more visualizations, not yards of text, to better understand the relationships and flows that created the meltdown.

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