The Cassandra of Credit Derivatives


Consultant Janet Tavakoli made no bones about the risks lurking in structured finance vehicles

"Who ruined more lives, al Qaeda or this mortgage mess?" Janet Tavakoli doesn't mince words, even if she might occasionally offend. The principal of Chicago-based Tavakoli Structured Finance, she has been a leading critic of subprime-lending practices and other financial schemes that promised outsize payouts without worry. She has also been right—and much in demand.

Some watch for her name in The Wall Street Journal or her face on Bloomberg TV; some buy her two books on collateralized debt obligations and credit derivatives; still others pay good money for her advice on how to avoid serious problems when issuing or packaging collateralized debt. "What she has prognosticated in this area has been born out in good stead," says Eric Gleacher, founder of Gleacher Partners, a New York investment bank. "She's been doing this for 20 years," during which she has foretold the collapse of the thrift industry, First Alliance Mortgage, Long-Term Capital Management, Enron, and others that misjudged the risk in debt and derivatives.

Though the world of finance seems arcane and, at times, utterly incomprehensible, things are basically simple, Tavakoli says over lunch on a cold Friday at the Midway Club, just off North Michigan Avenue. Lenders overspend on compensation while underestimating risk. They push products on unsuitable borrowers in order to generate commissions and fees, and then package the loans into securities that will generate fees for the investment banks. No one wants to ask tough questions until it's too late. "This has been the largest Ponzi scheme in the history of the capital markets," she says. "At some point, the business model just doesn't work."

Tavakoli is a Chicago native who earned a degree in chemical engineering at the Illinois Institute of Technology in 1975 and subsequently spent two years in Tehran with her then-husband, an Iranian citizen. She returned to Chicago in 1979 during the Iranian revolution and enrolled in University of Chicago Graduate School of Business, earning her MBA in 1981 and using it to move from chemistry to finance. "The math part was easy for me," she says. "The interesting part was the value."

Public Information

Tavakoli analyzed collateral debt obligations (CDOs) at a series of investment banks, including PaineWebber, Merrill Lynch (MER), and WestLB. She was living in London when she left WestLB to start her own firm. It's a one-woman show, but Tavakoli says that in Chicago, that's easy to do. She has a network of other consultants who can work with her as needed, and the city's universities have many students looking for finance internships. She won't discuss her client list, saying that would just help her competitors, but it seems to include CDO issuers and lawyers who need expert testimony in securities fraud cases.

Tavakoli relies entirely on information in the public domain for her research, although she notes that many people don't search all the different sources and don't analyze properly what they do find. "When you don't understand something," she says, "it should raise a red flag, because it isn't that hard to understand."

As the subprime debacle widens, media demand for Tavakoli seems assured, as does demand for her analytics, leaving her less time for bridge, one of her hobbies. "Bridge is about luck, skill, and your relationship with your partner," she says—similar to the qualities needed by successful consultants.

Logue is a writer for BusinessWeek Chicago.

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