on 7 September 2003
As a finance professional with almost ten years of experience, I was both educated and entertained. I especially enjoyed Tavakoli’s explanations of abuse in a variety of structured finance deals both past and present. She maintains that Sarbanes-Oxley is no deterrent as long as corporations instead of individuals feel the brunt of the consequences, but she also offers solutions.
I finally understand Enron’s abuse of offshore vehicles, the involvement of investment banks, and insurance companies (sureties). Tavakoli even explains motives and why finance professionals went along with it: profits, politics, and pluralistic ignorance. She makes the case that the players were well aware of what they were doing. She uses game theory to describe the moves the players made against each other when they tried to recover losses - or avoid making payments against claims - after Enron went bankrupt.
Tavakoli explains why banks have left themselves open to dangerously high concentrated credit exposures, fraud, and structured finance gaming. She explains how false social evidence, lack of due diligence, and lack of sufficient reserves further contributed to the problem.
The rating agencies also get their due. She recommends viewing ratings on structured finance products with skepticism, especially where documentation risk and cash flow diversion are involved. I was astonished to learn that products are being sold as AAA rated product, when it really is more like a AA rated product, or even worse.
The explanation of synthetic securitizations using credit derivatives is the best I?ve ever read. Tavakoli thoroughly discusses the language risks, cash flow risks, and rating risks. She compares a cash CDO with a 5-year maturity synthetic CDO. This is the first time I fully understood how these deals work. I was surprised to learn that there is no standard definition of a super senior tranche, and no one ? not rating agencies, regulators, or bank managers has challenged this.
In summary, this book is even better than Credit Derivatives? by the same author, and that book was a very good book. This book belongs on the bookshelves of investors, structurers, regulators, and managers.