Simoleon Sense Reviews Janet Tavakoli’s Dear Mr. Buffett

About The Author (via TSF)

Janet Tavakoli is the founder and president of Tavakoli Structured Finance, Inc. (TSF), a Chicago based consulting firm providing expert experience and knowledge about maximizing value in the face of complexity and uncertainty. TSF provides consulting services to financial institutions, institutional investors, and hedge funds.Ms. Tavakoli was years ahead of the financial industry predicting lax underwriting, excessive leverage, and misrating of structured products would result in a global financial crisis.

What’s The Book About?

Dear Mr. Buffett, chronicles the agency problems, poor regulations, and participants which led to the current financial crisis. Janet accomplishes this herculean task by capitalizing on her experiences with derivatives, Wall St, and her relationship with Warren Buffett. One wonders how she managed to pack so much material in such few pages!

Unlike many books which only analyze past events, Dear Mr. Buffett, offers proactive advice for improving financial markets. Janet is clearly very concerned about protecting individual rights, promoting honesty, and enhancing financial integrity. This is exactly the kind of character we should require of our financial leaders.

Business week once called Janet the Cassandra of Credit Derivatives. Without a doubt Janet should have been listened to. I’m confident that from now on she will be.

Excerpts (Via Dear Mr. Buffett)

On online financial news:

“There is a reason we call it the Information Age, not the age of wisdom. Financial research often ends where the internet begins. Articles are frequently incorrect, urban legend is sometimes presented as face, and trivial errors sometimes become viral financial lore.”

On Buffett selling puts:

“It is as if the models were predicting the future net worth of an entire Harvard MBA class based on their first job out of school. It is possible they won’t be worth more in 20 years, but it isn’t likely, since their earning power is likely to rapidly grow.”

On Options:

Derivatives like stock options can be used to leverage a bet. They can also be used to cover a scoundrel’s tracks.”

Which ever option pricing model a corporation uses, the biggest fudge factor in determining value is the volatility assumption.”

The problem with financial products that make cheating easy is that cheats end to flock to them. The deck is already stacked in favor of stock option holders and against other shareholders….It is not ncessairly illegal if everything is fully disclosed, but in every instance, it is sleazy.”

On Hedge Funds:

” A hedge fund manager usually has an anecdote, an after the fact anecdote, about how he made a small fortune on a prescient  bet on, say, the renminbi. He will leave out the part about the large euro trade in which he lost a large fortune. The manager is rarely able to tell you about his current trades; he will calim he doesn’t want other managers to know his strategy.”

” In other words, underperforming hedge funds often resort t oleverage in a gamble to inflate returns.”

On financial products & mortgatges:

In finance, we make up a lot of fancy and diifficult to pronounce names and create complicated models to erect a barrier to entry that keeps out lay people. High barriers tend to protect high pay….before I look at the latest hot lable dreamt up, I look at the cahs to find out whta is really going on. I also ask a lot of questions.”

On the rating agencies:

” The rating agencies seem not to care about the market’s forgiveness since not only they have not apologized- a necessary, but not sufficient condition – they seem to feel the market should change. Specifically the market should change its point of view about what it expects from the rating agencies. yet it seems that the market has the right to expect rating agencies to follow basic principles of statistics.”

Closing thoughts

Rather than a complicated book on financial esoterica, Janet has created a simple guide to understanding the current crisis. This book is a must read for all students of finance, economics, and business. If you haven’t read this book, please do so.

Warning –This book is likely to infuriate you, and that’s a good thing! Janet provides indicting evidence and citizens may be tempted to initiate vigilante like witch trials. Please consult with your doctor before taking this financial medication.

-Miguel

You can purchase Dear Mr. Buffett by clicking here.

For more information about Janet Tavakoli please visit this website.