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Scott Patterson and Janet Tavakoli Debate: Did Quants or Malfeasance (and Leverage) Cause the Financial Crisis?

06/01/2010 05:12 am 05:12:01 | Updated May 25, 2011

Scott Patterson, reporter, Wall Street Journal, and author of The Quants, and Janet Tavakoli, president, Tavakoli Structured Finance, Inc., author of Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (a book for laymen on the causes of the financial crisis and how to fix it) debated the causes of the financial crisis (March 31, 2010 at 12:30 pm ET) on BNN's Headline with Howard Green. (Video below.)

Over the years, I have written about and exposed flawed models, but I maintain that high leverage against assets that could only go down in value (and the subsequent seize-up of funding due to nervousness about malfeasance) was the cause. (See also: "Wall Street's Fraud and Solutions for Systemic Peril," TSF, September 29, 2009, and "Wall Street and Washington Hope You are Gullible: Disappoint Them," HuffPost, February 14, 2010.) Scott Patterson argues that over-reliance on models and mass delusion was the cause.

While I've written about flawed models, and how some hedge funds imploded because of them (LTCM, Peloton Funds, a Carlyle Fund, and more), the causes of the financial crisis were not chiefly due to these models. Investigation of the initial risks revealed the problems, and the crisis was preventable. So far, there have been no meaningful financial reforms to address the problems.

Part One at 7:48:
Banks used models as an excuse to get Congress to eliminate the previous 12:1 leverage limits. At times leverage exceeded 40:1. I also assert that securities models were flawed, but obligatory due diligence would have overcome these problems: "You can't blame the slide rule." False data was fed to models. A lot of people should be investigated for accounting fraud and securities fraud. "A lot of people should be held accountable; a lot of people should be going to jail."

Part Two at 2:40:
The SEC dropped a seminal investigation into collateralized debt obligations (CDOs) in 2005. The SEC turned a blind eye to securitizations it could have and should have shut down. Banks are using PR to cover-up their role in the crisis.

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