Guest Post: Commentary On Neil Barofsky's Upcoming TARP Report

Submitted by Janet Tavakoli from Tavakoli Structure Finance

My comments on the upcoming TARP report will echo my February 4, 2009 comments.  TARP’s inspector general Neil Barofsky already anticipates losses.  Unfortunately, the losses are right on schedule.
 
Let’s hope that Barofsky did not rely upon Blackrock for uncovering problems.  Blackrock was involved in disturbing activity as a CDO manager.  Among other things,  Blackrock Financial Management was CDO manager in some horrific 2007 vintage CDOs such as Pacific Pinnacle CDO ($1 billion; closed 1/1/07; Event of Default 2/4/08); Pinnacle Point Funding ($2B closed 6/7/07; acceleration 12/13/07); Tenorite CDO I ($1 B closed 5/11/07; liquidation 2/7/08); or Tourmaline CDO III ($1.5 billion closed 4/5/07; Event of Default 3/31/08). 
 
Blackrock is evaluating Fannie Mae and Freddie Mac.  It is also managing Maiden Lane [the stuffee for Bear Stearns’s assets via JPMorgan Chase, and the underlying positions of AIG’s credit default swaps that included Goldman’s trades and Goldman’s CDOs, (via SocGen, Calyon, etc.) along with many problematic Merrill deals] and was awarded no-bid government contracts to manage other TARP-related entities.  Blackrock is too close to the problem to be objective, and no bid contracts were inappropriate.  Given its track record, it seems to me that, Blackrock has an incentive to cover-up problems.
 
In the secondary trading market, CDOs such as the Goldman Abacus deal reported on yesterday by Bloomberg’s Jody Shenn are called WTF deals.  I call Blackrock’s no-bid awards CYA contracts.
 
From above interview:

Janet Tavakoli, president of Tavakoli Structured Finance, talks with Bloomberg's Pimm Fox about proposals to deal with troubled assets on the balance sheets of U.S. banks that are clogging the U.S. financial system.

Janet Tavakoli is for proposals that require private equity investors to put up 20% of their own money. The U.S. Treasury will put up 80% with the following terms: it gets paid back first, receives interest on its investment, and gets a share of the profits. This is a way of ensuring market pricing and allowing the banks to delever while the Treasury (the only source of a large enough balance sheet) levers up with the protection of a 20% cushion and mark-to-market pricing.

Among other reasons to urge mark-to-market accounting, there is a multiplier effect of losses (for some securitizations) because” total loss” tranches were transferred to other securitizations (especially synthetically), so that some CDOs and CDO-squareds are largely worthless. No one can tell which securitizations have this problem without analyzing each one. The Treasury will buy a pig in a poke. This is not a matter of opinion or “different views” it is a matter of fact.