I didn’t — couldn’t — read every business book published during the past year, but I was still gob-smacked by the number of books that I did read in 2009, including a few just for fun. (Imagine that!) But among those that I read and reviewed in this space, these titles represent the ones that I thought were exceptional, have lasting value and were worth my time — and yours.
A few things that may have deserved inclusion didn’t make the cut for one reason or another, and some worthy titles that came out in 2009 won’t get reviewed until January. Them’s the breaks. You may have a few choices that aren’t here either. If you’d like to share, I’m always happy to get e-mail from readers. After all, you make this all possible.
Thanks for reading!
(Books listed in chronological order by review. Date of original review follows each title. Full reviews of all books on this list are online at www.richardpachter.com)
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. Barry Ritholtz. Wiley. 332 pages. 6/1/09
Economist and investment guru Barry Ritholtz’s blog, The Big Picture, is a mandatory daily stop for many. This honest, unvarnished look at the forces that screwed up the U.S. economy is a worthy candidate for a time capsule so that future financial operators can avoid the same traps that we fell into. Or at least howl when history repeats itself.
“Our results show that political connections play an important role in a firm’s access to capital. The effects of political ties on federal capital investment are strongest for companies with weaker fundamentals, lower liquidity and poorer performance — which suggests that political ties shift capital allocation towards underperforming institutions.”
-Ran Duchin and Denis Sosyura, University of Michigan School of Business
File this one under “Duh!”
U.S. banks that spent more money on lobbying, were politically connected with the Fed, or had close ties with Pols, were more likely to get government bailout money.
That stunner is according to a new study released this week by two professors at the University of Michigan, Ross School of Business.
Profs Ran Duchin and Denis Sosyura paper also found that “TARP investment amounts” were positively correlated to banks’ political contributions and lobbying expenditures. Overall, the effect of political influence was strongest for the most poorly performing banks.
Here’s a Reuter’s excerpt:
“U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.
Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan’s Ross School of Business.
Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.
Political influence was most helpful for poorly performing banks, the study found.
Banks with an executive who sat on the board of a Federal Reserve Bank were 31% more likely to get bailouts through TARP’s Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26% more likely to get capital purchase program funds.”
Is there anyone in this country that finds this data remotely surprising . . . ?
In response, the government implemented a $700 billion bailout and has since adopted a series of rescue measures that put U.S. taxpayers on the hook for a potential $14 trillion, author Barry Ritholtz says.
The panic and the U.S. reaction spawned a wave of books. Money Bookshelf editor Gary H. Rawlins picks some of the better ones. The selection includes books that point the finger at Wall Street firms and their CEOs, that blast the government for excessive bailouts, that assail the U.S. economic policy triumvirate for letting the inflation genie out of the bottle, and that explain arcane financial derivatives and how they acted as viral agents spreading the crisis to the global economy.
•Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves by Andrew Sorkin (Viking Adult, $33). Arguably the definitive history of the banking crisis, a blow-by-blow account of how decisions made on Wall Street and in Washington in the past decade led to the crash of the global financial system.
•Bailout Nation: How, Greed and Easy Money Corrupted Wall Street and Shook the World Economy by Barry Ritholtz (Wiley, $25). Explores how the U.S. evolved from a rugged independent nation to a soft Bailout Nation, where financial firms are allowed to self-regulate in good times, but are bailed out by taxpayers in bad times.
•The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System by Charles Gasparino (HarperBusiness, $28). Argues that the financial collapse was just the latest in a 30-year pattern of executive excesses, unsustainable leverage, massive hidden losses and unreliable computer models. Gasparino is not optimistic that something similar won’t happen again.
Barry Ritholtz has written a must read book (assuming you’re interested in how we got in the pickle we’re in) called Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. Basically I underlined the entire book when I read it.
Bill Fleckenstein (Foreword). Wiley 2009, Hardcover, 332 pages, $14.55
Reading back over my notes I was re-struck (is that a word?) by Barry’s point of view on what drove the vaunted American Consumer-led economy (we buy all the world’s doo dads): Real Estate.
According to a 2005 study by Asha Bangalore of Northern Trust Company, 43 percent of all new job creation between November 2001 and April 2005 was real estate related.
So what did that mean . . .
The housing boom was creating jobs for builders, contractors, real estate agents, mortgage brokers, and even employees at Home Depot and Lowe’s. But the most significant impact to the economy came from home equity lines of credit (HELOCs) and cash-out mortgage refinancings. With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living.
This was one of the single biggest and most unexpected elements of the debt-driven economic expansion. Outside of real estate, employment gains were modest and real wage gains flat. It was debt that drove the increase in consumer spending. Mortgage equity withdrawals normally a small portion of consumer debt‚exploded.
Without this home equity-based consumption, the nation would have been in recession territory, with GDP flat to 1 percent. At least, according to an unofficial Fed study by none other than Alan Greenspan
And this . . .
The wealth effect of home price appreciation is much more widely distributed than stocks. This made the generational-low interest rates the single largest factor that resuscitated the economy. Sure, tax cuts, deficit spending, increased money supply, war spending, and the like all played a role‚but it was the ultralow rates and the mortgage equity withdrawal they allowed that dominated U.S. economic activity.
As a result, the economy will continue to look crappy to wage earners for some time to come (assets are still mispriced).
Everyone knows that senior execs at Bear Stearns and Lehman Brothers were paid largely in stock, and that they lost most of their wealth when the companies collapsed, right?
Turns out, not so much:
“Three professors at Harvard are disputing that logic in a new study, saying it is an urban myth that executives at Bear and Lehman were wiped out along with their companies.
Though the chiefs at both investment banks lost more than $900 million in their stock holdings, the professors argue that it is important to also consider all the riches the bankers took off the table in the years preceding the crisis.
At Lehman, the top five executives received cash bonuses and proceeds from stock sales totaling $1 billion between 2000 and 2008, and at Bear, the top five received more than $1.4 billion, according to the study, which was released on Sunday night on the Web site of the Program on Corporate Governance at Harvard Law School.
The payouts came in the form of cash bonuses as well as thousands of shares of stock that the executives sold as the share prices of their companies soared. Most of the executives sold far more shares during that period than the number they held when their companies hit bottom.”
This week marks the official publication of the longest, most comprehensive, and highest-priced ($32.95!) work of Crisis Lit yet, New York Times reporter Andrew Ross Sorkin’s epic Too Big to Fail, which clocks in at a whopping 539 pages (minus the index). “Too Big to Read,” you say? Not for Moe Tkacik, one of 7.6 million Americans left unemployed by the current recession, who has compiled this cheat sheet to the crisis literature thus far, complete with some highly subjective Moody’s-style ratings.*
Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis — and Themselves, by Andrew Ross Sorkin
WHAT: A virtually minute-by-minute account of the scariest hours of the crisis, beginning in the aftermath of the seizures of Fannie Mae and Freddie Mac and concluding with TARP and the hastily assembled near-afterthought that was the $180 billion AIG bailout.
BEST BIT: On page 120 appears the first print mention of the rumored affair between Joe Gregory, the widely reviled chief operating officer of Lehman Brothers, and Erin Callan, the statuesque, blonde, wholly inexperienced tax attorney promoted to chief financial officer of the firm at the beginning of the year. According to the book, Callan separated from her husband “around the time” of the promotion, after which she and Gregory “became inseparable.”
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Lawrence McDonald with Patrick Robinson
WHAT: The story of the firm’s failure as told through the perspective of a group of in-house dissidents who saw disaster approaching back in 2005 and tried repeatedly (and vainly) to warn CEO Dick Fuld. One of the most compelling of the current crisis chronicles and possibly the most engagingly written.
BEST BIT: In a meeting of the bank’s executive committee in the fall of 2006, fixed-income chief Mike Gelband appealed to Fuld to go bearish on the market, and launched into a lengthy explanation of the dangers posed by the pending collapse of massively leveraged structured investment vehicles (or SIVs):
The chairman didn’t get it. But he realized he needed clarification. In front of Mike, he called Henry Paulson, the secretary of the United States Treasury and a former CEO of Goldman Sachs. Dick did not even try to get into the details of the problem, and quickly handed the phone to Mike, who pointed out with immense clarity the serious problems recently developing in the asset-backed commercial paper market and its deadly potential impact on the giant leveraged SIVs, to which Wall Street and the largest commercial banks were exposed. Mike thought this would lead to a serious credit freeze, one that he believed was shimmering on the horizon. To this day, Henry Paulson, with a supreme grasp of the subject, insists that the first person ever to warn him of the coming catastrophe was Mike Gelband.
About eighteen months and $200 billion in perversely ill-advised commercial real estate investments later, Paulson counsels Fuld at a private dinner to begin selling off assets with all deliberate speed — and Fuld tells him he’ll do so on his own watch, thank you very much.
House of Cards: A Tale of Hubris and Wretched Excess, by William Cohan
WHAT: A play-by-play account of the collapse of Bear Stearns, told largely in an “oral history” style that sacrifices mention of former CEO Jimmy Cayne’s famous reefer-smoking habit for Cayne’s completely insane uncensored opinion of Tim Geithner.
BEST BIT: It’s ancient history, but this bit on former Bear chairman Ace Greenberg should not be overlooked:
Greenberg’s most peculiar donation was his $1 million gift, in June 1998, to pay for Viagra prescriptions for men who could not otherwise afford them. Most people couldn’t resist thinking that Greenberg had donated a million dollars for homeless men to have sex. He defended the gift despite the criticism. “I own stock in Pfizer,” he told the New York Times, referring to the drug’s manufacturer. “So It’s not altruistic. You can quote me on that … If you ask me how long I’ve been interested in the subject, I guess you can say I’ve been interested in it since I was 13 or 14.”
The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System, by Charles Gasparino
WHAT: How It All Happened, as told through the greedy, arrogant, overpaid, and power-addicted assholes who made fortunes setting the stage for a multi-trillion-dollar meltdown and 17 percent real unemployment rates! This is the most comprehensive portrait of the characters that hastened the crisis.
BEST BIT: In a book as redolent of juice as this, it’s almost a shame to boil it down to another anecdote about Jimmy Cayne. But we couldn’t pass up this anecdote from Cayne’s old buddy Phil “Filthy” Cohen, with whom Cayne has since had a falling-out:
Cohen recalls one such incident of Cayne’s free-living lifestyle: Cayne called him to his forty-eighth floor corner office with its great view of the East River in Lower Manhattan to discuss some firm business. After a couple minutes of small talk, Cohen says Cayne reached down into his desk and pulled out a blue Bromo Seltzer bottle. (Bromo Seltzer is a white powdery antacid.) “What do you think’s in here?” Cayne said, according to Cohen’s recollection. “Bromo Seltzer?” Cohen asked, slightly bewildered. “No, it’s filled with cocaine,” Cayne said with a smile. Cohen never checked to see if that was true, and Cayne in an interview says he has never done coke (he also called Cohen’s account “patent bullshit”).
And Then The Roof Caved In: How Wall Street’s Greed And Stupidity Brought Capitalism To Its Knees, by David Faber
WHAT: A slim yet substantial book based on Faber’s riveting (and horrifying) CNBC special “House of Cards” that takes readers from the mosquito-ridden swimming pools of option-ARM ghost towns to a Norwegian town bankrupted by ill-advised investments in “synthetic” bonds on the mortgages left behind.
BEST BIT: Chapter five consists mostly of a heated face-off between Alan Greenspan and FDIC chairman Sheila Bair over whether the government could have prevented the mortgage meltdown. A sample from Bair:
I mean, we’re not talking about rocket science here. We’re talking about underwriting at the fully indexed rate. Meaning when you make a loan, make sure they can take it when it resets, not at the initial [teaser] rate. We’re talking about verifying income … Seventy five percent of subprime loans end up being for refinancings … These were not new homeowners, but people who had been in their homes for many years and might have had some equity before they got [confusing adjustable rate mortgages]. It’s a very sad chapter for the history of mortgage finance in this country …
And the old Maestro:
But remember, the ultimate regulation is essentially a planned economy in which everything is constrained. You can’t do anything without getting permission, and these systems collapse.
Ah, yes … well, at least we can trust the unregulated free market to avoid systemic collapse!
Fool’s Gold: How The Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted By Wall Street Greed And Unleashed A Catastrophe, by Gillian Tett
WHAT: The (chock full of hubris!) story of the folks who brought you the credit default swap and the synthetic collateralized debt obligation, by a Financial Times columnist. Ironically, they invented these things at JPMorgan — the only bank that didn’t almost explode as a result!
BEST BIT: On page 56, a former “journalist from Dow Jones” who “had extensive contact” with the derivatives team is quoted:
When you heard these guys speak, you realized that they really believed this stuff. They thought they were the smartest guys on the planet. They had found this brilliant way to get around the [Basel] rules, to play around with all this risk. And they were just so proud of what they’d done.
The journalist is former “Page Six” editor Paula Froelich.
Last Man Standing: The Ascent Of Jamie Dimon And JPMorgan Chase, by Duff McDonald
WHAT: A comprehensive biography of JPMorgan Chase CEO Jamie Dimon, whose cash-hoarding ways and disdain for derivatives helped make him the undisputed victor — the press release goes so far as to dub him a “hero” — of the financial crisis.
BEST BIT: Dimon is relentlessly winsome for a banker, from the weird outfits that won him the distinction “absolute worst dresser” at Harvard Business School to his love of Shakespeare and Sinatra, but this bit of brown-nosing last October was our favorite detail:
Ever a student of history, Dimon sent Paulson a note including a citation from a speech Theodore Roosevelt made in Paris in 1910: “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.
(Which we would not have found as entertaining had we not read the following book … )
In Fed We Trust: Ben Bernanke’s War On The Great Panic, by David Wessel
WHAT: A well-reported but restrained chronicle of the crisis as seen from the perspective of the Federal Reserve and its endearing chairman Ben Bernanke, by The Wall Street Journal‘s economics correspondent.
BEST BIT: Wessel’s biggest service is his abridged history of the Federal Reserve, which was created largely in response to the Panic of 1907, in which James Pierpont Morgan personally bailed out “the Bear Stearns of his day,” Knickerbocker Trust, to avert systemic disaster.
One constant through both panics, though, was a largely absent commander in chief. As Morgan wheeled and dealed, Teddy Roosevelt was hunting bear in the canebrakes of northern Louisiana. When he finally surfaced a few days later, the New York Times reported archly that “he had added several deeper shades of tan to the bronze acquired during the summer months.”
A Failure of Capitalism: The Crisis of ‘08 And The Descent Into Depression, by Richard Posner
WHAT: A painfully dry explanation of the crisis by federal judge, legal scholar, prolific author, and Atlantic blogger Posner.
BEST BIT: Those who keep secret rosters of public intellectual fantasy teams will enjoy Posner’s defense of the “rational” role of emotion and greed on Wall Street decision-making on page 82:
Emotion does play a role in the behavior of businessmen and consumers, as of all human beings, but it is not necessarily or even typically irrational. It is a form of telescoped thinking, like intuition, and often it is superior to conscious analytic procedures.
Wait, wasn’t that the point of the Malcolm Gladwell book that Posner mercilessly skewered a few years ago in The New Republic?
Bailout Nation: How Greed And Easy Money Corrupted Wall Street and Shook The Economy, by Barry Ritholtz
WHAT: A comprehensive crisis scrapbook compiled by the money manager behind the popular financial blog the Big Picture in a quippy, no-nonsense voice that sometimes successfully channels Barney Frank.
BEST BIT: “The Naughty Child Index” (page 206), in which the most notorious bank failures are explained in terms of the types of wayward children who were apparently running them.
Lehman Brothers is like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, so no one is surprised when the dog turns around and bites him. But the kid hurts only himself and no one else. No one really cares that much. Bear Stearns is the little pyromaniac — the kid who is always playing with matches. He could not only harm himself, but burn the house down and indeed burn down the entire neighborhood. The Fed steps in to protect not him, but the rest of the block. AIG is the kid who accidentally stumbles into a biotech warfare lab and finds all these unlabeled vials. He heads out to the playground with a handful of them jammed into his pockets.
Busted: Life Inside The Mortgage Meltdown, by Edmund Andrews
WHAT: The New York Times economics reporter’s sometimes-excruciating personal tale of taking on a series of ever-scarier subprime mortgages in an attempt to foster domestic bliss with a second wife while chronicling the effects of credit addiction writ large for the newspaper.
BEST BIT: If you felt bad for Andrews when libertarian blogger Megan McArdle eviscerated him for failing to disclose his wife, Sandy Patty’s, two (pre-marriage) personal bankruptcies in the book, you’ll feel really bad for Patty, who moves across the country to marry her childhood sweetheart only to struggle to find work and submit herself to years of panicked 3 a.m. lectures from Andrews about how she doesn’t understand his financial woes or she wouldn’t be frittering away his paychecks on “extravagances” like … fresh orange juice for the kids.
*Moody’s bond credit ratings start at Aaa (Prime) and then descend through Aa1, Aa2, Aa3, A1, A2, A3, and then Baa1, Baa2, and so on.
There may be five stages of grief, but economics blogger Barry Ritholtz argues there are 10 stages of bailouts, all of which cause taxpayers grief. For example, a company (think American International Group or Bank of America) risks more money than it should. News trickles from insiders to industry-specific journalists. Corporate managers get antsy. The public panics. Later (hear those hooves?) government comes to the rescue.
In his raucous polemic, “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy,” Ritholtz, who writes “The Big Picture” blog and is chief executive of New York equity research firm Fusion IQ, argues that bailouts are a perversion of capitalism with a mind-bending cost to taxpayers. He figures government bailouts in the last century have cost $14 trillion. That’s more money, he calculates, than the combined inflation-adjusted costs of the Marshall Plan, Louisiana Purchase, race to the moon, New Deal, Vietnam War, Korean War, savings-and-loan crisis, Iraq invasion and NASA space program.
Bailouts violate Wall Street’s “eat what you kill” ethos, Ritholtz argues.
“There are … market players who fail to live or die by their own swords — and then expect to be rescued by others from their own folly,” he writes.
Ritholtz traces bad-idea bailouts back to the early 1970s, when the government saved Lockheed Aircraft Corp. and Penn Central Railroad. Lockheed had been in trouble for years, Ritholtz notes, losing a combined $10.8 million in 1969 and 1970, and had miscalculated on several big U.S. military projects. It got $250 million in loan guarantees. Penn Central, which in 1970 was America’s largest passenger railroad, also had mounting losses; it got $125 million in loan guarantees. In 1976, Congress spent $7 billion in operating subsidies for what was left of Penn Central and five other flailing East Coast rail lines.
“If Lockheed was the government’s first gulp of bailout elixir,” Ritholtz writes, “Penn Central was a big gulp that opened the floodgates for the bailout binge that was to come.”
By saving Chrysler Corp. with $1.5 billion in loan guarantees and $2 billion in commitments or concessions from owners, stockholders and others, the government may have saved 200,000 jobs, Ritholtz writes, but it also forestalled changes that could have prevented further disaster. If Chrysler had failed, he reasons, Ford and General Motors might have rethought their designs and created more attractive, efficient cars. And, he argues, the United Auto Workers, having seen the loss of thousands of union jobs, might have traded pension guarantees and health-care benefits for equity in the remaining Big Two. Carmakers would have been stronger going forward, he argues.
Ritholtz says President Ronald Reagan ushered in a deregulation trend that blossomed into nonregulation, or as he calls it, nonfeasance. Disaster followed, he says.
The 1999 repeal of the Depression-era Glass Steagall Act eliminated rules prohibiting bank holding companies from owning other financial companies. Minus Glass Steagall, Ritholtz writes, the new banking-center companies started underwriting all sorts of exotic products, including credit default swaps and collateralized debt obligations.
Ritholtz finds two main villains behind the current crisis: former Federal Reserve Chairman Alan Greenspan and former President George W. Bush. Greenspan, he said, allowed the housing bubble to inflate by cutting and keeping the federal funds rate, the interest rate at which banks lend to one another, below 1.75 from December 2001 to September 2004.
Although he blames President Bill Clinton for allowing the repeal of Glass Steagall and the passage of the Commodity Futures Modernization Act, which exempted derivatives from regulation, Ritholtz says Bush caused more damage making bad choices for leaders of the Securities and Exchange Commission and Federal Reserve and Treasury Department and for letting his free-markets-reign-supreme ideology rule.
Ritholtz covers the topics in a conversational, digestible way. People who missed the recent news, or slept in economics class, will emerge enlightened, and maybe enraged. They may also be exhausted by the book’s steady spray of superlatives. Reading them all was like having my head banged against a metal locker: “massive” (bam!) “tremendous” (bam!) “unbelievably enormous” (bam!).
“Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” by Barry Ritholtz, 332 pages, Wiley, $24.95.
Matthew Crowley is a copy editor for the Business Press’ sister publication, the Las Vegas Review-Journal. He can be reached firstname.lastname@example.org or 702-383-0304.
For the past three decades, finance replaced doctor or lawyer as the smart career choice. The cleverest people gravitated to business schools and then to Wall Street, some detouring to Silicon Valley during the dot-com boom. So how did these masters of the universe create the worst global economic misery in 80 years?
It was stupidity and arrogance, pure and simple, fund manager and TheStreet.com columnist Barry Ritholtz contends in Bailout Nation, the same traits that led a previous generation of America’s best and brightest to the tragedy of Vietnam (and a group of more recent, less illustrious ideologues to the debacle in Iraq). At least
Camelot’s villains thought they were doing good for the world. The modern bankers and traders and quants and arbs who acted so irresponsibly, almost exclusively with other people’s money, were simply trying to make themselves obscenely wealthy.
These “idiots”, as Ritholtz often calls them, richly deserve every ounce of approbation he musters. He repeatedly contends that rather than being bailed out, they deserve to have been bankrupted, exposed as charlatans, hooted out of their professions, tarred, feathered, and in some cases jailed.
In his very readable book that will delight general readers as well as finance buffs, Ritholtz traces the history of US bailouts. He acknowledges that American capitalism was never purely laissez faire. From manipulating tariffs, to war, to attacking Barbary pirates, to railroad land grants, Uncle Sam has assisted commerce.
Moving to modern times, Ritholtz rightly rejects comparisons between the New Deal and later bailouts. Although the 1930s feature remarkably similar shrieks of socialist takeover and demagoguery over presidential loyalty and origins (Franklin Delano Rosenfeld, they said back then), the government response was quite different. The New Deal focused on sector reform and aid to victims while the present – and Ritholtz contends, less justifiable – effort provides direct aid to corporations often guilty of gross mismanagement.
The US conversion to doing the wrong thing to support business began, according to Ritholtz, with the bailout of Lockheed Aviation in 1971. In that and subsequent industrial bailouts of Penn Central Railroad and Chrysler Motors, the government became convinced the country and taxpayers had less to lose from a bailout than letting the companies fail. Ritholtz explodes that myth by simply asking how the US auto industry could possibly be in worse shape now if Chrysler had gone belly up 30 years ago?
Who stole my cape? The financial bailout era begins with the October 19, 1987, Black Monday crash, when the Dow Jones Industrial Average plummeted a harrowing 22.6%. That was a first intervention by the man Ritholtz assigns the greatest slice of blame for the current debacle, former US Federal Reserve chairman and financial superhero Alan Greenspan. (Oddly and disappointingly, the book barely mentions the government’s US$180 billion Savings & Loan bailout of the early 1990s. which at least superficially resembles the present crash.)
Greenspan’s predilection to meddle in equity markets combined with his paradoxical disdain for regulation in the name of free markets created a climate for excessive risk-taking. When Greenspan cut interest rates to all-time lows after September 11, 2001, it forced bond investors to search for new products for returns in an atmosphere where those best and the brightest had carte blanche to practice financial alchemy with disastrous results.
After Greenspan, Ritholtz assigns the greatest blame to the Fed, twice – for keeping interest rates too low and failing as a bank regulator; then to rating agencies Moody’s, Standard & Poor’s and Fitch for classifying risky bonds as Triple A; to the Securities and Exchange Commission, for loosening leverage restrictions on investment banks; to mortgage lenders for offering liar loans; to borrowers and home buyers for lying; to Congress for its complicity in all; to the big five Wall Street firms and their greed-addled chief executive officers for ignoring Ritholtz’s “first rule of economics: ‘There is no free lunch’.”
Too big to succeed Ritholtz also placed high in the blame game a figure that epitomized the pollution of politics with money and the (literal) marriage of government and business to advantage the privileged while preaching the free-market gospel, former senator Phil Gramm. Gramm’s wife, Wendy, began the job of dismantling regulation of futures markets and then joined the board of directors at beneficiary Enron. Gramm (along with Bill Clinton Treasury secretary Robert Rubin, number 14 on Ritholtz’s blame list with protege Larry Summers) spearheaded repeal of the Glass-Stegall Act that kept banks separate from other financial institutions. That enabled banks like Citigroup to become, as Ritholtz puts it, “too big to succeed” and pose systemic risk when they went bad.
After their government service, Gramm and Rubin took jobs at Swiss bank UBS and Citigroup respectively, leviathans they helped create and eventually beach, costing shareholders and the public billions. Gramm remains unrepentant, “Bailout Nation’s most intellectually bankrupt citizen,” Ritholtz writes. “Like Greenspan, Gramm had only one idea; unlike Greenspan, he had no comprehension it was wrong.”
Ritholtz also absolves two of the rightwing fringe’s favorite targets, the Community Reinvestment Act (CRA) of 1977 and government-sponsored mortgage packagers Fannie Mae and Freddie Mac. The toothless CRA never compelled any bank to make any loan, let alone a bad loan. Moreover, most lenders making bad loans weren’t covered by CRA. As for Fannie and Freddie, Ritholtz acknowledges their problems (from good, old-fashioned fraud) that had nothing to do with the crisis. Politicians and ideologues that seize on CRA, Fannie and Freddy as villains are showcasing their own ignorance and intellectual bankruptcy.
Putting the A in AIG When things fell apart in September last year, Ritholtz says, the government should have nationalized AIG, separating the giant’s solvent insurance business from its loopy financial funhouse. Instead, US taxpayers have doled out $173 billion and counting to repay not widows and orphans holding policies on dear departed dads, but a coterie of Wall Street tycoons and overseas banks escaping the consequences of their foolish risks. That’s not capitalism but socialism for the wealthy at taxpayer expense.
For the housing market at the root of the boom and bust, Ritholtz convincingly demonstrates its disproportionate impact in the post-September US economy. He proposes converting 30% of any delinquent mortgage into a 10-year balloon loan with no interest accruing, and lenders carrying the loan as an asset. Ritholtz estimates that would save about one in five of the homes now threatened with foreclosure. The rest would need to be foreclosed to let prices adjust to reality. That’s how free markets are supposed to work, rather than the “we win-you lose” bets Wall Street is still cashing.
Bailout Nation‘s straightforward, compelling account puts the crisis in context, explains why the US government responded so stupidly, offers solutions, and advises how to prevent a repeat. Ritholtz’s indictment of the financial and political establishment isn’t terribly unique, but it’s devastatingly accurate.
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy by Barry Ritholtz with Aaron Task. Hoboken, New Jersey, USA, John Wiley & Sons, May 2009. ISBN: 978-0-470-52038-3. US$24.95; 332 pages.
Former broadcast news producer Muhammad Cohen told America’s story to the world as a US diplomat and is author of Hong Kong On Air, a novel set during the 1997 handover about television news, love, betrayal, financial crisis, and cheap lingerie. Follow Muhammad Cohen’s blog for more on the media and Asia, his adopted home.
The US President Barack Obama, despite being articulate, is allowing his team to sound like philosophers and researchers when they explain what is going on in the marketplace and what the business plan is to fix it, rues Barry Ritholtz in ‘Bailout Nation’ (www.wiley.com). “This is the first time we’ve had to handle this situation, and it’s incredibly complex and difficult. While it takes great minds to devise a solution, when it’s time to explain it to the typical family, it needs to be kept reasonably simple and clear.”
The author gives an analogy from the field of sports, thus: “If a football coach has a brilliant game plan on the blackboard but cannot simplify it so it is crystal clear to the players, that plan will not get executed properly. The probability for failure increases.”
Perhaps, Obama’s speech last week, in the Federal Hall on Wall Street, was to make amends for the absence of clear communication. He had then chastised the industry for still engaging in “reckless behaviour,” “quick kills,” “bloated bonuses,” and taking “exorbitant risks that were unsustainable for the system,” as www.bloomberg.com reported on September 15.
The book has a chapter titled ‘Casino capitalism,’ which suggests that a simple solution to banks’ problems is to identify the banks that are insolvent and temporarily nationalise them. “Appoint new management, and give them six months to spin out 10 per cent of each of the separate viable pieces, with the taxpayer retaining the rest as passive investors. Bank of America can spin out five major pieces: BoA, Merrill, Countrywide, a toxic holding company, and the rest of its holdings,” Ritholtz recommends.
The call for nationalisation, he reasons, is not a move toward socialism, but an attempt to prevent casino capitalism from bankrupting the country. “Real capitalists nationalise; faux capitalists look for the free lunch.”
An example of the latter is the backdoor bailout of major financial institutions with AIG serving as the middleman; for, it is actually a bailout of private speculators, the author fumes. “Not only are US taxpayers subsidising the bad decisions made by executives in the US, but we are also bailing out the poor judgment of the rest of the world.”