Posted on: June 20, 2009 at 10:30 am

Bailout Nation — Part 1: This is new book has me fascinated.

Ritholtz points out there are three main reasons why the word “bailout” is such a dirty word (and I agree with him):

1. There is something unjust about some people getting a free ride while everyone else has to pay their own way. We Americans will always help someone down on their luck, but this is not what the current crop of bailouts is about. This is the government financially rescuing people despite — or perhaps because of — their own enormous recklessness and incompetence.

2. The process of how some groups get rescued by the government, while others are left to flounder, is in and of itself suspect.

3. Then there are the costs. If we have learned anything about bailouts over the past hundred years, it is that each rescue attempt is more costly than the one that preceded it. As of February 2009, the costs have raced past $14 trillion. This is an unprecedented sum of money, greater than another other single government expenditure in the nation’s history.

His Excellent book highlights “Things You Probably Did Not Know About Bailouts“:

+ This was not a “perfect storm” -unforseeable random events that just happened. In reality, it was a series of conscious decisions made by investment banks, commercial banks, government officials, regulators, and central bankers that were simply awful.

+ The bailout has cost more so far than the Marshall Plan, the Louisiana Purchase, the race to the Moon, the S&L Crisis, the Korean War, The New Deal, the Gulf War II/Invasion of Iraq, Vietnam War, NASA and War World II COMBINED. That includes adjusting these for inflation.

+ The CEOs of the biggest 15 investment banks, mortgage firms and commercial banks “retired” from the firms they helped to ruin — and took home over $1.5 billion dollars in compensation !

+ Contrary to popular rumor, AIG was not brought down by the collapse of Lehman Brothers. In fact, AIG’s exposure to LEH was balanced. Instead, they were like two swimmers both caught in the same riptide. And the same forces that led to Lehman’s demise also killed AIG: too much leverage, too much sub-prime mortgage exposure, too little risk management.

+ When the US bailed out Chrysler in 1980, the UAW had 1.5 million members and the Big 3 had a 75% US market share. Since that “successful” (?!?) bailout, the UAW is down to 400,000 members and falling; the big three fell below a 50% US market share for the first time last in May 2008.

+ Much of the damage to bailed out companies was self-inflicted: The excess leverage, mortgage exposure, deregulation and lowering of credit standards. They were not killed by others, they committed suicide!

+ TARP was an elaborate ruse designed to hide the fact that Citigroup was insolvent.

+ Wells Fargo bought Wachovia for $15 billion dollars, but managed to squeeze a $74 billion tax shelter thru the IRS for the purchase. Net profit, $59 billion dollars — nice for one day’s work.

+ Citigroup had been lobbying for the repeal of Glass-Steagall act since the 1980s. They finally got their wish-and it helped destroy the bank!

Ritholtz has a good blog on the economy at www.ritholtz.com/blog/.

“In Search of the Perfect Investment.”

http://www.technologyinvestor.com/index.php