Wow, I almost let this slip by unannounced: The paperback edition of Bailout Nation is here ($11.53 for the paperback, $10.38 for the kindle edition).
There is a new chapter on whether the Reform legislation will fix much of anything (take a guess where I fall no this). The cover has reviews instead of blurbs, but other than that, it is the same book you saw before.
You can search the full book here, and posted a chapter posted in the Book section.
Bailout Nation, with New Post-Crisis Update: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
“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 . . . ?
Banks and Bailouts: Playing politics?
Ran Duchin and Denis Sosyura
University of Michigan, 12/21/2009
Banks with political ties got bailouts, study shows
Reuters, Dec 21 2009
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.”
Another myth of the Bailout era dies . . .
Executives Kept Wealth as Firms Failed, Study Says
NYT, November 22, 2009
Economist Barry Ritholtz discusses what led to the recession and how to bounce back
by Danny Teigman/The Star-Ledger
Thursday September 03, 2009, 6:00 AM
Economist Barry Ritholtz is the author of “Bailout Nation,” which warns that the nation’s banking system remains far from sound.
The late 2000s may go down as the age of the bailout. What began with Bear Stearns in March 2008 grew to include a cadre of famous-turned-infamous American financial institutions.
As immediate panic settled, outright bailouts morphed into a multi-billion dollar stimulus package whose impacts are still trickling through the economy.
Economist Barry Ritholtz, author of “Bailout Nation” and director of equity research at Fusion IQ, a New York financial research firm, has a case of the bailout blues. He warns the fundamentals of the country’s banking system remain far from sound.
While economic incentives are not so toxic as Uncle Sam giveaways, consumer subsidies threaten to turn Americans into a collection of perpetual bargain hunters.
Without a complete overhaul, the next financial crisis may make the current one look like a “minor scare,” he argues.
Ritholtz, 47, spoke with Your Business about the events that brought the country to the brink of economic collapse.
Q: What is the big-picture view of how the nation got to where it is?
A: There were a number of factors that took place. They’re all interrelated. It begins probably 30 years ago with the idea that excessive, complex, and costly (government) regulation is a bad thing, and we need to reduce that.
And what ended up happening is somehow that concept morphed into any form of regulation is bad. There’s a balance in the economic world between encouraging financial innovation and allowing rougue brokers to become reckless and threaten the world economy.
If you and I, as taxpayers, have the obligation to be there when these guys screw up we should have the ability to say we’re going to put a speed limit here and not let you go 180 mph.
Q: What other elements helped cause the current recession?
A: The Federal Reserve had encouraged a lot of easy money by essentially taking (interest) rates really low and keeping them there for way too long. When we make the cost of borrowing really cheap, we’re going to encourage people to go out and find things to do with their money.
In January 2001, (Alan Greenspan) started cutting rates down to unprecedented levels. They had been down to under 2 percent previously, (in the 1950s and 60s) but just for really brief periods. Rates were not below 2 percent (for several) quarters at a time.
Greenspan took rates under 2 percent for over 36 months. And he took rates to 1 percent for more than a year. Simply unprecedented.
Q: What were the consequences of ultra-low interest rates?
A: First, everything priced in dollars went through the roof. Second, you had a massive influx of people borrowing money really cheap and then putting it to work. So, that encouraged speculation.
And probably most important for our issue, housing ignited. So you cause a giant spike in home prices over the next couple of years. (Essentially what you create is) this giant backwards economic cycle where people were spending money out of their houses as opposed to earning money in a way to maintain their lifestyle. In the nineties, less than 1 percent of discretionary spending came from (a home’s equity).
By ’04, ’05, ’06, it had leaped to over 10 percent of discretionary spending. It actually ended up adding 2 percent to Gross Domestic Product.
Q: So, how did cheap money result in the age of bailouts? Why are bailouts so bad?
A: Essentially, the Treasury Department and the Federal Reserve panicked and just started throwing as much money as they could at these (banks). The phrase that we heard was that we have to save the banking system.
But if you want to save the banking system, you don’t care about individual banks. The best example of that is Japan in 1989. They had zombie banks around for 10, 15 years. They didn’t put any of their banks out of their misery, and they had a decade-long recession.
The idea of saying Citigroup is insolvent was unthinkable to them. They were a sacred cow. If the sacred cow gets mad cow disease, you’ve got to put it down. The problem with bailouts in general is when an industry or company goes bankrupt it typically means that there is a structural flaw in the setup of that company.
Instead of fixing the problem we’re essentially covering up the cracks with a lot of cash. We (still) have banks that are engaged in any manner of highly leveraged, highly reckless speculation. We have yet to fix that.
Q: When was the country’s first major company bailout and was the financial rescue a success?
A: In 1971, it was Lockheed. It was a $250 million loan. It really set the stage for what (later) took place. Since we’ve now spent trillions of dollars bailing out all these banks, and it traces itself back to Lockheed, it was a horrific failure in terms of encouraging more reckless behavior by management.
I did an interview with US News about the bailouts:
US News, & World Report
September 01, 2009 04:19 PM ET | Rick Newman
Did they work?
With the financial meltdown finally contained and the Year of the Bailout drawing to a close, we can start to make some meaningful assessments about whether hundreds of corporate rescue packages did more harm than good. It’s probably fair to say that aggressive government intervention in the economy, starting with the Bear Stearns bailout in March 2008, prevented a deeper collapse and maybe even a depression. But the government also erred on the side of doing too much and propped up some huge, mismanaged companies that would have, and perhaps should have, failed. To gauge the consequences of all the bailouts, I spoke recently with Barry Ritholtz, author of Bailout Nation and CEO of research firm FusionIQ. Excerpts:
Have any of these been good bailouts? I can imagine a bailout done well. Washington Mutual might be the closest example. Once the FDIC identified that bank as insolvent [in September 2008], they effectively came in on Friday night and carried out an orderly reorganization. They fired the board, the common stock ended up worthless, and by Monday morning, they had already sold key assets to JPMorgan Chase. The toxic debt and the shareholders were wiped out, and the bondholders took a big haircut. I don’t know if we’d call that a bailout, but it was not a reckless collapse like Lehman Brothers. And it didn’t cost the taxpayers anything.
The ideal bailout is not a bailout of reckless financiers. It’s like the government equivalent of a hospice for dying companies, involving no taxpayer money and no moral hazard. And the people who behaved recklessly, they get their comeuppance.
The most egregious bailout, that’s a tossup between Citigroup and AIG. I think AIG was worse just because it involved so much money. And there’s no way we’re going to see all of that back. It could end up being the greatest theft in history.
Citi is a perennial debacle. They were clearly insolvent. They were too big to fail but also too big to succeed. They had lobbied for the repeal of the Glass-Steagall Act for 10 years before it actually happened. They started in the late ’80s, when they realized they were limited in terms of growth and the only way to really grow would be to buy other companies on other side of the investment business. To do that, they needed the repeal of Glass-Steagall. The bailout was the classic example of saving the bank instead of saving the banking system.
What would have been a better way to deal with AIG? There was a simple solution. AIG was basically a AAA-rated, conservatively run insurance company with a hedge fund hidden under its skirts—AIG Financial Products. It looked to them like they were making free money: selling $3 trillion worth of risk and taking 10 basis points [of profit] on it. It was like going to Vegas. If you play in the casinos and you win, then the Nevada Gaming Commission is going to make sure the casino pays. But if you play craps with some guys out in the alley and you win, there’s nobody there to make sure they pay. AIG Financial Products was like that craps game in the alley.
We could have done this by cleaving FP from the insurance company. So anybody owed debts by FP would have been dealing with FP alone. And if they didn’t get their money back, too bad. You’re supposed to lose money when you put it into insolvent companies. You’re supposed to suffer pain and agony when you put money into a company that’s as corrupt as that AIG hedge fund. Then we could have spun out AIG the insurance company in 30 days, as a stand-alone entity, without FP.
Then wind down FP separately. That should have been demonized and pulled out and closed. To throw $185 billion at AIG to save them, the whole thing is pointless. The best thing would have been to just rip the Band-Aid off.
Could the feds have done this in 2008? Or only earlier, before the crisis hit? Yes, we could have done it in September 2008. The problem is there’s psychological pain, and we humans always want to put off the pain. I see this all the time in investing. When people buy a stock at 80, they know they’re taking a risk, then it falls to 3 and the phone call comes asking, “What should I do?” When you ask what do they want, usually the subtext is, “I want the pain to stop.” So to make the pain stop, you just sell the damn thing. That’s what we did with AIG. We just wanted the pain to stop.
Wasn‘t the Fed hamstrung? The Fed was in a position where it couldn’t do nothing, but it could have done something more creative. The way I see it, if a company blows itself up the way AIG and Citigroup did, in a capitalist system, you have to take it out back and put it down like Old Yeller.
By the way, there was a huge amount of capital in private trusts and partnerships and private investments. Not one of those blew up. When it’s a public firm, you can’t go after senior executives’ personal assets if it collapses. But if it’s a private operation, you can. And none of the guys with their own money on the line went belly up.
What would have been a better way to handle Citi? They should have been WaMued: put into receivership. The FDIC fires the board, and stockholders get wiped out. Bondholders get what’s left over, given their priority in the capital structure. The government could have said, “We’ll see how close we can come to making you whole,” but they probably would have been down 30, 40, maybe 50 percent. Then they could have spun out Smith Barney, a nice, profitable brokerage firm. The bank, Citibank, they could have spun that out as a stand-alone, with its $1 trillion in deposits. Pull out the toxic sludge. Another dozen entities within Citigroup either get spun off, if there are buyers, or just shut down. That’s what happens to bankrupt companies.
They could have done the same with Bank of America. Spin out Merrill Lynch, sell off Countrywide as a mortgage broker, and the senior management and the board—they get jack.
It‘s conventional wisdom on Wall Street that the government made a mistake in letting Lehman Brothers collapse last September. But some people think the real mistake was rescuing Bear Stearns a few months earlier, since that led Lehman to expect a rescue. Bear Stearns was an organized collapse. They could have just let Bear Stearns go down. JPMorgan supposedly had 40 percent of the $9 trillion in Bear’s derivatives exposure, so why not let JPMorgan deal with it? After the Fed saved Bear, Dick Fuld [CEO of Lehman Brothers] sees Warren Buffett come in with a bunch of billions. That’s supposedly how much he offered: “A bunch of billions.” At a pretty good rate. And Fuld turns him down! He must have been thinking he’d get a better deal from the government. Classic moral hazard! So now it’s September, the night before bankruptcy, and Fuld is meeting with the Fed and the Treasury. Boy, would I have liked to be a fly on the wall. You can just imagine Paulson and Bernanke saying, “You turned Buffett down? You made the mistake of turning Warren Buffett down? And now you want money from us?” No wonder they didn’t want to bail out Lehman—even if they could have.
Goldman Sachs ended up with just about the best deal of all. Not just the $10 billion federal bailout, which it paid back, but all that extra money from the AIG bailout. It’s astonishing that Goldman Sachs walked away with what they did. As an AIG counterparty, they got $13 billion from the AIG bailout. That’s on top of the $5.9 billion they grabbed on the eve of AIG’s collapse. It’s just so egregious.
What do you think of the idea that Goldman got special treatment just because Hank Paulson, the t reasury s ecretary under Bush, had been Goldman CEO right before coming to Washington ? I don’t know, but it’s certainly true that no Wall Street house has more people strewn throughout the Treasury and the Federal Reserve Bank of New York than Goldman. And if AIG had gone through bankruptcy, Goldman would have been $19 billion poorer. Goldman is the only counterparty I know that through the whole thing got bailouts at 100 cents on the dollar. It was an unbelievable transfer of wealth from taxpayers to reckless companies.
What do you think of the auto bailouts? At least those companies had to testify before Congress and present a public plan saying what their problems were and what they needed. Plus, they got put into bankruptcy. That was certainly better than just throwing a trillion dollars at them.
Are we learning the right lessons? The American public is notorious for its short attention span. They were paying attention for a while, but if another celebrity dies or there’s an Elvis sighting, forget it.
Rahm Emanuel likes to say that you shouldn’t waste a good crisis, but I think we have. I don’t understand why the rating agencies haven’t been given the Arthur Andersen treatment. Instead, we get this bill about credit card practices that has absolutely nothing to do with what just happened. Once the markets started moving back up again after bottoming out in March, it might have been too late for real reform. The Obama administration dawdled. I don’t think they expected as much of a rally as we’ve had since March. And now the lobbyists for Wall Street have taken over. It’s on to the next issue—so now we’ve got a healthcare reform debate. They should have taken care of the first crying baby before picking up the next one.
Do you think anything good will come out of all this? No. Benjamin Disraeli said, “The one thing we learn from history is that we learn nothing from history.” My biggest fear is we revert to business as usual—until the next crisis.
“The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.”
-New York Times
My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with, well, then, you have a profit.
Let’s say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a “profit.”
Perhaps the rookies are manning the terminals, with the senior people away on vacation. That would explain the inexplicably clueless headline over at the NYT this morning: As Big Banks Repay Bailout Money, U.S. Sees a Profit.
“Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.”
Now, by any traditional measure of profits, you include all of the costs incurred against the total revenue, to determine if there is a net gain (or loss). This simple mathematical analysis of what a profit is — Are we up or down? — seems to have eluded the headline writers.
At least the author makes mention of how tenuous the usage of that word is the article’s body:
“These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.
The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.”
What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history.
click for larger graphic
As Big Banks Repay Bailout Money, U.S. Sees a Profit
NYT August 30, 2009
I just got this via email!
As someone who has purchased Business and Investing books from Amazon.com, you might like to know there are more than 340,000 of the most popular books available on Kindle.
New York Times bestsellers and New Releases are only $9.99 unless marked otherwise.
Kindle’s free wireless delivery means books in less than 60 seconds.
Kansas City Fed President Thomas Hoenig, the host for the annual Jackson Hole Fed confab, is utterly against bailouts, and thinks “Too Big To Fail” is a losing strategy.
As I noted previously, “Real capitalists nationalize; faux capitalists look for the free lunch.”
Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it . . .
Hoenig, 62, took office in 1991 and is soon to be the longest-serving Fed policy maker. Out of the 12 regional Fed presidents, he is one of two to have served as a head of bank supervision. Hoenig is tougher than his colleagues on inflation, having dissented from interest-rate votes four times since 1995, always for tighter policy.
Alternative to Bailouts
Companies with weak capital or investor confidence shouldn’t be bailed out, Hoenig said in a private talk in Omaha, Nebraska, in March. He said the government instead should declare them insolvent, replace managers, remove the bad assets and require shareholders to take losses. Hoenig broke from his usual practice of speaking from notes on index cards for non- economic comments and released written text entitled “Too Big Has Failed.”
One of the great tragedies of the entire banking debacle — from the run up to the collapse and aftermath — is how miuch good advice was ignored. This is yet another unfortunate example . . .
See this July video, Hoenig Calls For Takeover Process For Failing Firms.
TOO BIG HAS FAILED
Thomas M. Hoenig President and Chief Executive Officer
Federal Reserve Bank of Kansas City, March 6, 2009
Hoenig Stirs Debate on Bank Failures as Fed Forum Convenes
Bloomberg, August 20 2009
The artist who created Wall Street’s famed “Charging Bull” statue sued Random House and the authors of a recently released book on the collapse of investment bank Lehman Brothers over their use of an image of the bull.
Wait, you mean you can’t do that . . . ?
Dow Jones Excerpt:
On Wednesday, artist Arturo Di Modica filed a lawsuit in U.S. District Court in Manhattan, alleging the book, “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” uses an unauthorized image of the bull on its dust jacket.
The nearly 7,000-pound sculpture was placed unannounced in front of the New York Stock Exchange in 1989 and was soon moved to Bowling Green in lower Manhattan, where it has been on “temporary” display for 17 years. It has become a popular stop for tourists.
Di Modica has previously said he was inspired by the 1987 stock market crash to create a sculpture “that would encourage young people to rebound and help put American business back on track.” He registered a copyright on the bull in 1998 and has previously brought legal action over the unauthorized use of the bull’s image.
His Web site proclaims Di Modica “sculptor of the world famous bronze ‘Charging Bull’” and promises to soon have a “Charging Bull Gift Shop,” a 360-degree view of the sculpture and other features related to the bull.
My Superagent/Lawyer, Lloyd Jassin, emails me: “It’s a teachable moment. Pig parody = transformative fair use, i.e., a socially productive use looked upon favorably by copyright law. Used for a different purpose than original. Bull cover = infringement.” (see this on Fair Use)
Thank goodness for Derivative Works copyright rules! The pig pull is obviously protected as Parody.