Book Review: Rescue Fatigue
Michael Maiello, 07.16.09, 12:01 AM EDT
Barry Ritholtz’s ”Bailout Nation.”
http://www.forbes.com/2009/07/15/bailout-nation-aig-chrysler-opinions-book-review-barry-ritholtz.html
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
By Barry Ritholtz with Aaron Task (Wiley, $24.95)
This week, Steve Rattner, the private equity investor turned auto czar, left the Obama administration because the heavy wheeling and dealing overGeneral Motors and Chrysler has been accomplished. Some say that the government spent $100 billion on the sector, though it might see a return on some of that money. It was a bailout justified by the need to save jobs in a recession. But did it? Both companies, infused with taxpayer dollars, laid off tens of thousands or workers. What did we pay for?
The government put more than $1 trillion in taxpayer dollars at risk to bail out Wall Street’s banks after the failure of Lehman Brothers ( LEHMQ – news – people ) led to a crisis of confidence among the biggest players in finance–JPMorgan Chase ( JPM – news – people ), Goldman Sachs ( GS – news- people ) and Deutsche Bank ( DB – news – people ). The bailout of AIG ( AIG – news – people ), a firm we were told was so important that its failure could take down financial companies around the world, turned out to be a black hole for money–at first AIG needed $40 billion, but the price now stands at over $170 billion and a lot of that money went to foreign firms like Deutsche Bank. When did the U.S. Treasuryget into the business of bailing out European stockholders?
These are some of the provocative and even dangerous questions that Barry Ritholtz takes on in Bailout Nation: How Greed And Easy Money Corrupted Wall Street And Shook the World Economy. Ritholtz is no greed-hater. He invests for a living, using a combination of behavioral economics and fundamental and macro analysis as director of research at quant shop FusionIQ. He’s both a market historian and a participant, which might explain how he was able to write something this definitive about the financial crisis as it was going on.
Above all, Bailout Nation is about the socialization of risk and the privatization of profits. Bailouts are always unfair. Small businesses and individuals are left to the mercies of bankruptcy courts all the time. When CIT Group ( CIT – news -people ), a lender to small businesses, got into trouble, the government wasn’t sure what to do. But when the larger and more politically connected Citigroup ( C – news – people ) got into trouble, the Treasury rode to the rescue.
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The Nanny Nation
Dwyer Gunn
NYT Freakonomics Blog
http://freakonomics.blogs.nytimes.com/2009/07/08/the-nanny-nation/
Once upon a time, America was a wild, unsettled country. Enterprising men and women eager for land of their own literally ran for it. They spent their lives working from dawn until dusk on lonely homesteads to build a better life for themselves and their children.
The distance between survival and total failure was small, and families behaved accordingly — protecting against risk with great caution.
Barry Ritholtz, in his new book Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy writes, “The iconic image is the American cowboy. You can picture him on a cattle drive, wearily watching over his herd. All he needed to get by were his wits, his horse — and his trusty Winchester.”
Americans are proud of this heritage, proud of being a country of “determined, self-reliant individuals” where hard work, not government handouts or family connections, promised a shiny future. Ritholtz’
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Summary: ‘Bailout Nation’
06.23.09, 06:00 PM EDT
http://www.forbes.com/2009/06/23/bailout-nation-tarp-opinions-business-visionaries-summary.html
Entertaining and informative, Bailout Nation shows how years of trying to control the economy with easy money has finally caught up with the federal government and why bailout has become such a dirty word in the American financial vernacular. According to Ritholtz, there are three main problems with bailouts: There is something inherently unjust about some people getting a free ride when everyone else has to pay his own way. The process of how some groups get rescued by the government, while others are left to flounder, is in and of itself suspect. 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.
Barry Ritholtz’s rogues gallery of perpetrators and enablers includes Alan Greenspan, former Sen. Phil Gramm, Presidents Bush and Clinton, Treasury Secretaries Robert Rubin and Larry Summers, the biggest Wall Street firms, the ratings agencies, and Washington regulators. Together these individuals and institutions created a system that allowed banks and financial institutions to operate with little or no effective oversight, reaping the rewards of their success and ensuring their failures would be underwritten by taxpayers. He also shows how each bailout throughout modern history has impacted what happens in the future–for example, why Chrysler should have been allowed to fend for itself in 1980, and the impact that has on future bailouts.
Scathing and tough-minded, Bailout Nation is the history of how the United States evolved from a rugged, independent nation to a soft Bailout Nation. But rather than ending on a downbeat note, Ritholtz offers a survey of ideas from some of the best and the brightest in the financial industry, of constructive advice in the following categories: resolving the housing and credit mess, fixing the economy, improving monetary policy, energy innovations, and presidential leadership. Let’s not be fooled again.
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Bailout Nation
by Danielle Park
Tue 23 Jun 2009 11:37 AM EDT
Permanent Link
http://www.jugglingdynamite.com/blog/_archives/2009/6/23/4232139.html
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Just finished reading Barry Ritholtz’s new book Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook The World Economy:
Barry is one of the rare, refreshingly candid, financial commentators. He also has a law degree which helps him to easily recognize the glaring conflicts of interest in the finance world. Barry calls ‘bullshit’ with clarity, humour and style. While entertaining, the book delivers detailed perspective on past financial crisis, bailouts, and classically human mistakes, aided and abetted by government through the past 100 years.
Ritholtz uses his education and real life experience as a stool to stand on in order to see over the clouds of minutiae to big picture clarity. Available in fine stores everywhere or on line here. You can also read his daily blog here: The Big Picture.
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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
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Bailout Nation Review
Well I finally got around to reading Bailout Nation. If you want to save some time this morning then just go buy the book, read it and then plan on reading again in six months. If you want some color from me on why I think you should read the book then keep reading this post.
As far the general tone of the book, remember you are reading what will be viewed as a reference piece of what happened, it reads very easily and very familiarly for anyone who usually reads Barry’s blog.
One thing that struck me is how many moving parts there were to this and how they each had their seat at the table contributing to the blow up. When was the last time you thought about SIVs? They were front-page important for a while there and now you probably go weeks without thinking about them. How much do remember about Indymac and what a huge player it was? How the hell could Fannie and Freddie blow up like that? Fannie and Freddie. Do you really know how insidious the entire AIG saga is?
I like that Barry goes out of his way to point readers to other references for more detail on quite a few subjects–this contributes to the blog like feel of the book. Barry chronicled most of this as it occurred so it was easy to draw from that writing to cull the book together, point being that it captures what was happening at each step along the way instead of trying to piece it together with third party info.
Barry draws many conclusions and offers a lot in the way of possible solutions. I did not necessarily agree with every conclusion however. For example Barry does not think the Community Reinvestment Act played a role in the meltdown and he thinks arguments that it did are misinformed. His argument is quite sound because as he says CRA didn’t force banks to lend money to people who had no shot of paying it back. No argument.
I’m not going to out debate Barry on anything except maybe fire suppression tactics or Red Sox trivia but WRT to the CRA argument I would wonder (and to be clear I do not know the answer, just asking the question) what sort of environment CRA contributed to creating in terms of some sort of suasion that may have existed.
The question is subtle, I don’t think was addressed in the book and could be a non starter but there was a collective consciousness at play and it is possible that CRA contributed to it. I don’t know the answer but at one point in the book Barry talks about minorities generally getting hosed because of redlining and there have been many accounts of those folks getting hosed on mortgages. The two might be connected.
Page 232 lists who is most to blame and number one on the list in Alan Greenspan of whom Barry says “history will not be kind to the Maestro.”
There was a nitty gritty accounting if just about all the major players and institutions throughout the book to the point of being funny and sad at the same time.
There was quite a bit of humor in the book, there were several instances where I literally laughed out loud. I’ll close out the same way I started; get the book and read it. You will know more about what happened than you do now.
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Ritholtz On Reform: The Real Problem Is No One Is Following the Rules
By David Weidner
Marketbeat, June 17 2009
http://blogs.wsj.com/marketbeat/2009/06/17/ritholtz-on-reform-the-real-problem-is-no-one-is-following-the-rules/
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Barry Ritholtz, the Big Picture blogger and author of Bailout Nation, dropped by MarketBeat headquarters late Tuesday and shared many of his thoughts on the current climate, including his lukewarm response to the Obama administration’s proposed financial system reforms.
Though many of the proposals, including an effort to contain systemic risk, are admirable, Ritholtz said he’s disappointed the government has not drawn a line with its existing rules, which he believes would have cost taxpayers less if enforced. Basically, he thinks Citigroup Inc. and possibly other major banks should have been seized.
“The real problem is that you have rules in place — the FDIC receivership rules. When a bank is insolvent it goes into receivership. I don’t care if it’s the biggest bank in the world, or the biggest insurer in the world.”
Ritholtz thinks that the financial system has stabilized, “you keep throwing money stuff and eventually you will get some stabilization, though it won’t be structural,” he said. But he does not believe that we’re on a full-blown recovery.
“When the market is freefalling no one is forecasting that we’re going to hell,” Ritholtz said. “You bounce off those lows people feel better about it. Consumer confidence just tracks the Dow (Jones Industrial Average).”
Ritholtz said the government should have split American International Group Inc. much in the way a split of bond insurer MBIA Inc. into a good company (insurance) and bad company (derivatives) is being considered.
AIG shouldn’t have been “a conduit for $180 billion to Goldman Sachs and a 20 foreign banks that made a lot of bad bets.”
Ritholtz said he’s still shocked that there hasn’t been more outrage about the bailouts. “There hasn’t really been a substantial groundswell” despite the fact that bailouts represent the “greatest monetary theft” in history, the transfer of wealth from taxpayers to corporations.
He’s not a fan of former Treasury Secretary Henry Paulson, who he believes should have allowed Bear Stearns Cos. to fail. That would have sent a message to Richard Fuld at Lehman Brothers to raise capital. Instead, Fuld rebuffed an investment by Warren Buffett and Lehman collapsed – a move Ritholtz believes was healthy for the system.
Paulson aside, Ritholtz didn’t go after Federal Reserve Chairman Ben Bernanke very hard in his book, because he said the verdict is still out on how the monetary policy side of the government’s response has fared. He does, however, blame Bernanke’s predecessor, Alan Greenspan, for keeping rates too low.
“You have to think he (Bernanke) did a pretty good job even though I’m not happy with all of the interventions under Greenspan,” Ritholtz said.
Finally, Ritholtz believes any plan won’t be successful if it doesn’t address executive compensation. He thinks mutual funds should be more active in reining in excessive pay. The main problem is too many conflicts between companies and fund companies exist. ”They all want the 401(k) business. They all want the syndicates and IPOs.”
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FDL Book Salon Welcomes Barry Ritholtz – Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
By: Ian Welsh Saturday June 13, 2009 2:00 pm
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In Bailout Nation, econoblogger and analyst Barry Ritholtz asks how America turned into a country where those who don’t manage risk properly are bailed out from the consequences of their own decisions and stupidity. Clocking in at 300 pages, the answer isn’t short, but Ritholtz’s combination of wit and clarity makes the book an enjoyable read. I’ve gone through a number of books on the crisis, and this one is the clearest and easiest to understand, yet it remains accurate. Ritholtz keeps it simple, but he doesn’t oversimplify.
I’ve been following this crisis for, well, long before it existed, at least as far back as 2002 (when it became clear Greenspan’s policies would lead to a housing bubble). I’d say I know a fair bit about how the crisis came to be, but Bailout Nation had a number of insights and many facts I wasn’t aware of.
Perhaps the best thing about Ritholtz’s narrative is that Barry puts current events in context. Not only does the book have a brief history of the central banks in America, it runs through the New Deal, the post war period and deals with past bailouts. Ritholtz notes that the era of bailouts actually started in 1971…
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Bailout study widens the “Big Picture”
Thu Jun 11, 2009 3:47pm EDT
By Pedro Nicolaci da Costa
http://www.reuters.com/article/ousiv/idUSTRE55A6CK20090611
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NEW YORK (Reuters) – Readers of Barry Ritholtz’s “Big Picture” blog are familiar with his take-no-prisoners style and accurate predictions in the financial crisis.
Now Ritholtz brings the same flare to “Bailout Nation” ($24.95, Wiley), a chronicle of what he describes as a descent from rugged individualism to corporate dependence on government handouts.
“The first modest government interventions and legislative fixes soon changed to far more insidious corporate welfare,” Ritholtz writes. “The cumulative effect has been a creeping paternalism, rife with moral hazard.”
While his vision of the 19th century may seem overly rose-tinted, he makes a convincing case why big money and politics do not — or should not — mix.
For example, he calculates that, even when adjusted for inflation, the cost of current bailouts surpass the combined price tag of the Marshall Plan, the Louisiana Purchase, the race to the moon, the S&L crisis, the Korean War, the New Deal, the second Gulf War, the Vietnam War, NASA and World War II.
Another gem is his contention that Fed Chairman Ben Bernanke has studied the Great Depression too literally, using the following “fun trick”:
Take any Depression-era railroad lending legislation, and place it into a document. Then substitute the words “home mortgages” for “railroad bonds.”
“You very nearly end up with … the Troubled Asset Relief Program,” he writes, a reference to current bank bailout legislation.
He also draws a distinction between the rescues of times past, where families and individuals received help to survive circumstances beyond their control, and the current wave of bailouts.
“Here is a neat reversal of roles: Business leaders in the 1930s strongly objected to the government oversight and regulation that came with taxpayer largess,” he writes. “In the modern era, it is the taxpayers who are objecting, while business leaders take private jets to Congress to go on bended knee and request bailout bucks.”
By recognizing the failures of financial deregulation and highly-selective rescue plans, Ritholtz lays the groundwork for possible solutions.
For these, he relies on colleagues such as hedge fund manager Doug Kass and former Merrill Lynch economist David Rosenberg for advice that includes a more direct effort to help struggling state and local governments.
His line of argument suggests he would also favor a major overhaul of the U.S. system of campaign finance. He never quite goes there in the book, however, leaving that subject, perhaps, for his blog (www.ritholtz.com/blog).
(Reporting by Pedro Nicolaci da Costa; Editing by Eddie Evans)
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The Aleph Blog: Book Review: Bailout Nation
David Merkel
http://alephblog.com/2009/06/09/book-review-bailout-nation/
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“All in all, a great book. If there is a better one to describe the crisis, I will be very surprised.”
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I liked Financial Shock. But it was kind of like listening to the news on the radio, versus watching it on television, in comparison to Bailout Nation. What can I say, Barry writes ably and amusingly, without losing erudition. With help from Aaron Task, the book sings. Having written for RealMoney, I have experienced the superb editing by editors that understand finance. (I always enjoyed interacting with Aaron in the CC.)
Also, the writing is simple to understand, but you don’t get a simplistic view of who was to blame, similar to my Blame Game series. There are a lot of culprits who took advantage of the boom times, leaving themselves and all of us more vulnerable in the eventual bust.
Barry begins the book by describing the normal temptation of nations to bail out large private interests when things go south. The US resisted these temptations until the creation of the Federal Reserve, an quasi-public entity that I like to say was created so that the Treasury Department could take actions that would otherwise be unconstitutional.
He then describes early bailouts (Lockheed, Chrysler) that set the pattern for what will come later. But the greater factor that Barry describes are the implicit bailouts where Greenspan threw liquidity at every crisis, which avoided the reconciliation of bad lending decisions. Great examples include: commercial mortgages in the early ’90s, Mexico and mortgages in 94, Russia/Asia/LTCM in 98, and the Nasdaq in 2000-2.
Liquidity was never absent in the Greenspan era, and debts built up, realizing that since the Fed would protect them, why not take more risk?
The idea backfired on the Fed. Investors took more risk because they thought the Fed would protect them, and so they leveraged up on investments at narrow spreads over risk-free investments in order to meet return targets.
Any policy that reduces risk-consciousness is a bad one. Ditto for those that say follow the crowd.
As I have said before, if a country has fiat money, it must also regulate credit. Conditions in the banking sector deteriorated through the Bush Jr., administration, leading to the credit crises we are seeing today. Conservative, it is not.
Barry also details the crisis in 2008 as it unfolded, and questions the motives of parties involved, or, why they didn’t act earlier.
Personal Notes
- The 1996 Greenspan comment on “irrational exuberance” is treated well by Barry. Greenspan was long on words but short on deeds.
- Barry could have done more with the Banking crisis 1989-93, which prompted the aggressive Fed policy which is similar to today’s policy.
- Big as the Federal Reserve is, they certainly did not do their regulatory job with respect to lending terms.
- Barry agrees with me that the CPI is understated.
- On AIG, I would note that AIG Financial Products was not the only problem, though it was the biggest. The domestic life companies had real issues.
- I was gratified to see how many experts that Barry cited favored increased immigration to the US of those that are wealthy.
- Finally, on the second to last page, he quotes an obscure economist with a weirdly-named blog. Hey Felix, yes, he quoted few bloggers, but you missed this one.
All in all, a great book. If there is a better one to describe the crisis, I will be very surprised. If you want to buy it you can buy it here: Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
. For one final note, I love the cover of the book where they morph the Wall Street Bull into a pig. It symbolizes the era we are in in.
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