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Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
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Sales rank 15,412
Customers rating (based on 49 reviews)
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An engaging look at what led to the financial turmoil we now find ourselves in Bailout Nation offers one of the clearest looks at the financial lenders, regulators, and politicians responsible for the financial crisis of 2008. Written by Barry Ritholtz, one of today's most popular economic bloggers and a well-established industry pundit, this book skillfully explores how the United States 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. Entertaining and informative, this book clearly shows you how years of trying to control the economy with easy money has finally caught up with the federal government and how its practice of repeatedly rescuing Wall Street has come back to bite them. - The definitive book on the financial crisis of 2008
- Names the culprits responsible for this tragedy-from financial regulators to politicians
- Shows how each bailout throughout modern history has impacted what happened in the future
- Examines why the consumer/taxpayer is left suffering in an economy of bubbles, bailouts, and possible inflation
- Ritholtz operates a hugely popular blog, www.ritholtz.com/blog
Scathing, but fair, Bailout Nation is a voice of reason in these uncertain economic times.
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| Publisher | Wiley | | Release date | 05/2009 | | Availability | Usually ships in 24 hours | | Edition | Hardcover |
| | List price | $24.95 | | Our price | $16.47 (you save 33.99%) | | Used price | from $9.98 |
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 A valuable historical perspective
If you are like me, you may have once thought that the core of our bank bail out predicaments was a small percentage of unscrupulous lenders and uneducated home buyers. Defaults from these loans trickled through financial systems, often poorly managed, to eventually topple huge banking giants. Bailout Nation indeed provides an education of these events, but points out other system failures that had equal or greater bearing. Specifically, the deregulation of the bank system though various regimes and the failure of the Federal Reserve, under Alan Greenspan, to enact wise monetary policy and be a watchdog for bank failures. Rithholtz offers easy to read and convincing evidence of these multiple failures culminating in bank bailouts. I now feel like I can get an arm around one leg of this complicated elephant.
The book had it's shortcomings. It offered a bulk of interesting hindsight. Near the end, it thinly touched on :
1. The future impact of these huge money outlays to global economies.
2. What we should do to prevent similar events.
3. Alternative courses of action instead of bailouts.
4. How to get housing back on it's feet.
Having a rapt audience, Ritholtz succeeded in his finger pointing and then failed to offer viable bailout alternatives and remedies. For example, he consider AIG's pleas for multiple moneys to be cloaked in fear tactics and a virtual waste. If you can believe mainstream media, credit markets had become defensive and insoluble to the point of global business within a day or days of coming to a standstill. While the bailouts may have been excessive and had misappropriations, they may have helped avoid a global economic catastrophe. His solution was to nationalize troubled banks. Thereby transferring management from sometimes greedy and mismanaged financial institutes to burdensome and inexpert bureaucracies. A debate for another day.
I believe he also failed to fully recognize the impact of basic supply side and laissez faire economics as a root cause of all these failures. A ball that started rolling in the Reagan (Reganomics) administration and has continued to roll through various administrations and has also influenced Fed. policy. Holding to these principals was perhaps more the failure of Greenspan that his lack of insight.
In a broader sense, the book helped less specifically to point out the increasing risk complicated mega- businesses have in influencing global prosperity. And their need for watchdogs and wise regulation. This might extend beyond financial institutes into energy, food production, and other critical goods and services
Noses to the trough. A depressing, relentless tale of pillage, greed, incompetence, and intellectual dishonesty
Greed begets greed. Bailouts socialize losses, handing a free lunch to incompetent, lazy, gluttonous executives, all paid-for by the taxpayer, facilitated by asleep-at-the-wheel regulators and conniving politicians. Villains abound. No solution in sight. A depressing, relentless tale of greed, incompetence, and intellectual dishonesty.
What is depressing is the realization that taxpayer funded bailouts have been happening for decades. Each bailout only makes things worse, and sets the stage for a larger bailout down the road. Companies and industries lobby for these bailouts, get them, and yet find themselves out of business a decade or two later, despite the bailouts. The Federal Reserve, ever expanding its mandate and powers, personified and led by the blind pursuit of an intellectual belief in the self-correcting powers of the market by Alan Greenspan, has probably done more damage to the US economy than any other single player or institution. Politicians, US Presidents, and the Congress, Democrats and Republicans alike, have allowed themselves to be corrupted by the banking lobby. Treasury Secretaries have been like the proverbial wolves set to protect the sheep from the wolves. And this is without getting to the banks, the traders, the investment firms... Everyone has been relentless in their pillage of the taxpayer.
The bailout numbers are huge. They start out relatively modest, in the low hundreds of millions of dollars, with the bailout of Lockheed Aircraft Corporation in 1971, then with the Chrysler bailout, and by the time we reach the end of the last decade, they are flowing like a torrent, gushing hundreds of billions of dollars, to all and sundry. Numbers so large they dwarf the cost of the Second World War, of the rebuilding of Europe, of the New Deal. Not only the amounts, but also the frequency is mind-boggling. A cash injection of $45 billion dollars and guarantees of $306 billion to the Bank of America. A $700 billion TARP program. The takeover of AIG - $173 billion. $249 billion in guarantees to Citi. And on and on.
Barry Ritholtz takes his pen to the crisis and paints a rogues' gallery of players, all with their noses to the trough. Take the SEC, which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. How in heaven's name can you expect effective regulation when the head of the SEC believes in less regulation, or is on record having advised companies to destroy evidence??!!
..... Bush's first SEC appointment, Harvey Pitt ... as a Wall Street lawyer, Pitt had "recommended that clients destroy sensitive documents before they could be used against them [page 241]
What about the Treasury Secretaries - Hank Paulson under George Bush, and Tim Geithner under Barack Obama; they are all cut from the same cloth.
..... "... are bankers, first and foremost. As such, they do what most professionals do when their industry is under assault: protect the institutions. ... The obvious solution--put the insolvent banks into FDIC receivership, fire management, liquidate holdings, sell the assets off, wipe out shareholders, and pay the bondholders whatever was left over - was simply unthinkable." [page 221]
The less said about the Congress the better. Maybe Mark Twain said it first, and said it best.
..... "Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself." [page 245]
Ritholtz singles out former Federal Reserve chairman, Alan Greenspan, as the single most culpable player in this entire meltdown, and for the most withering of criticisms. Once seen as a demi-god, about whom Senator John McCain would go so far as to state during the GOP debate of 2000, "I would not only reappoint Mr. Greenspan - if Mr. Greenspan should happen to die, God forbid . . . I'd prop him up and put a pair of dark glasses on him and keep him as long as we could." ... "By 2008, the man formerly known as the Maestro saw his reputation in tatters." [page 61]
..... Under the guidance of Alan Greenspan, the Federal Reserve abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products. ... Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. [page 233]
..... The U.S. central bank created moral hazard not by targeting inflation or the business cycle, but instead by focusing on asset prices. [page 58]
..... Rather than seeing markets as a sign of the economy's health, the Fed chair tended to see asset prices as an end unto themselves. [page 60]
..... With the World Trade Center smoldering in ruins, the Fed sat around and waited. Wednesday, Thursday, Friday - nothing. It wasn't until right before the markets reopened - when it would matter most to asset prices - that it finally did something. On September 17, 2001, almost one week after the attack, and precisely one hour before markets reopened, the Fed slashed rates another half point.
Whatever doubts there were that Greenspan was supporting asset prices disappeared forever that morning. [page 86]
The unstinting champion of these unregulated derivatives was Alan Greenspan - "We think it would be a mistake to more deeply regulate the contracts." [page 138]
..... " it was then Fed Governor Bernanke who ... provided the framework and intellectual cover for Greenspan's ultra-easy money circa 2001 to 2003." [page 235]
..... "... With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living. ... Mortgage equity withdrawals (MEWs)--normally a small portion of consumer debt--exploded. The accelerating borrowing against their homes allowed consumers to keep on spending, even as their savings rate went negative for the first time since the 1930s." [page 95]
The Glass-Steagall Act of 1933 not only established the Federal Deposit Insurance Coporation (FDIC) but also established separation between commercial banking and the securities industry. This Act was repealed in 1999 through the Financial Services Modernization Act, and set the stage for the rampant speculation by banks.
..... "The CFMA removed derivatives and credit default swaps from any and all state and federal regulatory oversight." [page 138]
...
..... "Among the over-the-counter derivatives freed from any federal jurisdiction by the CFMA were energy futures.... A key sponsor of the CFMA was Texas Senator Phil Gramm, whose wife, Dr. Wendy Gramm, was a member of Enron's board..."
...
..... "Enron paid Dr. Gramm between $915,000 and $1.85 million in salary, attendance fees, stock option sales, and dividends from 1993 to 2001."
...
..... "Days before her attorneys informed Enron in December 1998 that Wendy Gramm's control of Enron stock might pose a conflict of interest with her husband's work, she sold $276,912 worth of Enron stock." [pages 139, 140]
..... "... Placing any blame on deregulation was simply "an emerging myth," the retired Texas senator has said. Deregulation "played virtually no role" in the economic turmoil engulfing the globe, Gramm claimed in November 2008."
..... "What shameless nonsense. You will not come across a greater example of cognitive dissonance in your lifetime. ... The inconsistency of his deeply held philosophy and the results thereof are logically incomprehensible to Gramm's conflicted brain. If he were ever to admit the truth, he would likely go stark, raving mad" [pages 235, 236]
..... "Banking establishments are more dangerous than standing armies," Jefferson famously declared [page 15]
..... "The rapidly growing trade in derivatives poses a "mega-catastrophic risk." . . . (F)or the economy, derivatives are financial weapons of mass destruction that could harm not only their buyers and sellers, but the whole economic system." - Warren Buffett, Berkshire Hathaway 2002 Annual Report [page 137]
What serves as a chilling reminder of the law of unintended consequences and of the hubris that attends possibly accidental success is articulated in Chapter 12 - "Strange Connections, Unintended Consequences". The 1996 Telecommunications Reform Act eliminated media ownership regulations, resulted in Clear Chanel Communications owning 1200 channels nationwide, getting rewarded with a stock price of $70 and a $40 billion market cap. "now it trades for pennies. ... an under $1 billion market cap." Why??? It fired its local talent, replacing their programming with "... a homogenized playlist feed from a central bunker in Texas"
The root cause - the root of the greed, the craziness, the mad dash to leverage, all of it - according to Ritholtz, was the result of "dot-com stock option p*nis envy". Yes. Not the first rush of technology driven billionaires like Oracle, Microsoft, EMC, Intel, Cisco, Dell, etc... Not even the second rush in the 1990s - Netscape, Yahoo!, RIM, etc... It was the dot-com boom where nerdy students with nothing more than gluttonous greed in their eyes and a paper-napkin thin business plans becoming paper millionaires that drove Wall Street bankers crazy. With envy. With greed. With a sense of an intellectual inferiority complex. Hence the rise of the quants on Wall Street.
..... "We're engineers, too - financial engineers! We design derivatives and securitize debt! We have access to massive leverage! Hey, everybody, we're all gonna get laid!" [page 197]
..... "In 1836, Mayer Rothschild wrote, "Give me control of a nation's money, and I care not who makes the laws."" [page 234]
Some solutions are suggested towards the end of the book. Some are practical, some too idealistic; but at the end of the day, almost every one of those suggestions is better than keeping the status quo. And unfortunately, the status quo is what has actually been preserved. A free lunch to the pillagers of the American economy, fully paid-for by the taxpayer.
..... "Newsletter writer John Mauldin concurs: "Bring in one million fairly affluent, legal immigrants, and you put a floor (and maybe some bounce) in the housing markets at all levels." [page 289]
This is a suggestion that is going to be anathema to both sides of the political spectrum, for various reasons.
The US pumped in $170 billion into AIG - money that has most certainly gone down the drain, completely. Instead, if this money had been earmarked over a 10 year period to help fund research into green technologies, the payoff would have been much, much greater. The government could grant $100 million to 100 universities. That would be only $10 billion. Grant $100 each million to 100 startups in the energy technology sector. That's another $10 billion. Provide a $1000 credit to 10 million homeowners who install energy saving insulation, or upgrade their heating systems to greener alternatives. That's $10 billion. And so on...
For $35 billion you could "...'fund four years of public college education for every student in high school with at least a B average." [page 294]
This is less than one-fourth of the money pumped into one single entity - AIG!!! This amount is less than 5% of the money under the TARP program!!
A must-read book.
A Brilliant Book by Someone Who Knows
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.
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)."
The book is just brilliant. Read it.
A Definitive Study of the Bailout
Barry Ritholtz has written a thorough, well-researched study of the Wall Street Bailout.
He provides some history of bailouts such as the Lockheed and Chrysler bailouts.
His ten-step Bailout Pattern details the process.
He also examines the differences and similarities of the current crisis compared to the Great Depression.
A cartoon slogan at the beginning of the first chapter was totally on point. It reads- "Socialism for the Rich- Capitalism for the Rest."
An excellent point that Mr. Ritholtz makes is that we don't regulate the markets, we regulate human behavior in the markets.
He was critical of the rating agencies and rightfully so! They were complicit in the fiasco.
On page 165 he makes a statement that's right on target.
"Vast amounts of money up for grabs have a tendency to corrupt anything they come near."
BAILOUT NATION is a definitive study of American economical bailouts that anyone can read. You don't have to be an economist to understand what Barry Ritholtz has written. He names names and explains how those particular entities are responsible for this mess. It's one of the better books I have read on the subject.
Mr. Ritholtz' "The Big Picture" blog is another educational tool for economics. The book and website are more than worthy of a close look.
laymen's POV
After reading and thoroughly enjoying the book, I want to encourage others, and especially those of us with little Economics/Finance background to give Mr. Ritholz's book a try. The book was compelling and Ritholz' views and his suggestions for correction of our collective economic problems thought-provoking. It is a worthy introduction to a large segment of American economic history. There was a strong sense of the author's passion and energetic investment for the subject matter covered in the reading. He cares deeply for his material and that care translates to a lively read. His wise-cracking infuses the book with character and constant wake-up calls. Having read some of the other reviews of the book, Ritholz' passion may have been misunderstood as ideology and partisan by some, but I'm not seeing it. I have to say that I could find little evidence of "agenda" in the book and found the criticisms of individuals and policies to be even-handed and based on the data available, not merely principles as articulated in college textbooks by Nobel prize-winners . I like my Econ lit balanced, honest, straightforward, and easy-to understand. I don't know him, but I am grateful that he took the time to clarify a potentially mind-numbing subject. He is standing by his product. He has offered the whiners a money-back guarantee on the purchase of his book. Imagine if everyone that played a large role in our recent economic collapse had the backbone and the foundation of principles to make a similar offer! The American taxpayer/citizen would feel alot less cheated right now and we would have alot less debt to worry about.. My initial reading of the book was done thru the public library. I liked the book so much that I went out to buy it. Quality in our time needs to be acknowledged.
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