Customer Reviews

Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy

5 star:		(43)
4 star:		(10)
3 star:		(3)
2 star:		(2)
1 star:		(6)

 

 

Amazon Review


Long story short: After Bill Fleckenstein's GREENSPAN'S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE McGraw Hill asked him to do a follow up to that book. He (wisely) said no.

However, Bill suggested they contact me.

Which the publisher did. I turned them down (several times). Who had time to write a book? Besides, I did not want to do a fast rush-to-judgment type of thing. But they were tenacious in their pursuit, and I eventually succumbed to their flattery -- but on my terms, including having final edit on the manuscript. (This becomes important later on, as you will soon see).

Because of the way events played out, I ended up writing three separate Bailout Nation books over the next 15 months. The first version was a history of bailouts. This overview covered an arc from Lockheed (1971) to Bear Stearns (March 2008). Around the time this book was due (~Labor Day 2008), something was in the air . . . you could smell the leading edge of the approaching storm. I convinced the publisher to hold off a few weeks.

Boom! Fannie Mae blew up. Then Freddie Mac, Lehman Brothers, AIG, Citigroup, Bank of America. Soon Merrill was on the ropes, followed by Morgan Stanley, Goldman Sachs, GM and GE. All hell was breaking loose. Well, I thought, at least I had an ending. The expanded version of the manuscript, with greater emphasis on the latter part of 2008, was finished in December '08.

Or so I thought.

After I handed the book into the publisher (McGraw Hill), they let me know they had problems with my assessment of the Ratings Agencies. They were unhappy with my calling them "Pimps & Hos", or describing their business model of rating junk bonds as AAA for big fees as "Payola." (What would you call it?)

Not coincidentally, McGraw Hill owns of the largest Rating Agencies, Standard & Poor's.

The compromise was to remove the reference to Pimps, but using publicly available data and congressional testimony, to add more detailed analysis and quotations from experts. When it was finished, I found the revised section to be much more even handed -- and far more devastating -- to S&P. They (along with fellow rating agencies Moody's and Fitch's) were key enablers to the entire crisis. There were many other guilty parties, but I simply could not under-emphasize the ratings agencies.

When McGH rejected it again, I exercised my right to buy the manuscript back from them in January 2009. Numerous publishers were interested, but I went with Wiley -- they have a great deal of experience publishing business/investing related books, and as a publisher, had no conflicts of interest that would interfere with telling the full story.

The third version was the charm.

By this time, the amount of bailout money going to mismanaged companies, reckless speculators, and incompetent corporate executives had skyrocketed to 14 trillion dollars. This was infuriating to anyone paying attention.

Astonishing things happened as the book progresses. The more I researched and wrote, the more it was apparent we were witnessing the greatest heist ever made. By the last section of the book, history's biggest transfer of wealth -- from the taxpayer to the Banksters -- was taking place. Trillions were being shifted from the responsible to the reckless, from the prudent to the incompetent. It was infuriating -- and you will see as the book progresses my initial academic tone gets replaced with greater snark and anger.

I not only had my ending, I had a new cause -- exposing those who caused this mess, be they Democrat or Republican, Corporate CEO or derivatives trader. I hope the end result is something that will inform and illuminate, while entertaining you along the way . . .

Mr Ritholtz does an excellent job drawing a trendline from the first bailout in 70's to the latest bailouts of 2009. He illustrates how our own government cheer-led us into the Next Great Depression.

What makes this book different from books of other numerous authors?

* The book is written in a plain language an average person can understand
* The book is well-structured and sticks to historical events which led us into the mess
* For all government bailouts, Mr Ritholtz brings focus to their long-term effects rather than short-term ones
* Mr Ritholtz does not try to predict future or give investment advice (thank you)
* Illustrations are hilariously funny


I enjoyed every page, it is very well worth time and money.

It has been said that 'if you can't explain something in simple terms that anyone can understand, you don't understand it well enough yourself.' From the standpoint of that axiom, it is clear that Barry Ritholtz understands well the causes of the Great Financial Crisis of 2008. In plain terms, Ritholtz explains not only what directly led to the Crisis, but the events of the last 30 years which laid the groundwork of moral hazard which allowed the Crisis to occur as it did. Indeed, the events of the last two years were the result of a confluence of things gone wrong, and all sides of the political aisle are culpable, which Ritholtz makes clear in Bailout Nation.

If you are looking for a clear, concise, bias-free explanation in layman's terms of the Financial Crisis and, most importantly, the myriad events which led up to it, then you should read this book. Actually, I think that EVERYONE should read this book, because if the warnings implicit in the book are not heeded very soon, the US will find itself in a situation that will be impossible to recover from intact. Indeed, we may already be there...

I'm a long-time reader (addict?) of The Big Picture and bought this book when it first came out. Unfortunately (time constraints being what they are) I only had a chance to read it this summer and time to review it now.

I'll start with a brief chapter summary of the book (paraphrasing).

[Chpt 0] Revised Edition. Six bogus principles: 1) Efficient Market; 2) Self-interest prevents recklessness; 3) Markets can self-regulate; 4) Deregulation is always good; 5) Consumers are rational; 6) Compensation is properly aligned. These must be discarded.

Areas we must reform: Campaign finance; Derivatives; Repeal 2004 leverage exemption; Encourage shorting; Remove bank regulation from the Fed; Create a single regulator; Restore Glass-Steagall; Break up "too big to fails"; Hold senior management responsible; Regulate non-bank lenders; Allow full clawbacks; Overturn federal preemption; Educate consumers; Allow SEC whistle-blowers.

[Chpt 1] Intro: $14T mess, lots of bailouts after Lockheed.

[Chpt 2] Need for a single currency. Establishment of Fed and growth of Fed power.

[Chpt 3] (1860 - 1942) Early history of US growth. Govt funds infrastructure projects. Consumers choose winners and losers. Current market crash not as bad as Great Depression. History of home ownership programs (HOLC). Bailout versus Rescue. Timeline of New Deal programs.

[Chpt 4] (1971 - 1995) Corporate welfare is born: Lockheed! Amtrak! Chrysler! Nixon takes US off gold standard, dollar's value falls through the floor. Lesson 1: Short-term pain avoidance yields major long-term future pain. Lesson 2: The organizations that hate the free market the most are large, well-established corporations.

[Chpt 5] (1987 - 1995) Stock Market Bailouts. Black Monday. Fed hell-bent on supporting asset prices (where's the charter for that?) instead of addressing inflation. Wall Street: "Greenspan's got our back!"

[Chpt 6] (1996 - 1999) Irrational Exuberance. More Greenspan asset price tricks: "bubbles cannot be preempted cheaply." LTCM starts imploding and Greenspan, Rubin, and Summers rescue it. Mistake: Greenspan should have stuck to his (supposed) laissez-fair principles and let LTCM fail. That would have taught everyone a valuable lesson. Again: "Greenspan's got our backs!"

[Chpt 7] (2000 - 2003) Tech Wreck. Greenspan says there's a bubble in 1996, but takes no action. Instead, Fed injects $50B liquidity in late 1999 and NASDAQ doubles. Bubble burst and Greenspan cuts rates in desperate attempt to shore up asset prices. 9/11 was final confirmation of Greenspan policy. Not good: ultra-low rates can cause many problems.

[Chpt 8] Backwards, Rate-Driven Economy. 2002 - 2007 housing cycle fueled by low rates and exotic instruments. Job creation very weak. Stagnant wages => House-as-ATM. Stock buy-backs the new rage. Mtgs: ability to pay succumbs to ability to securitize.

[Chpt 9] Scramble for Yield. Low Fed rates generate mad rush for "safety" of MBS yields. Huge growth in MBSs, CMOs, CDOs, CDSs. Rating agency payola.

[Chpt 10] Subprime Machinery. Abdication of all lending standards begins in early 2000s, driven by Wall St demand. Sleazy mortgage lenders with 90-day warranties were paid by loan volume, not quality. Fraud in appraisals, referrals, applications, mortgages, lending, and builder incentives. Bizarre "innovative" loans. Regulation was virtually non-existent. Washington helped in myriad ways.

[Chpt 11] Radical Deregulation, Nonfeasance. Reagan started deregulation, and it snowballed. Compensation systems encouraged short-term profits. Glass-Steagall, CFMA, Gramm nepotism, Enron. Self-regulating markets don't work. The "Bear Stearns Rule:" 2004 leverage exemption.

[Chpt 12] Unintended Consequences. Clear Channel: cannibalizes own market! Securities Litigation Reform Act of 1995: accounting fraud explodes! Boskin Commission: lying about CPI. Bear bailout encourages Lehman arrogance? CFMA triggers AIG. Lockheed -> Chrysler -> SUVs!

[Chpt 13] Moral Hazard. Greenspan and LTCM. Chrysler: encouraged Big 3 to lobby rather than innovate. Table of "Smart Money" disasters. Housing Collapse Anatomy graphic.

[Chpt 14] Suicide by Democracy. Bear implodes, JPM picks up pieces. Random, knee-jerk reactions from Treasury. Bush went AWOL. Nice Bailout Tally table.

[Chpt 15] Bear. Heavy fixed-income focus, heavy leverage. Crisis of confidence and competence. Cayne, Schwartz, and Spector. Lehman: mark-to-make-believe. Feds think Bear is the only bailout they should make; Lehman expects otherwise. Bear Lessons: Go Big; Go First; Threaten Counterparties; Risk the Economy; Incompetence, Not Arrogance; Balance Sheets Matter; Unintended Consequences.

[Chpt 16] Dot-Com Envy. Overcompensation originated in dot-com days. If startups could do it, so could Wall St execs. Just lever up! Problem: they were betting with pension money. Mutual funds dropped the ball on oversight. Good table on executive pay.

[Chpt 17] Year of Bailout, part 1: AIG. Financial Products managers kept 32% of up-front profits on $3.26B (2005) in revenue. Massive risk (Bloomberg: $587B). More "mark-to-make-believe." Real reason for AIG, Freddie, and Fannie nationalization: to protect counterparties.

[Chpt 18] Year of Bailout, part 2: Too Big to Succeed. Citi a victim of Glass-Steagall greed; used accounting gimmicks (SIVs) to move troubled assets off its books; ballooned into a monster. Despite gross incompetence, Treasury delivers sweetheart deal. BofA buys Countrywide (oops), and then overpays for Merrill. TARP is a one-page receipt for $700B from headless chicken Paulson, but is merely a coverup to hide Citi's bankruptcy. PPIP a bad joke and Congressional end-around.

[Chpt 19] Casting Blame. Long list of culprits with Greenspan/Fed, Gramm, and Ratings Agencies at the top. Rubin opposed Brooksley Born on CDS regs, along with Greenspan and Summers.

[Chpt 20] Misplaced Fault. Mtg Interest Deduction. Naked Shorts. CRA. Fannie & Freddie.

[Chpt 21] Foreclosure Virtue. The market needs to correct but the govt is preventing this. Foreclosures need to happen.

[Chpt 22] Casino Capitalism. Follow the Swedes, not the Japanese. Nationalize the losers.

[Chpt PS] Advice to Obama. Education! Ideas from other Wall St vets.

Here's what I think is missing. Somewhere on these Amazon review pages Ritholtz says that there are three "But For" causes of the crisis, one of which is the ratings agencies. (I.e. "But For" these three, the crisis would not have occurred.) I couldn't agree more. These government-granted monopolists made out like bandits as they passed off toxic waste to pension fund managers as holy water. The ratings agencies abused their privileged status and shirked their responsibility to provide accurate ratings -- all in the name of short-term profits.

Yet in this 300 page book, Ritholtz devotes all of five pages (total) to covering the rating agencies!

I think readers would have appreciated learning how the NRSRO nightmare came about, and how their business model changed around the time the NRSRO designation was established. In particular, I think that not mentioning the fact that Securities Act Rule 436 protected the rating agencies from liability is a large hole in the book.

Another hole: why is there no coverage of the foreign bailouts of the 90s? Wasn't Goldman a leading underwriter of Mexican equities and bonds in the early 90s? And what Wall Street banks welcomed the Asian bailout? Or the Russian or Brazil bailouts? These are excellent examples of Wall Street learning that they can pocket profits while socializing risks.

Also, readers who are looking for the complete "Big Picture" on the housing meltdown will need to keep reading. The holes mentioned above notwithstanding, Ritholtz covers the Wall Street angle exceptionally well. What you won't get is an account of how lending standards became so relaxed; the role politicians and bureaucrats played (except for a couple of Phil Gramm bills); the overall market hype that was in play at the time; and all the amazing stories of fraud at every level in the housing chain.

In particular, Ritholtz seems to reject any notion that there's an ideology that says "Housing Is an American Right." Yet I think it is this ideology that was the catalyst for the development of "innovative mortgage products" and provided the pressure on regulatory agencies to relax standards so banks could make more loans. In my mind, this ideology shares responsibility for the boom with the "Markets Can Self-Regulate" ideology: they both work to corrupt oversight of the market.

Finally, there's an awesome quote by Thomas Jefferson on page 15:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

which Snopes says is bogus.

In spite of all this, I enjoyed reading this book. It provides a highly accessible description of the history of direct government support of the markets, the mistakes of Greenspan and the Fed, the market environment leading up to the crisis, and the major Wall Street players' mistakes. Especially good are the closing chapters 21 and 22, where Ritholtz discusses the virtues of foreclosure and nationalization. There's also an excellent "What If Chrysler Went Bankrupt" section in chapter 4 that should be mandatory reading for all poly sci majors.

Hopefully there will be an updated version that might address some of the issues above (and skewer the so-called reform bill?). In the meantime, if you haven't checked out The Big Picture blog, you're missing out.

I will admit I am an outsider to the financial world. However Bailout Nation clarified current financial issues into a format that was hilarious and easy to follow. I am an avid reader of Barry Ritholtz's blog "The Big Picture," and this book showcases his ability to streamline all the best sources out there in a very comprehensive yet succinct manner. The clever artwork on the cover and between chapters proves very entertaining. I also enjoyed the section towards the end in which Ritholtz's respected contemporaries offered advice to President Obama.

The author does an excellent job in this book ,overall, in showing how Wall Street speculator firms (Bear Stearns,Goldman Sachs,Lehman Brothers,Merrill Lynch,Morgan Stanley,hedge funds,private equity firms,etc.)were able to take over the Republican and Democratic parties,starting with the election of Jimmy Carter in 1976,in order to deregulate the financial sector so that they could engage in debt leverage using completely unregulated derivatives in an attempt to make profits without the production of any goods or services except for phony " financial services " based on purely speculative securitization claims that have no connection to any products and services that would appear in gross domestic product.

The author indirectly shows that the same academics,economists,senators,congressman and politicians who supported the massive concentration of the commercial banking industry through 35 years of mergers,acquisitions and takeovers ,are also the supporters of the current " to big to fail" bailout line used by both George W. Bush and Barack Obama .

There are a few places where the author could have stengthened his argument.First,he needed to duscuss the earlier work of Adam Smith,J M Keynes and Benoit Mandelbrot .All three of these thinkers clearly identified what the result would be if banks are allowed to make loans to speculators seeking to engage in debt leverage.

The author needed to spend more than the two pages (pp.258-259) he spent on the close connections between Wall Street speculator firms(see above),the heads of Fannie Mae (James "Jim " Johnson,Franklin D Raines,Daniel Mudd),and the head of CountryWide,Angelo Mozilo.Fannie Mae was essentially controlled by Mozilo and Wall Street.Bill Clinton,George W.Bush,Barney Frank,Chris Dodd and NY Senator Schumer essentially were paid off with millions in campaign contributions/donations by Wall Street in return for eliminating whatever regulatory apparatus was in place.

The problem is not low interest rates and easy money per se.The problem is the private banking industry's refusal to abide by and enforce their own basic creditworthiness standards.The really important question is ," Who gets the loans ?" Is it the Smithian projectors,imprudent risk takers and prodigals and/or Keynesian rentiers and speculators ? Or is it the Smithian sober people (small businessmen)? It makes a huge difference overall.

I recommend that this book be purchased.

"Capitalism without failure is like religion without sin - it just doesn't work." Allan Maultzer, economist.
"The ultimate result of shielding men from the effects of folly is to fill the world with fools." Herbert Spencer, English philosopher.

Ritholtz tells the tale of how years of trying to control the economy with easy money has finally caught up with the U.S., and how the government's practice of repeatedly rescuing Wall Street and other organizations and industries has come back to bite them.

The government's response to the credit crunch and housing bust so far has rung up over $14 trillion in taxpayer liabilities. This all began in 1971 with the rescue of Lockheed aircraft ($250 million), followed by loan guarantees for Penn Central in 1974 ($676 million), the $1.5 billion rescue of Chrysler in 1980, Continental Illinois Bank in 1984 for $1.8 billion, the S&L Crisis of the early 1990s ($179 billion), etc. Other bailouts have used Federal Reserve rate reductions - eg. the 1998 LTCM crisis., the 1987 market crash, the dot.com crash, 9/11 as the Federal Reserve morphed from a lender of last resort to a guarantor of asset prices.

If the Community Reinvestment Act (CRA) was to blame, the housing boom would have been worse in CRA regions like Harlem, South Philly, Compton, and inner Washington. The opposite occured - the suburbs boomed and busted and went into foreclosure in much greater numbers than inner cities. Further, by 2006, only 28% of depository banks and thrifts were even subject to CRA regulations. The vast majority of subprime mortgages were underwritten by unregulated private firms, and they sold the bulk of their mortgages to Wall Street, not Fannie or Freddie. Having no deposits they were not under FDIC or Office of Thrift Supervision jurisdiction. A Federal Reserve study also notes that over 84% of subprime 2006 mortgages in 2006 were issued by private lending institutions - Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.

Other points - the housing boom and bust was global, and CRA loans were less likely to default then subprime mortgages

Who's to blame? The author includes Greenspan, Bernanke, rating agencies, mortgage originators, mortgage borrowers, President Bush, and Senator Gramm. He also excludes the Community Reinvestment Act because the biggest mortgage messes were in areas (L.A., Florida, Las Vegas, Phoenix) were not significantly influenced by CRA rules; in addition, major sources of subprime loans were not subject to the CRA rules.

I'm an actuarial student studying for the MLC exam (actuarial models) and CLEP Micro/Macro equivalencies. I ordered this book both because I wanted to learn more about the current financial crisis, as well as to become more fluent and comfortable with the concepts and terminology of economics and finance.

The book succeeded on both counts. And it was fun to boot. If you think economics is a dry and boring subject, you'll be surprised. I read it in 2 days. When my fiancee asked what book I was so engrossed in, I said, "Oh, it's kind of a detective story/suspense thriller". Which is not an inaccurate description.

Ritholtz explains the inner workings of Wall Street in understandable language. Having already passed the FM (financial math) exam, I knew the basics of amortization, interest rates, insurance, bonds, and derivatives. But these concepts are explained through concrete examples that make the abstract basics come to life. He has a way of getting to the heart of a matter and not obfuscating or obscuring things.

The author definitely has a viewpoint and "bias" (as one reviewer claimed), but that viewpoint is well-supported with references and logic. He doesn't just express outrage at the Fed or Greenspan or the SEC, he tells exactly what specific actions they did were wrong, and why. And yes the tone is strident near the end, but when one honestly stops to ponder the events that have unfolded, can anyone blame him?

Another important thing I appreciated about this book is that the author recognizes that economics can never be divorced from public policy, politics, ethics, and philosophy. Yes, economics is a subject in its own right, but (normative) economics cannot be addressed solely by "purely economic" considerations. The fact is, we live in a society -- a democracy -- and economic public policy decisions should be based on their potential impact on society at large, not just on theoretical ideas or models about "the market".

One fantastic read! This is a fast paced, fact laden walk through the entire mess which has caused us to become the BAILOUT NATION. How did the greatest capitalistic nation on earth get where we are today? Barry Ritholtz has the answers. If you are at all interested in politics or business this is a must read.

Barry Ritholtz was a contrarian when it wasn't cool. He called it early and called it right. Now he deserves the praise that this great book is earning. We need more cool-headed analysts like Barry.