ritholtz - bailout nation; how greed and easy money corrupted wall street and shock the world economy (2009)

“Do you fi nd yourself wondering: How did we get here? How did the United States of America get into such a predicament whereby in one year, 2008, the fi nancial system nearly vaporized, the stock market crashed, real estate tanked, and major corporations were being bailed out. . . . How did our great country, a bastion of capitalism, devolve into a Bailout Nation where the gains were privatized, but the losses were socialized?” —From the Foreword by Bill Fleckenstein In Bailout Nation, Barry Ritholtz, author of the popular fi nance blog www.ritholtz.com/blog/ , deftly mixes fi nancial history with an insider’s knowledge of modern fi nance to reveal how we’ve arrived at one of the worst economic crises ever. Engaging and informative, this book clearly shows how years of trying to control the economy with easy money has fi nally caught up with the United States and how the government’s practice of repeatedly rescuing Wall Street—as well as other industries and organizations—has come back to bite them. Divided into fi ve compelling parts, this timely guide opens with a brief history of bailouts, detailing their particular patterns and unintended consequences. From here, it quickly moves on to reveal the events, individuals, and institutions that have shaped our current situation. You’ll see how various government interventions—in individual companies such as Lockheed during the 1970s, in specifi c sectors such as banking in the early 1990s, and eventually, entire markets with the rescue of stocks in 2000—opened up a Pandora’s Box. You’ll also discover how the misguided philosophies of many players, from Fed Chairmen and Presidents to Senators and Treasury Secretaries, promoted the massive meltdown that has engulfed our global economy. Ritholtz leaves no stone unturned, as he breaks down how the Federal Reserve’s interest-rate targeting policies as well as a condition known as moral hazard— the belief that you won’t bear the full consequences of your actions—perpetuated the reckless fi nancial risk taking that has pushed us to the brink. Ritholtz also takes some of the biggest Wall Street fi rms—along with their enablers, the ratings agencies—to task. Page by page, you’ll learn how the repeal of certain regulations allowed banks to merge into unruly fi nancial behemoths, while unproven investment vehicles, including collateralized debt obligations (CDOs) and credit default swaps (CDSs), wreaked havoc on both the credit and housing markets. The United States has abandoned its capitalist roots and become a Bailout Nation. The implications of this are signifi cant and far-reaching. If you intend on navigating today’s treacherous terrain, it would be wise to understand how we got here and what you need to get ahead. Scathing, but fair, Bailout Nation puts this fi nancial debacle in perspective—through discussions of past miscues and an exploration of solutions being proposed—and offers a voice of reason during these uncertain economic times. BARRY RITHOLTZ operates one of today’s most popular economic blogs, www.ritholtz.com/blog/, which has received over 50 mil- lion page views since launching. He is the CEO and Director of Equity Research at FusionIQ, an online quantitative research fi rm. He is a frequent guest on CNBC; a regular guest on Fast Money, Kudlow & Company, and Power Lunch; and author of the popular “Apprenticed Investor” column at TheStreet.com. Jacket Design and Illustration: © John Sherffius “ If you want to know how we got into this mess, then Ritholtz’s Bailout Nation is where you should begin. He chronicled the collapse from the beginning with a rare clarity, and that shines through in this book.” —Chris Anderson, author of The Long Tail “ One of the biggest myths of the great credit debacle of 2008 is that nobody saw it coming. Bull. Barry Ritholtz did. In Bailout Nation, Ritholtz throws our current travails into historical relief. For those who want to know how we got to this miserable place—and who want to have fun doing it—this is essential reading.” —Daniel Gross, Newsweek and Slate “ Highly entertaining rants against the stupidity of our biggest fi nancial institutions. Ritholtz brings intelligence and moral outrage to this book.” —Rex Nutting, MarketWatch “ Nobody in the fi nancial punditry world has been ‘righter’ about the economic crisis unfolding than Barry. If there was such a thing as a fi nancial pundits Hall of Fame, he would have to be an inaugural inductee. Ignore Bailout Nation at your own peril.” — Tobin Smith, founder, ChangeWave Research, and Contributing Market Analyst, Fox News “ Bailout Nation provides an easily understandable and vividly descriptive road map as to how our domestic economy got into the rut we are now in . . . It is a must-read for serious students of fi nancial history . . . and for all investors in bonds and stocks who want to preserve and grow their capital in the future!” —Doug Kass, Seabreeze Partners, Real Money.com, CNBC $24.95 USA / $29.95 CAN (continued on back flap) BAILOUT NATIONBAILOUT NATION RITHOLTZRITHOLTZ (continued from front flap) BAILOUT NATIONBAILOUT NATION Praise for P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come iv P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come Praise for Bailout Nation “The greatest economic calamity in a generation has now swept from Wall Street through Main Street, to Iceland, Europe, and beyond. Barry Ritholtz not only saw the financial tidal wave coming, but tried to warn us before it hit, when few believed anything like it could happen. Now that clean-up is at hand, who better to explain what went wrong? Read this book: when Barry Ritholtz speaks, as the saying goes, attention must be paid.” —Jeff Matthews Author, Pilgrimage to Warren Buffett’s Omaha “This thrilling page-turner is really a doctoral thesis in disguise on the history of financial debacles and the inner workings of the global financial system and modern economics. Barry is truly one of Wall Street’s important thinkers and rising stars. Bravo Barry!” —Jeffrey A. Hirsch Editor-in-Chief, Stock Trader’s Almanac “Barry Ritholtz, long known to readers of The Big Picture for telling it like it is, does exactly that in Bailout Nation. With sparkling clarity and his inimitable brashness, Barry names names and tells you where to look for the bodies who are profiting from the unprecedented $8 trillion government bailout.” —Michelle Leder Author, Financial Fine Print and Footnoted “Part history lesson, part social commentary, part in-depth analysis, Bailout Nation serves up a riveting indictment of the age of hubris and excess.” —Michael Panzner Financial Armageddon i P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come “As Wall Street wizards were turning into welfare kings, Barry Ritholtz was there to chronicle every new outrage on his blog, The Big Picture. Now he’s focused on the really Big Picture—how we got into this mess—with his great new book, Bailout Nation.” —Jesse Eisinger Portfolio “Barry Ritholtz crystallizes the absurdity of the bailouts and why America’s addiction to them is doomed to fail. This should be required reading for every future politician with a conscience.” —Herb Greenberg former journalist, CNBC, Marketwatch, and now director of GreebergMeritz Research & Analytics “Barry Ritholtz is leading the first wave of critical analysts who are trying to make sense of the past year beyond the official explanations. He not only illustrates the conflicts and contradiction in current economic leaders and policies, but suggests some solutions and even opportunities in this sea of global financial misery. I’m already looking forward to volume two.” —Christopher Whalen Institutional Risk Analytics “Bailout Nation provides a timely review and analysis of the issues and problems that led to and are evidenced in the present financial turmoil. These forensics are much needed today.” —David Kotok Cumberland Advisors “Barry Ritholtz has a one-two combination punch of insight and skepticism that leaves financiers, bankers and politicians out cold on the floor. This is pungent and funny required reading about the current crisis.” —Dr. Paul Kedrosky Infectious Greed Partner, Ventures West VC ii P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come Bailout Nation iii P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come iv P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come Bailout Nation How Greed and Easy Money Corrupted Wall Street and Shook the World Economy Barry Ritholtz with Aaron Task John Wiley & Sons, Inc. v P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come Copyright C  2009 by Barry Ritholtz. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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ISBN 978-0-470-52038-3 Printed in the United States of America 10987654321 vi P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come To Wendy, who has bailed me out of more than a few jams vii P1: OTE/PGN P2: OTE fm JWBT124-Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come viii [...]... set the stage for what we are witnessing today in the United States (and in the United Kingdom), with the prudent being forced to bail out the reckless As Barry notes, The parallels between what doomed LTCM in 1998 and what forced Wall Street to run to Washington for a handout in 2008 are all there.” The United States has abandoned its capitalist roots, and the country has morphed into a Bailout Nation;. .. All of the people I know who work on the Street whether in stocks, bonds, options, or commodities—have a strong sense of fair play “Eat what you kill” is the classic Wall Street attitude toward risk and reward, profit and loss There are, however, those market players who fail to live or die by their own swords—but then expect to be rescued by others from their own folly They embody a fair-weather belief... in the free market system, somehow thinking it applies only during the good times This is a high form of moral cowardice, and it is rightly despised by those who play fairly and by the rules Since the turn of the twenty-first century, well-connected, moneyed interests have managed to keep all of their profits and bonuses during Introduction 3 good times, but have somehow thrown off their risk and the. .. equal to the gross domestic product (GDP) of the United States in 2007 And as 2008 came to a close, even more industries caught the scent of easy money: Automakers, home builders, insurers, and even state and local governments were clamoring for a piece of the bailout pie The implications of this are significant The current bout of bailouts the banks and brokers, airlines and automakers, lenders and borrowers... portions of their underlying assets are found to be essentially worthless The mind-set of deregulation that was championed by Federal Reserve Chairman Alan Greenspan in the wake of the Long-Term Capital Management (LTCM) bailout in 1998 is partially responsible for the massive overleveraging of nearly the entire financial system in the United States That Wall Street bailout (which led to the notion of the “Greenspan... when they deliver the results it wants If they don’t, an attempt is made to alter the outcome, leading to unintended consequences down the road, which often are more severe than the original problem Ritholtz also names the villains in this tragedy the rogues’ gallery of politicians and officials who screwed up big time and demonstrates what they did to make the problem either bigger or worse He also shows... rustlers The new gauchos ride not on the range, but on the financial vistas Instead of herding cattle, they rope derivatives, wrangle financial instruments, and round up paper wealth The differences between the modern-day cowboy/bankers 1 2 B A I L O U T N AT I O N and the ranch hands of the old West are many, not the least of which is monetary—today’s banker/rustler makes a whole lot more money than the. .. Introduction Bailout Nation 1 PART I 7 A BRIEF HISTORY OF BAILOUTS Chapter 1 A Brief History of Bailouts Chapter 2 The Creation of the Federal Reserve, and Its Role in Creating Our Bailout Nation 13 Chapter 3 Pre -Bailout Nation (1860–1942) 21 Chapter 4 Industrial-Era Bailouts (1971–1995) 33 Intermezzo A Pattern Emerges 45 9 PART II THE MODERN ERA OF BAILOUTS 51 Chapter 5 Stock Market Bailouts (1987–1995)... borrowers in the housing industry—will have significant, long-lasting repercussions So far, they have turned the United States into a Bailout Nation And that’s just the beginning Part I A BRIEF HISTORY OF BAILOUTS Source: By permission of John Sherffius and Creators Syndicate, Inc Chapter 1 A Brief History of Bailouts The ultimate result of shielding men from the effects of folly is to fill the world with... with only modest monetary and fiscal powers Eventually, these powers were expanded dramatically The next phase took place in the 1930s and 1940s, between the Great Depression and World War II The widespread economic turmoil A Brief History of Bailouts 11 and political discontent forced the government to engage in a series of economic stimuli designed to generate jobs, income, and economic activity While . JWBT124 -Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come iv P1: OTE/PGN P2: OTE fm JWBT124 -Ritholtz April 21, 2009 8:4 Printer Name: Yet to Come Bailout Nation How Greed and Easy Money Corrupted. 1998 and what forced Wall Street to run to Washington for a handout in 2008 are all there.” The United States has abandoned its capitalist roots, and the country has morphed into a Bailout Nation;. for under- standing how to navigate the future. The primary reason that I wrote Greenspan’s Bubbles: The Age of Igno- rance at the Federal Reserve (McGraw-Hill, 2008) was so that when the U.S. credit/housing