14 Feb Bailout Nation a Disappointing Bust
I am not kidding that through the first 120 pages or so of Barry Ritholtz’s Bailout Nation, I was feeling like I may have a new favorite book in this project I have embarked upon regarding the financial crisis of 2008. By the time the book was complete, I am fairly certain this was one of the worst ones.
The sad reality is that Ritholtz squandered a golden opportunity here. He did a better job explaining how past bailouts set the tone for the events of 2007-2009 than anyone else I have read. He thoroughly decimated Alan Greenspan’s monetary policy, and where he wasn’t busy copying Flexkenstein nearly word-for-word, he established beyond any shadow of any doubt that the Fed’s careless targeting of asset prices throughout Greenspan’s reign re-defined how investors treated risk. It is excellent material, and worthy of commendation. But at some point around chapter 11, Ritholtz turned the book into an incoherent pot pourri of anti-free market gibberish, and I am shocked that someone of his capability could be so off target.
Ritholtz decided to join the consensus left-wing orthodoxy about the financial crisis – that it was primarily a failure of the free market, and that if only more regulation had been in place it all could have been avoided. How he can not see the glaring internal contradiction is own conclusions is beyond me. He spends over a hundred pages persuasively proving his case that all the government did was disastrous – that their actions in case after case carried horrid unintended consequences – that policymakers have been ineffective bureaucrats for decades – and so forth and so on. Then, in a bizarre twist reeks of ideological plagiarism, Ritholtz morphes into a market-blaming leftist in chapter 11, boldly asserting that if only the government had better controlled and regulated the evil free market all would have been fine. I have read every single credible book on the financial crisis that has been published, and I have never seen a more eggregious case of an author trying to stand on all sides. He joins in the highly cliche and naïve pile-on of Glass-Stegall’s 1999 repeal, absurdly stating that the “ugly financial impact at Citibank can be traced directly” to this act. In an even more maddening act of “yeah, what he said”-ism, Ritholtz jumps on Michael Lewis’s bandwagon regarding the evils of financial institutions being owned by shareholders (vs. private partnerships where the partners have individual liability). While I credit Lewis with devising a highly effective scapegoat in terms of its emotive and rhetorical value, Ritholtz surely has to know better. Why in the world would the public markets model be so dangerous for financial companies, but have worked so well for every other sector of the market (industrials, consumer, energy, utilities, health care, etc.)? Why did Dick Fuld (Lehman Brothers) and Jimmy Cayne (Bear Stearns) have $1 billion of their own equity melt away into nothing if the only issue was their personal exposure? Could Wall Street have not participated in highly irresponsible and leveraged borrowing as partnership entities? Of course they could have! Ritholtz picks two examples of partnership entities that were not decimated by the mortgage credit fiasco (Lazard and private equity firm, KKR), and says, “see, I told you so”. I just have to forgive such a silly exercise as well-meaning amnesia. If he would like a list of all the non-public companies that were put out of business by their own decisions before and during the financial crisis, I could provide one for him if his hard drive has sufficient space.
His book is a hodge-podge of every other bad idea about the crisis that has come out, but with two pecularities: (1) He includes some good observations, and (2) He includes every single bad observation, instead of just one. I do not mean to challenge his research capabilities, but the only conclusion I can draw after having read the entire book is that he simpyl borrowed one thought from every single financial crisi commentator and compiled them together in this book. Let me critique a few of his particular points:
(1) He ever so professionally refers to Wall Street’s “dotcom penis envy” as an explanation as to why Wall Street took unwise risks in the 2000’s. This is his not-so-cute way of saying that Wall Street big-wigs were so jealous of the moneys dotcom college kids were making that they decided to lever their firm’s financial well-being into the stratosphere. There is a kind of bizarre omission from this theory, and that is that Wall Street didn’t exactly start their ill-advised risk taking in 2000, now did they? What kind of “penis envy” was it when Drexel Burnham blew up, Mr. Ritholtz? Or Kidder Peabody? Or any of the other 1,200 major financial firms that from 1900-2000 went kaput. This attempt at piling on misses the mark badly, and actually and ironically gives Wall Street too much credit. Poor judgment and ill-advised risk-taking is not exactly a new phenomena. I don’t think the dotcom mania (something that Wall Street made a gazillion dollars from) helps explain anything.
(2) He spends an entire sentence dimissing the draconian requirements of “mark-to-market” accounting as having anything to do with what caused the crisis. He doesn’t engage it, or rebut it, or treat it seriously – he just spends one sentence saying “mark to market accounting had nothing to do with it.” Well, Ritholtz may or may not be right. But I am going to go out on a limb and say that since March of 2009 was the exact point in time at which FASB 157 (the so-called mark-to-market accounting requirement) was loosened, and March of 2009 was exactly the same point at which credit spreads began tightening, stock markets began recovering, capital began being paid back, and the depths of the financial crisis hit their “bottoms” by any rational person’s definition, perhaps the burden of proof is on Ritholtz. Now, perhaps it is all a big coincidence, and it is a total coincidence that the repeal of mark-to-market happened right before all of the aforementioned events, as I certainly understand that “correlation is not causation”. However, the magnitude of this “coincidence” requires a more scholarly treatment in a 300-page book than the one sentence Ritholtz gave it.
(3) I hope I was clear earlier, but just in case: There really is a lot in this book worthy of praise. I appreciated much of the first 120 pages. But his relentless assault on free markets is both irrational and totally misplaced. The fatal mistake these “we could have regulated ourselves from ever going through this catastrophe” people make is that they are calling upon the people who were most complicit in this disaster to have been the saviors. It makes no sense. And it really makes no sense in a book that elsewhere correctly identifies the problem!!! Mortgage brokers, banks, and Wall Street securitizers did not care about idiotic risk because they knew they could hand off the potato. Financial institutions buying the products believed (with very good precedent) that they would be made whole. The government set the tone for all of this with a generation of bailout policies, with an easy monetary policy that screamed for recklessness, and with a social-engineering housing policy that practically mandated it. Ritholtz basically identifies all of the above (with the mysterious exception of the last point, which it seems was too inconvenient for this other theses to admit to). And yet, even after properly identifying much of what caused this crisis, Ritholtz decides to sign on hook, line, and sinker to the silliest notion of this entire escapade: That somehow inept and corrupt regulators could have prevented this crisis.
One can see how badly Ritholtz wanted to agree with every other commentator of this crisis on pp. 232 and 233. He lists a couple dozen of the major culprits in this mess. He gives one line and no elaboration to the American people who borrowed money they couldn’t afford to pay back and lied about their financial resources in doing so (oops – slipped his mind). But fortunately he includes Ronald Reagan, who apparently “set a tone” of deregulation and “markets are good-fever” that ended up biting us in the rear. I reiterate my earlier point: The parts of this book that were good were quite promising; the parts that were bad were totally devastating. The final couple chapters where somehow Fannie and Freddie were vindicated but Ronald Reagan iudicted truthfully do not warrant a serious response.
And since I know that Ritholtz understands the monetary fire that the Fed was igniting at the same time that risk was being more incorrectly priced than any time in market history, I know that he doesn’t need me to tell him this. He just needs to re-read the good parts of his own book.