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How U.S. became a bailout nation

Marketplace Staff May 27, 2009

How U.S. became a bailout nation

Marketplace Staff May 27, 2009


Kai Ryssdal: Years from now, when you hear the word “bailout,” you’re probably going to think of this particular moment in economic time. And all the money that the government has given to banks and automakers and insurance companies. Even the porn industry asked for a handout, although they didn’t get it. Barry Ritholtz writes about the current state affairs in his new book “Bailout Nation.” He works on Wall Street. He’s the CEO and Director for Equity Research for a company called Fusion IQ, so I asked him where we are right now in the bailout story.

BARRY RITHOLTZ: We’ve kinda gone through this cycle of, we don’t really understand it but it sounds like a lot of money, to, gee, I guess it’s an emergency they have to do it, to, this was absolutely a generational theft — why did we give all this money to people who caused the problem in the first place? This is ridiculous.

Ryssdal: Let me back you up for a minute and first point out that you’re guy who makes his living doing research on Wall Street, for Wall Street firms, right? So how do you feel about trying to figure out whose fault this is? I mean, is it Wall Street’s fault? Is it Washington’s fault? I mean Wall Street was doing what it’s supposed to do, right? Make money.

RITHOLTZ: From the Wall Street perspective people were getting paid for taking exorbitant risks and piling up a whole bunch of money. But they weren’t getting paid based on if that was profitable or not. The best example is AIG Financial Products. Where essentially they were getting one tenth of 1 percent on these derivatives they had written, and you know you write $3 trillion worth of derivatives and even one tenth of 1 percent is a lot of money. It’s $3 billion a year. But in order to get that $3 billion they had to expose the firm to just incredible amounts of risk, and guess what? The risk came up double zero, and the firm went bust.

Ryssdal: Well, how does Wall Street about what Wall Street did?

RITHOLTZ: Most of Wall Street is furious at what happened. Most of Wall Street aren’t involved in mortgage securitization or derivatives or any of the other bad assets that have been blowing up. The average guy — you know Wall Street is a meritocracy, eat what you kill, as much as you can earn in profits you get to take as a bonus — and I know a lot of guys, everywhere from Merrill Lynch to Bear Stearns to Lehman, that actually were really profitable. But because this one division was run by rogue pirate traders and reckless derivatives salesmen, they wiped up the entire bonus pool for the entire firm, and then some, all the while engaging in really reckless behavior.

Ryssdal: Do you figure we’re stuck now as a bailout nation? We’re going to be subsidizing banks and car companies and insurance companies for some time to come.

RITHOLTZ: You know we’ve already seen the trucking industry make hints they want stuff. And we’ve seen the homebuilders who are key players in this, who just overbuilt everything. They’ve been asking for a bailout. That’s the slippery slope. Once you reward people for their worst behavior, for speculative, irresponsible investing and punish the prudent and the people who are careful with that money. Everybody seems to think it’s a free for all. Hey, you’ve got yours. How do I get mine?

Ryssdal: What’s the alternative to these bailouts? I mean should we have just done nothing?

RITHOLTZ: What you do is what the FDIC does when a bank is found to be insolvent. Look what happened with Washington Mutual. On a Friday afternoon, the FDIC shows up and said, “according to our reading of your books, you are insolvent.” They fire the board of directors. They fire the senior management. They take the assets and figure out what it’s worth, and they’ve already reached out to potential buyers. J.P. Morgan wrote a big multimillion dollar check. It is a controlled dissolution or reorganization where the net result isn’t that Uncle Sam is running the banks — which is what’s happening with Bank of America and Citigroup and AIG — what you’re actually doing is following the law. The FDIC’s rules require insolvent banks to be put out of their misery and put into good hands. You don’t want to reward incompetent management, and that’s pretty much what we’ve been doing. Oh, you guys drove this company into the ground, and you’ve lost $180 billion, here’s a check. Come back if you need some more. It’s insane.

Ryssdal: Barry Ritholtz runs a blog called The Big Picture. More to the point though, his book is called “Bailout Nation.” Barry, thanks a lot.

RITHOLTZ: Thanks for having me.

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