Book Review: Bailout Nation

Just finished up "Bailout Nation" by Barry Ritholz. As you may know, Ritholz is famous for his blog "The Big Picture", and its why he got the book deal in the first place.

Although I am not a huge fan of this blog (I am more into the shock-and-awe blogs such as NakedCapitalism and ZeroHedge), this book has a lot of useful information. Barry Ritholz was able to explain a lot of the current problems the US, and the world, are experiencing in layman's terms.

The books begins with him talking about the history of US bailouts. Starting from Lockheed Martin in 1979 and going through the S&L crisis to Long Term Capital Managment in the summer of 1998. With each bailout, he ties in the whole moral hazard theme and attempts to explain how each of these bailouts is directly responsible for where we are today.

Two interesting topics he touches on that I have seen no other commentary are:

1) "The mad scramble for yeild" - an enormous amount of money run on behalf of large foundations, endowments, pension funds, and chartiable trusts. These institutions are constrained by some basic money managment principles. Foremost, amount these is the payout requirement -- the minimum distribution of money that these organizations must pay out each year. Basically, trust and foundations must spend or give away 5% of the average market value of their assets. Failing to do so would lead to heavy penalties (2% of assets).

Greenspan's ultralow rates caused "tremendous angst and consternation" among fixed-income managers because the coul not generate the needed returns when the FED had driven the FF rates so low. There, they ended up in AAA tranches of CDOs/CLOs, etc...we all know how that episode ended.

2) The Commodity Futures Modernization Act of 2000 (sponsored by Phil Gramm).
This piece of legislation allowed derivatives such as Credit Default Swaps to become an enormous, unregulated shadow insurance industry. Removing derivatives from any and all regulation created a situation in which AIGFP could become a giant hedgefund hidden inside of a legitimate, respected insurance company.

The whole books was great, including the ending where Ritholz makes a list of everyone he holds responsible, in their order of responsibility.