Barry Ritholtz -- Bailout nation: how greed and easy money corrupted wall street and shook the world economy
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A good critique of the changes in regulations, laws, and oversight
that resulted in the financial crash of 2008.

We also need more help with what to do going forward.  But, since we
(in the U.S.) seem to lack the political will and coherence needed
to take the needed steps, perhaps that does not matter anyway.

In a perverse way, its a fun read.  If we can't put the
perpetrators of this disaster in jail, at the least we can assign
blame.  Ritholtz does that in a chapter titled "Casting blame".
Alan Greenspan tops the list.  (How *does* that man sleep at night.)
But, The Federal Reserve (for failing in its supervision duties);
ex-senator Phil Gramm (for pushing through the Gramm-Leach-Bliley
deregulation act); Moody's Standard & Poor's, and Fitch rating
agencies (for blessing such atrocious loans and investment
instruments with high ratings); and The Securities and Exchange
Commission (also for failing in its duty to supervise)

There's plenty to learn from this book also.  Some of that is
fundamental theory of banking and money.  A few examples:

- The net capitalization rule limits the amount of money that a bank
  can loan on a given amount of capital.  When the SEC granted
  exemptions to this rule to specific large investment firms,
  specifically Bear Stearns, Lehman Bros., Merrill Lynch, Morgan
  Stanley, and Goldman Sachs, doing so open the door to disaster and
  said, "walk right in".

- An explanation for the most destructive change in mortgage
  lending: the shift banks and loan originators made from
  investigating the ability and likelihood of the borrower to repay
  to repackaging and selling loans at a way to reduce the risk of
  suffering as a result of defaults by borrows.  When that happened,
  they shifted the consequences of failure to pay to someone else,
  removed an aversion to risk and loss (something banks were
  formerly quite serious about), and eventually dropped the terrible
  losses on all of us.

- A description of the "machinery" of the subprime loan industry,
  how that process changed from more conservative lending times, and
  how the supply chain, from originators (mortgage brokers,
  nondepository mortgage originators) to banks to investment firms.

- Moral hazard -- We can blame those at the major banks and
  investment banks for trashing the financial system, but if you set
  up a system where participants can take high risks, make huge
  profits, and suffer no adverse consequences, then you have to
  expect them to do that.  As comedian Flip Wilson's Geraldine
  character would have said, "What you see is what you get".

Ritholtz is a proponent of the "Swedish solution" for failing banks,
specifically: (1) temporarily nationalize the bank; (2) fire the
management (it happened on their watch; they were driving when the
wreck happened); (3) wipe out stockholders (brutal, but after all they
made a bad investment); (4) give bondholders a haircut and force
them to take part ownership in exchange (the pain must be shared
somewhere); (5) separate good and bad/toxic assets and ... (OK, I
admit that I really don't understand how this last piece works).

I side with those who say that we have not done what is necessary to
prevent the next financial disaster.  Still, if we do not continue
trying to understand what happened during the current fiasco, we
have no hope of preventing or, at least, delaying or, at the very
least, mitigating the next one.

03/24/2011

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