'Bailout Nation': Barry Ritholtz Takes on Citigroup, Chrysler and Other Companies

May 27, 2009— -- How long does it take to explain how the U.S. government has ended up spending billions of dollars in taxpayer funds to bail out some of the country's largest, most well-known corporations?

If you check with bailout critic and Fusion IQ chief executive Barry Ritholtz, the answer is about 300 pages. "Bailout Nation, Ritholtz's new book, "points fingers and lays the blame at a number of places," the author told ABCNews.com.

"Now that the worst of the crisis is over, we need to start thinking about how this happened and how we can prevent it from happening again in the future," Ritholtz said. "It's important not only that we avoid repeating the mistake but we figure out the causes of this and then start setting about repairing the damage that was done."

Below are some of the highlights of the analysis in Ritholtz's book, courtesy of the book's publisher, Wiley. For an excerpt from the book's introduction, see the third page.

From 'Bailout Nation'

1. This was not a "perfect storm" -- unforeseeable random events that just happened. In reality, it was a series of conscious decisions made by investment banks, commercial banks, government officials, regulators and central bankers that were simply awful.

2. The bailout has cost more so far than the Marshall Plan, the Louisiana Purchase, the race to the Moon, the S&L crisis, the Korean War, The New Deal, the Gulf War II/Invasion of Iraq, Vietnam War, NASA and War World II COMBINED. (Oh, and that includes adjusting the other expenses for inflation).

3. The CEOs of the biggest 15 investment banks, mortgage firms and commercial banks "retired" from the firms they helped to ruin, and took home more than $1.5 billion in compensation.

4. Warren Buffet offered Lehman Brothers a multi-billion dollar investment that would have saved the firm. Dick Fuld, Lehman's CEO, turned him down, so he invested it in Goldman Sachs instead.

5. No, contrary to popular rumor, AIG was not brought down by the collapse of Lehman Brothers. In fact, AIG's exposure to LEH was balanced. Instead, they were like two swimmers caught in the same riptide. And the same forces that led to Lehman's demise also killed AIG: too much leverage, too much sub-prime mortgage exposure, too little risk management.

Highlights From 'Bailout Nation' (cont.)

6. When the United States bailed out Chrysler in 1980, the UAW had 1.5 million members and the Big 3 had a 75 percent U.S. market share. Since that "successful" bailout, the UAW is down to 400,000 members and falling; the Big Three fell below a 50 percent U.S. market share for the first time in May 2008.

7. Nearly every bailout had followed the same script: similar timeliness, official statements, stock action, politics and, ultimately, taxpayer money.

8. Much of the damage to these companies was self-inflicted: the excess leverage, mortgage exposure, deregulation and lowering of credit standards took place at the behest of these firms. They were not killed by others, they committed suicide.

9. The S&L crisis wasn't a bailout; it was a payout on a federally funded deposit insurance program.

10. The total cost of the bailouts so far, including loans, guarantees, assumption of risk and outright gifts, exceeds $14 trillion.

11. The Troubled Assets Relief Program was an elaborate ruse designed to hide the fact that Citigroup was insolvent.

12. Wells Fargo bought Wachovia for $15 billion, but managed to squeeze a $74 billion tax shelter through the IRS for the purchase. Net profit, $59 billion dollars, pretty nice for one day's work.

13. Citigroup had been lobbying for the repeal of the Glass-Steagall Act since the 1980s. They finally got their wish, and it helped destroy the bank.

For an excerpt from the introduction of 'Bailout Nation', see the next page.

'Bailout Nation' Excerpt: Going to the Honey Pot

The modern era of finance is now defined by the bailout. "Systemic risk" has become the buzzword du jour. History teaches us that these bouts of intervention to save the system occur far more regularly than an honest definition of that phrase would require. Indeed, systemic risk has become the rallying cry of those who patrol the corridors of Washington D.C., hats in hand, looking for a handout. As we too often learn after the fact, what is described as systemic risk is more often than not an issue of political connections and politics. Perhaps a more accurate phrase is economic expediency.

The past generation has seen increasing dependence on government intervention into the affairs of finance. Industrial companies, banks, markets, and now financial firms have all gone to the honey pot. This is no longer a question of philosophical purity, but rather a regular occurrence of politically connected corporations -- and their well-greased politicians -- throwing off the responsibility for their failures onto the public. Any sort of guiding philosophy or ideology regarding free markets, competition, success and failure seems to have simply faded away as inconvenient. No worries, the taxpayer will cover it.

Some people -- most notably, current Federal Reserve chairman Ben Bernanke and former chairman Alan Greenspan -- seem to feel that it is the responsibility of governmental entities such as the Federal Reserve or Congress to intervene only when the entire system is at risk. The events of the past year have made it clear that this is a terribly expensive approach. Perhaps what the government should be doing is acting to prevent systemic risk before it threatens to destabilize the world's economy, rather than merely cleaning up and bailing out afterwards. An ounce of regulatory prevention may save trillions in clean up cures.

The United States finds itself in the midst of an unprecedented cleanup of toxic financial waste. As of this writing, the response to the credit crunch, housing collapse, and recession by various and sundry government agencies had rung up over $14 trillion in taxpayer liabilities, including bailouts for Fannie Mae and Freddie Mac, GM and Chrysler, AIG (three times) Bank of America (two times) and Citigroup (three times). It has forced capital injections into other major banks, and government-engineered mergers involving once vaunted firms Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Washington Mutual. It has led to the FDIC receivership, nationalization and sale of Washington Mutual, now in the hands of JP Morgan, and Wachovia, flipped over the course of a weekend to Wells Fargo.

Yes, that's $14 trillion (plus) -- about 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, homebuilders, insurers, and even state and local governments were clamoring for a piece of the Fed's bailout pie.

The implications of this are significant. The current bout of bailouts – the banks and brokers, airlines and auto makers, lenders and borrowers in the housing industry, will have significant, long-lasting repercussions.

So far, they have turned America into a Bailout Nation.

And that's just the beginning.

Excerpted with permission from the publisher, John Wiley & Sons, Inc., from Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, by Barry Ritholtz. Copyright © 2009 by Barry Ritholtz.