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Archive for the ‘Book Review’ Category

Book Review.  “Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves,” by Mike Mayo.

Mike Mayo witnessed a disaster: America’s real estate crash.  Mayo is a certified financial analyst.  He’s spent a career analyzing the value of America’s major financial firms.  In 2008, Fortune magazine recognized Mayo as one of “Eight Who Saw the Crisis Coming.”  Mayo therefore has unique credibility in understanding the flaws in our financial system—and why the biggest bailout and regulatory drive in our nation’s history has changed nothing.

Exile on Wall Street is mostly an autobiography.  Mayo describes the challenge of getting his first job on Wall Street, which only came after Mayo spent five years at the Federal Reserve reviewing applications for bank mergers.   Once Mayo joined the ranks of analysts, he faced the conflicts built into the financial system.  As an analyst, Mayo was frequently expected to work hand & glove with the investment bankers competing for business from America’s largest banks.  Mayo, however, saw his job as providing frank advice based on careful research.  That approach sometimes earned him enmity from executives at banks he was charged with analyzing.

Mayo provides an in-depth look at the history of Citigroup and his interactions with the company.  Citigroup was too big to fail in 2008.  In fact, Mayo notes that Citigroup or its borrowers received government support or bailouts numerous times over its history.  City Bank of New York played a major role in the 1929 stock market crash, the Penn Central bailout of 1970, the Latin American sovereign debt crisis of the 1980s, and on up to today.

Citigroup lobbied hard for the repeal of the Glass-Steagall Act in 1999.  That didn’t stop Citigroup from leading the bailout charge in 2008.  Mayo recognized the problems with Citigroup’s growth strategy for years.  Read Mayo’s book to understand how too many CEOs play a double game:  trumpeting free market risk-taking while evading responsibility and ultimately seeking taxpayer bailouts.

Mayo offers some solutions that address flaws in the current system.  Accounting and auditing functions need to be overhauled due to conflicts of interest that undermine accountability.  Mayo contends that bankruptcy is the solution for the handful banks “too big to fail.”  Organizations too large and unwieldy to manage risk do not deserve government protection.  Allowing Citigroup, for example, to bear the results of its continued risk-taking would ultimately accomplish more than another raft-load of regulations.

Mayo saw the problems in the banking industry before many others.  His book provides a keen look at the problems that persist to this day.  The crash of 2008 ultimately changed nothing for the better.  Mayo starts the dialogue on what needs to change to prevent another crisis.

The Wall Street Journal recently profiled Mayo as an analyst gadlfy who has stayed in the game.   If Mayo is a gadfly, it is time to put some gadflys in charge.

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Book Review:  “Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present,” by Jeff Madrick.

Jeff Madrick is a former economics columnist for the New York Times and a senior fellow at both the Roosevelt Institute and the Scwhartz Center for Economic Policy Analysis, The New School.  It therefore isn’t surprising that Madrick views the financial bubble through the prism of favoring bigger government.

Age of Greed chronicles the story of various financiers, economists and political figures over the past few decades, including some of the left’s favorite villains.  Madrick’s thesis is that de-regulation led to the economic crisis.  He singles out Howard Jarvis and Jack Kemp as key figures who tapped into anger at the malaise era of Jimmy Carter.  In 1978, Jarvis’ Proposition 13 passed in California with 65% of the vote.  Prop 13 limited taxes at a time that California outstripped the rest of the country in high property taxes.  Kemp advocated the Laffer Curve, which posits that reducing high marginal tax rates can increase both growth and total revenue receipts.  Madrick contends that the desire to restrain the growth of government led to what he calls the Age of Greed.

Madrick excels at providing an overview of pivotal moments in the careers of various business and finance figures.  Madrick covers everyone from George Soros to Alan Greenspan.  GE’s Jack Welch transformed a conglomerate into a finance-driven titan.  Joe Flom was one of a handful of attorneys who oversaw the era of the leveraged buy-out.  Other figures appear as clear villains: Ivan Boesky and Michael Milken; Ken Lay of Enron and Angelo Mozillo of Countrywide Financial.

Although the stories are entertaining, there’s little evidence that greed was invented in the 1970s.  Nor can Madrick explain how his pro-Keynesian economic view will prevent such problems in the future.

Madrick ascribes the decline of American manufacturing and other jobs sectors to the rise of finance.  He believes that the growth in finance led to a misallocation of resources, pointing to recurring financial bubbles.  Excessive compensation attracts top students to finance over other more “productive” industries.  Yet higher executive compensation hasn’t been limited to the financial industry.

The growth of U.S. financial firms is due to much more than “greed.”  American financial firms are global giants in a global market for capital.  The capital allocated to U.S. real estate investments was international as well.  Given the continued importance of the U.S. economy, U.S. financial firms have been uniquely positioned to assume a global role.

America’s loss of manufacturing has been a gain for other countries.  From 1950 to 2000, World GDP grew about ten-fold, while U.S. GDP grew about six-fold.  We’ve gone from being one-half of the world economy to about one-quarter.  Manufacturing growth in other countries is lessening income inequality in a way that government programs never could.  That also reveals a tension in Madrick’s thesis.  Does he favor a robust manufacturing America like the 1960s–at the expense of other nations–or is he simply opposed to American preeminence in the world of finance?  If American finance hadn’t grown (and grown at times through excess), American manufacturers in some sectors still could not have competed with their emerging international competitors.

Read Madrick’s book for a portrait of a mix of financial titans from the past several decades.  Recognize, though that new regulatory schemes show no signs of ending human greed.  Nor have various strong-government kleptocracies managed to avoid the perils of human greed.

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Book Review:  “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Let to Economic Armageddon,” by Gretchen Morgenson and Joshua Rosner.

Reckless Endangerment tells the story of how crony capitalism led to the financial crisis of 2008.  Morgenson is a business reporter for the New York Times and Rosner a research consultant on the mortgage industry.  Both conducted interviews concerning the mortgage industry and Wall Street over the last decade.

Reckless Endangerment identifies the powerful people whose actions led to the financial crisis.  In the wake of the Wall Street bailouts, “the American people realize they’ve been robbed.  They’re just not sure by whom.”  The authors explain in detail the key players who profited from the decades-long relationship between Wall Street and Washington.

The financial collapse of 2008 resulted in part from the concept of public-private partnerships.  Rather than serve as a neutral enforcer of the rules, the federal government became a “partner” of Freddie Mac and Fannie Mae.  Freddie and Fannie are GSEs (government sponsored enterprises) benefitted from the guarantee of government credit long before the bank bailouts of 2008-09.

The book details the career of James A. Johnson, who served as CEO of Fannie Mae from 1991 to 1998.  Johnson came to Fannie Mae from politics and Wall Street.  Johnson served as the campaign manager of Walter Mondale’s 1984 presidential campaign and also worked on George McGovern’s 1972 presidential campaign.  From 1985 to 1990, Johnson became a managing director at Lehman Brothers.

Johnson recognized that defending and expanding Fannie Mae’s relationship with the federal government would prove lucrative.  Many of Fannie’s political champions were Democrats, including Barney Frank and Maxine Waters.  One of Johnson’s initiatives established regional Fannie Mae Partnership offices intended to promote ever-expanding homeownership by working with elected officials.  These regional offices became a political network designed to thwart any efforts to reign in Fannie Mae.  In 1995, the new House Speaker, Rep. Newt Gingrich, attended the opening of the Atlanta office.  Gingrich hailed “Fannie Mae as an excellent example of a former government institution fulfilling its mandate while functioning in the market economy.”  The GSEs, however, existed to rely on government support, not compete on an equal playing field.

Fannie Mae also used its regional offices to hire former congressional staffers from the offices of men like Sen. Robert Bennet (R-Utah)(defeated by the liberty movement in a 2010 GOP primary) and Sen. Tom Daschle (D-N.Dak.) who became Senate Majority leader and nearly became a member of President Obama’s cabinet. Fannie Mae also hired Herb Moses, Rep. Barney Frank’s partner.  Rep. Frank became a key defender of both Fannie and Freddie Mac.

Other financial firms also benefited from lobbying Congress and the White House. Sandy Weill the then-CEO of Travelers Group led the push to repeal the Glass-Steagall Act.  Clinton Secretary of the Treasury Robert Rubin was instrumental in the push to allow commercial banks to combine with insurance companies and investment banks into firms “too big to fail.”  Rubin became the Vice-Chair of Citigroup shortly before the full repeal of Glass-Steagall.  Glass-Steagall’s repeal did not create a “free market” banking system.  Banks took greater risks, with ever less financial transparency.   As events proved, these mega-firms could count on government support to privatize their profits while piling their losses on the U.S. taxpayer.  Long-Term Capital Management failed in 1999.  The Federal Reserve responded with a bail-out, creating the conditions for future bail-outs.  At the same time, the Fed expected the banking industry to do the right thing with little or no oversight.  Capital reserve requirements were watered down, allowing ever greater leverage, especially when combined with accounting gimmicks to manipulate profits & losses and potential liabilities.  Such policies were inconsistent with the sort of ad hoc government bailouts that followed.

Reckless Endangerment also chronicles the story of some of the subprime lenders, such as Countrywide Financial, NovaStar, and Fremont, all companies that pursued loose lending standards in search of short-term profits.

Many firms engaged in accounting fraud, including Fannie Mae.  In his last year as CEO, James Johnson received millions more in bonuses due to manipulations of the timing of earnings.  Johnson’s successor, Franklin Raines, suffered the consequences of such shenanigans.  Fannie Mae was later forced to restate earnings by $6.3 billion.  Still, Raines was allowed to resign and received substantial bonuses at his departure.  Years later, Raines paid millions of dollars in civil penalties.  The penalties were a small fraction of his total compensation from Fannie.  In 2008, Johnson was appointed Senator Barack Obama’s three-member Vice-Presidential candidate search committee, but resigned after the McCain campaign made his involvement an issue.

The authors contend that “the failure to hold central figures accountable for their actions sets a dangerous precedent.”  Many of those responsible for the financial debacle still remain in positions of influence.  Reckless Endangerment provides a glimpse of the crony capitalism that is motivating average citizens to take action. It is not the complete story of the financial crisis, but is one element of the problem that should be addressed.  Instead of recognizing the shortcomings of such purported “partnerships,” Congress and the Obama Administration are creating more regulatory agencies with even more layers of bureaucracy.  Read Reckless Endangerment, then you can decide whether you believe the political system is capable of refining crony capitalism and public-private partnerships into a workable economic system.

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