Afterwards, I went back to look over some reviews, and I saw this Amazon synopsis/review which I missed. I thought it was a fair overview:
I’m a long-time reader (addict?) of The Big Picture and bought this book when it first came out. Unfortunately (time constraints being what they are) I only had a chance to read it this summer and time to review it now.
Brief chapter summary of the book (paraphrasing).
[Chpt 0] Revised Edition. Six bogus principles:
1) Efficient Market;
2) Self-interest prevents recklessness;
3) Markets can self-regulate;
4) Deregulation is always good;
5) Consumers are rational;
6) Compensation is properly aligned. These must be discarded.
Areas we must reform: Campaign finance; Derivatives; Repeal 2004 leverage exemption; Encourage shorting; Remove bank regulation from the Fed; Create a single regulator; Restore Glass-Steagall; Break up “too big to fails”; Hold senior management responsible; Regulate non-bank lenders; Allow full clawbacks; Overturn federal preemption; Educate consumers; Allow SEC whistle-blowers.
[Chpt 1] Intro: $14T mess, lots of bailouts after Lockheed.
[Chpt 2] Need for a single currency. Establishment of Fed and growth of Fed power.
[Chpt 3] (1860 – 1942) Early history of US growth. Govt funds infrastructure projects. Consumers choose winners and losers. Current market crash not as bad as Great Depression. History of home ownership programs (HOLC). Bailout versus Rescue. Timeline of New Deal programs.
[Chpt 4] (1971 – 1995) Corporate welfare is born: Lockheed! Amtrak! Chrysler! Nixon takes US off gold standard, dollar’s value falls through the floor. Lesson 1: Short-term pain avoidance yields major long-term future pain. Lesson 2: The organizations that hate the free market the most are large, well-established corporations.
[Chpt 5] (1987 – 1995) Stock Market Bailouts. Black Monday. Fed hell-bent on supporting asset prices (where’s the charter for that?) instead of addressing inflation. Wall Street: “Greenspan’s got our back!”
[Chpt 6] (1996 – 1999) Irrational Exuberance. More Greenspan asset price tricks: “bubbles cannot be preempted cheaply.” LTCM starts imploding and Greenspan, Rubin, and Summers rescue it. Mistake: Greenspan should have stuck to his (supposed) laissez-fair principles and let LTCM fail. That would have taught everyone a valuable lesson. Again: “Greenspan’s got our backs!”
[Chpt 7] (2000 – 2003) Tech Wreck. Greenspan says there’s a bubble in 1996, but takes no action. Instead, Fed injects $50B liquidity in late 1999 and NASDAQ doubles. Bubble burst and Greenspan cuts rates in desperate attempt to shore up asset prices. 9/11 was final confirmation of Greenspan policy. Not good: ultra-low rates can cause many problems.
[Chpt 8] Backwards, Rate-Driven Economy. 2002 – 2007 housing cycle fueled by low rates and exotic instruments. Job creation very weak. Stagnant wages => House-as-ATM. Stock buy-backs the new rage. Mtgs: ability to pay succumbs to ability to securitize.
[Chpt 9] Scramble for Yield. Low Fed rates generate mad rush for “safety” of MBS yields. Huge growth in MBSs, CMOs, CDOs, CDSs. Rating agency payola.
[Chpt 10] Subprime Machinery. Abdication of all lending standards begins in early 2000s, driven by Wall St demand. Sleazy mortgage lenders with 90-day warranties were paid by loan volume, not quality. Fraud in appraisals, referrals, applications, mortgages, lending, and builder incentives. Bizarre “innovative” loans. Regulation was virtually non-existent. Washington helped in myriad ways.
[Chpt 11] Radical Deregulation, Nonfeasance. Reagan started deregulation, and it snowballed. Compensation systems encouraged short-term profits. Glass-Steagall, CFMA, Gramm nepotism, Enron. Self-regulating markets don’t work. The “Bear Stearns Rule:” 2004 leverage exemption.
[Chpt 12] Unintended Consequences. Clear Channel: cannibalizes own market! Securities Litigation Reform Act of 1995: accounting fraud explodes! Boskin Commission: lying about CPI. Bear bailout encourages Lehman arrogance? CFMA triggers AIG. Lockheed -> Chrysler -> SUVs!
[Chpt 13] Moral Hazard. Greenspan and LTCM. Chrysler: encouraged Big 3 to lobby rather than innovate. Table of “Smart Money” disasters. Housing Collapse Anatomy graphic.
[Chpt 14] Suicide by Democracy. Bear implodes, JPM picks up pieces. Random, knee-jerk reactions from Treasury. Bush went AWOL. Nice Bailout Tally table.
[Chpt 15] Bear. Heavy fixed-income focus, heavy leverage. Crisis of confidence and competence. Cayne, Schwartz, and Spector. Lehman: mark-to-make-believe. Feds think Bear is the only bailout they should make; Lehman expects otherwise. Bear Lessons: Go Big; Go First; Threaten Counterparties; Risk the Economy; Incompetaence, Not Arrogance; Balance Sheets Matter; Unintended Consequences.
[Chpt 16] Dot-Com Envy. Overcompensation originated in dot-com days. If startups could do it, so could Wall St execs. Just lever up! Problem: they were betting with pension money. Mutual funds dropped the ball on oversight. Good table on executive pay.
[Chpt 17] Year of Bailout, part 1: AIG. Financial Products managers kept 32% of up-front profits on $3.26B (2005) in revenue. Massive risk (Bloomberg: $587B). More “mark-to-make-believe.” Real reason for AIG, Freddie, and Fannie nationalization: to protect counterparties.
[Chpt 18] Year of Bailout, part 2: Too Big to Succeed. Citi a victim of Glass-Steagall greed; used accounting gimmicks (SIVs) to move troubled assets off its books; ballooned into a monster. Despite gross incompetence, Treasury delivers sweetheart deal. BofA buys Countrywide (oops), and then overpays for Merrill. TARP is a one-page receipt for $700B from headless chicken Paulson, but is merely a coverup to hide Citi’s bankruptcy. PPIP a bad joke and Congressional end-around.
[Chpt 19] Casting Blame. Long list of culprits with Greenspan/Fed, Gramm, and Ratings Agencies at the top. Rubin opposed Brooksley Born on CDS regs, along with Greenspan and Summers.
[Chpt 20] Misplaced Fault. Mtg Interest Deduction. Naked Shorts. CRA. Fannie & Freddie.
[Chpt 21] Foreclosure Virtue. The market needs to correct but the govt is preventing this. Foreclosures need to happen.
[Chpt 22] Casino Capitalism. Follow the Swedes, not the Japanese. Nationalize the losers.
[Chpt PS] Advice to Obama. Education! Ideas from other Wall St vets.