• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
FORBES Interview with Barry RitholtzSTEVE FORBES:
Well Barry, it's good to have you with us.
BARRY RITHOLTZ:
Thanks for having me.
STEVE FORBES:
Well, thank you for joining us. You have a new book coming out?
BARRY RITHOLTZ:
Yes.
STEVE FORBES:
What's the title?
BARRY RITHOLTZ:
Bailout Nation, on your grocer's shelves on May 12th is thepublication date.
STEVE FORBES:
Well, finish the title because it gets even better.
BARRY RITHOLTZ:
Oh. How Greed and Easy Money Corrupted Wall Street andShook the World's Economy.
STEVE FORBES:
Now, this means you've been a bear for awhile. When did you turnbearish and why?
BARRY RITHOLTZ:
Well, we have two degrees of bearishness. Bearishness numberone, is how do you really feel about where things are going? And bearish posture numbertwo, is how are you invested? And fortunately, I work with partners that are smartenough to let me be as bearish as I want when it comes to the first one.But we run a quantitative model. And sometimes we're long, even though we hate it. Infact, in the summer of '07, I was saying I was miserable. I couldn't wait to climb into thebear cave with just some gold bars and nothing else. But at that point, we were stillactually net long and stayed that way until pretty much the end of '07. And then it waspretty clear it was all over but the crying. As to why I became bearish, you know, I'm abig believer that things run in regular cycles.I don't mean you could predict where the market's going to be 43 years from now fromthe cycle. But you know after a recession ends, the Fed will do what the Fed always does.They've cut rates. And you know how business will respond and how employment andincome will go up and all the usual good things that take place when the economy startsto expand on its own with a little push from the Fed.We started looking at the post-2001 recession recovery as, by the data, as surprisinglyweak. When you looked at the historical measures of how long it took to get back to thepre-recession employment levels, this was the worst employment recovery since the endof World War II. It was very surprising. And then on top of it, you had what was very
 
obviously ultra-low rates. The former Fed chief didn't just cut rates but took them downto levels not seen in generations.You know, if you go back to the recessions of the '50s and '60s-- '54, '58, '61-- rateswould dip below two percent for a couple of weeks, a month or two, and then come back above. We were aware of the fact there was no free lunch. And if you took rates down toolong, you have recession and inflation and other problems.But this time around, we had rates below two percent for 36 months, and at one percentfor over a year. That was just unprecedented. So, it was clear that anything that wasdenominated in dollars was going to have a nice boom. And anything that was creditdependent was going to have a big boom. But it eventually became just an outsizedportion of the economy. And I don't believe you can borrow and spend your way toprosperity. You have to earn your way to prosperity. If you create jobs and haveincreased income, people could go out and actually spend money they make, as opposedto spending money they're borrowing. And it was pretty apparent by '05, '06, that wewere going down a wrong path. We were just borrowing and spending.
No Greenspan Fan
 
STEVE FORBES:
Is that when you decided to do your book?
BARRY RITHOLTZ:
No. The book actually came about. I was working on a differentbook, which is a couple years away. But this book came about because I had been writingabout the Fed. And I'm not a fan of Greenspan. I don't think he's the greatest Fed chief ever. And I think he was just too easy with money.So, there were a number of articles, a number of research pieces I had written. And whenBear Stearns hit, I had begun to go back in history and say, "How do we get to the pointwhere the fed is targeting asset prices instead of targeting either inflation or jobcreation?" If you look at the ECB, they have an easier job.They have to just worry about price stability. Job creation, economic expansion, that sortof stuff, they don't care about. So, it was kind of interesting that our Fed, our centralbank, not only is charged with maintaining price stability and making sure the economyreaches its potential, but we've seen a number of examples where the fed becameinterested in market psychology.You know, what is the psychology going on? What's happening out there? And thateventually leads to targeting asset prices. So, the book I started writing in the spring of '08 right after the Bear Stearns collapse, thinking that I would really be looking at the bigarc of history from Bear Stearns backwards. And then, by the time we got to August, if you're working in the market long enough, you could just smell it coming. The book wasactually due August 15th. And I said to the publisher, "You know, I've been doing thislong enough. Something wicked this way comes. I can't tell you what it is. But let's justgive it another month or two."
 
And the first week in September, all hell broke loose. We were concerned that I wouldnever be able to finish the book. It would just basically be a weekly serial, because everyweekend, you know, if it's Sunday, it's got to be a new bailout. So, each week I wouldhave to, this is a true story, the last chapter of the book since August was called, Who'sNext? And any name I put down in the "who's next," it was the kiss of death. They werethe next bailout. So, AIG is a possible, boom. AIG goes down. And then Lehman.
STEVE FORBES:
So, who are you putting in now?
BARRY RITHOLTZ:
Well, now, we're going beyond who's going to be bailed out, andlooking at who's going to be nationalized and who are the shareholders going to be wipedout? And when I think of nationalization, I think of really, an FDIC-mandatedprepackaged bankruptcy. You know, we've bailed out dozens of banks over the past year.People don't realize. Now just Bear Stearns, but if you look at, on Friday, WashingtonMutual was an independent company. And on Monday, they were owned by JP Morgan.Same thing with Wachovia and Wells Fargo. In fact, it was so transparent.
Banks Will Fail
 
STEVE FORBES:
So, let us know. Are there life insurance? How many more majorfinancial institutions do you think are going to really hit the skids?
BARRY RITHOLTZ:
Well, the good news is, about 65 percent of the banks in the U.S.are triple-A rated. They're mostly small, commercial and regional banks. They're wellrun. They're profitable. The joke is they make money the old-fashioned way. They earnit. They're not just gamblers and speculators. The problem is, about two-thirds in theassets in the country are held by the four or five largest banks.So, you have this huge swath of banks that are doing things right. But they don't have allthe assets. So, the next couple of banks that we're going to see, the question is, is it goingto be one of the smaller banks that go under? Or are things going to get so bad atCitigroup or Bank America or, let's say, AIG, that there's no alternative but to force theminto that FDIC receivership and wipe them out?
STEVE FORBES:
Well, what's going to happen to the life insurance companies?They've been hammered in the stock market.
BARRY RITHOLTZ:
You know, I think they're being painted with too broad a brushbased on AIG. We keep no learning that AIG, this triple-A, very closely regulatedinsurance company, also had under its roof this unregulated, unsupervised shadow hedgefund that was doing all this structured-finance stuff. You know, you look at the insuranceside. There's literally centuries of actuarial data that you can look at and say, "Well, weknow if we insure this many people's life insurance," or you could look at any historicalphenomena, even hurricanes and things like that.
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...