Is Barry Ritholtz's Thesis For The Origins Of "Bailout Nation" Plausible?

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In his very entertaining and very informative book, “Bailout Nation,” Barry Ritholtz argues that the origins of business recklessness that led to the financial disaster of last year lay in a little known 1971 loan to Lockheed.

We suggest you read Ritholtz’s book. But a short version of the argument can be found today in New Jersey’s Star-Ledger interview with Ritholtz.

Q: When was the country’s first major company bailout and was the financial rescue a success?

A: In 1971, it was Lockheed. It was a $250 million loan. It really set the stage for what (later) took place. Since we’ve now spent trillions of dollars bailing out all these banks, and it traces itself back to Lockheed, it was a horrific failure in terms of encouraging more reckless behaviour by management.

As far as we know, this thesis is unique to Ritholtz. It seems to run against the grain of some of his arguments against the Community Reinvestment Act’s culpability for the mortgage mess. In one recent response to arguments about the CRA, Rtiholtz insisted that it could not be caused by the CRA, which he dismissed as “some 1977 legislation.”

So if 1977 legislation cannot be significant because it is too old, does it make sense to tout the significance of a 1971 bailout almost know one has ever heard of? 

It’s possible we’re misreading Ritholtz here. Perhaps he just means that Lockheed was the original instance for government business bailing out business, not an influence on future bailouts. And an unknown story that is too good too pass up. Or perhaps it is mostly useful because it illustrated a pattern that would subsequently be followed in later bailouts.

But Ritholtz’s insistence that it acted to encourage reckless behaviour by management sure seems to imply something more than that. Indeed, he seems to imply that the Lockheed bailout somehow led to the disaster on Wall Street.

In any case, we’re not convinced that Ritholtz is wrong. We suspect that perhaps he’s got a deeper understanding of this than we do. But we’re curious what readers think. Do you buy the Lockheed storyline?

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