Boomerang

Michael Lewis, “Boomerang: Travels In The New Third World” W.W. Norton & Co, 2011, 212 pps

Michael Lewis always has an excellent grasp of his subject and his writing style is always easy to read. This latest book is only one of others I have read and previously posted on my blog: Liars Poker (C1989), Panic (The Story of Modern Financial Insanity C2010), The Big Short (Inside the Doomsday Machine C2009).

Reading this current book, I sat back for awhile and thought of why money has value and, of course, concluded it is because we trust we can exchange it. What if that trust is misplaced? These are the kinds of thoughts this book provokes. The financial crisis of 2008 was suspended only because investors believed that governments could borrow whatever they needed to rescue their banks. What happens when governments themselves cease to be credible.

My Notes:
Pg. xi: A hedge fund manager, Kyle Bass, presents a convincing argument that the financial crisis isn’t over. It is simply being smothered by the full faith and credit of rich Western governments. He is not talking about the collapse of a few bonds but the collapse of entire countries. From 2002 what appeared to be economic growth was activity fueled by people borrowing money they probably could not afford to repay: by his rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. The big banks that had extended much of this credit were no longer treated as private enterprises but as extensions of their local governments, sure to be bailed out in a crisis. Bass investigated how big these banking systems were, especially in relation to government revenues. The totals are alarming: Ireland has amassed debts of more than twenty-five times its annual tax revenues; Spain and France debts are more than ten times their annual revenues. Historically, such levels of government indebtedness have led to government default. Thus, Bass’s new investment thesis is that the subprime mortgage crisis was more symptom than cause. When investors wake up to this they will demand higher interest rates to lend. In a few especially alarming cases—Greece, Ireland, Japan—it wouldn’t take much of a rise in rates for budgets to be consumed entirely by interest payments.

Pg. 46: Would you believe that among the most credible and risk conscious banks are those in Greece. They alone among European bankers did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money The biggest problem the Greek banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks did not sink the country. The country sank the banks.

Pg. 51: Few pay their taxes in Greece. Somewhere between 30 and 40 percent of the activity in the Greek economy that might be subject to income tax goes officially unrecorded, compared with an average of about 18 percent in the rest of Europe. The easiest way to launder caqsh is to buy real estate. Conveniently for the black market—and alone among European countries—Greece has no working national land registry.

Pg. 60: For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones. In 2001, Greece entered the European Monetary Union, swapped the drachma for the euro, and acquired for its debt an implicit European (read German) guarantee. Greeks could now borrow long-term funds at roughly the same rate as Germans—not 18 percent but 5 percent. All they had to do was cook the books to show the Union that they were maintaining budget deficits below 3 percent of GDP, a requirement of the Union. Goldman Sachs helped out in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness. The investment bankers also taught the Greek government officials how to securitize future receipts from the national lottery, highway tolls, and airport landing fees. Any future stream of income that could be identified was sold for cash up front and spent.

Pg. 81: The ancient orator Isocrates stated: “Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.”

Pg. 125: Ireland Bankruptcy Law. When a bank forces an Irish person into receivership, it follows up with a letter to his blood relations, informing them of his insolvency—and his shame. A notice of the bankruptcy is published in one national and one local newspaper. For as many as twelve years the Irish bankrupt is not permitted to take out a loan for more than 650 euros, or to own assets amounting to more than 3,100 euros, or to travel abroad without government permission. For twelve years part of what he earns may pass directly to his creditors.

Pg. 143: At the bottom of the Greek financial mess is the unwillingness, or inability, of the Greeks to change their behavior. That was what the currency union always implied: entire peoples had to change their way of life. Conceived as a tool for integrating Germany with Europe, and preventing the Germans from dominating others, the euro had become the opposite. For better or worse, the Germans now control the financial fate of Europe. If the rest of Europe was to continue to enjoy the benefits of what was essentially a German currency they’d need to become more German.

Pg. 145: There was no credit boom in Germany. Real estate prices were completely flat. There was no borrowing for consumption; this kind of behavior is totally unacceptable in Germany. It is perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s. But the German bankers went out of their way to lend money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things that no German ever would do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet to be determined amount in Greek bonds.

Pg. 206: States will not go bankrupt, most, by law are not even allowed to. The federal government pushes its cuts down to the states and they, in turn push cuts down to the local level, a level where bankruptcies can and do occur. In August 2011, the same week that Standard & Poor’s downgraded the debt of the U.S. government, a judge approved the bankruptcy plan for Vallejo, California. Vallejo’s creditors ended up with five cents on the dollar, public employees with something like twenty and thirty cents on the dollar. (Harrisburg, the capital of Pennsylvania, filed for bankruptcy as I type this).