Over the two decades leading up to 2008, financial markets were anything but free. The nuts-and-bolts government infrastructure that free markets require to thrive—healthy fear of failure, respect for the rule of law, and fair rules for everyone—was crumbling.
In 1975, the City of New York looked close to defaulting on its municipal bonds, as Charles Gasparino, now a Fox Business reporter, recalls in The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System. But a young bond salesman named Jimmy Cayne—the pot-smoking, bridge-playing future CEO of Bear Stearns—didn’t think his city would walk away from its debt. Cayne bought tens of millions of dollars’ worth of New York’s bonds from panicked investors, who were selling them for pennies on the dollar. When the state and the feds came through with a rescue, Cayne had made a “small fortune” for his firm. It was a great trade. But Gasparino fails to mention the most fateful part of the tale: Cayne undoubtedly absorbed the lesson that the federal government, fearful of the disruptive consequences, would not let big borrowers default. He was among the first to bet on bailouts.