Customer Reviews

The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America

5 star:		(14)
4 star:		(7)
3 star:		(0)
2 star:		(1)
1 star:		(2)

 

 

In the last few months I have read four accounts of the tech bubble. Glutton for punishment, aren't I. I've just got through Alex Berenson's "The Number". I was sent a free copy by the publisher. Alex Berenson himself emailed me to arrange this. So first up, in the spirit of full and fair disclosure, I disclose that I was given this book to review. I feel the need to say that especially in this case because I thought this was rather a good book. By some margin the best of the bunch, actually.

Where Roger Lowenstein's "Origins of the Crash" had the air of being something of an aggregation of newspaper clippings, and Frank Partnoy's "Infectious Greed" was less focussed, less penetrating, and in no real sense dispassionate, Mr. Berenson clearly sets out his stall with an interesting (and relevant) history of the regulation of corporate governance and reporting since the 1920s, and an analysis of the issues associated with accounting of any sort. In two short but clear appendices, Berenson explains in lay terms the difference between (and pros and cons of) accrual and sale accounting, and then balance sheets as opposed to income statements. These are fundamentals that one needs to understand what was going on, and not all of the authors who have written on the subject necessarily have a grasp of them.

Where as other authors have targeted (with varying degrees of persuasiveness) bodies such as ISDA, the SEC and the credit rating agencies as the main culprit, Berenson's focus stays very much with the auditing accountants and the corporate executives. A number of sectors in the financial system (in fact pretty much all of them) took their eye off the ball at the critical stages of the bubble, but were it not for the vagaries and flexibilities of accounting policy and sheer out-and-out greed of executives, this might not have happened, at least perhaps not quite so dreadfully. Berenson is convincing on both these scores.

That said, I don't subscribe to all Berenson's views. While the actions of some auditors (notably Andersen) are indefensible, Berenson supplies a pretty solid excuse for the profession generally: the preparation of company accounts, he notes, necessarily involves hundreds of assumptions, approximations and best guesses, and as even with the best will in the world these can be wrong, and "those who want to cheat have an almost infinite number of ways to do so". Given that the auditing function can only cost so much before it drives a company out of business by itself, there must be limits to what any auditor can be expected to detect. But Berenson still holds the profession to book. This isn't always consistent with Berenson's other view, which he expresses convincingly, that the "number" is intrinsically unreliable and should be much less of a determinant for market sentiment than it currently is. On the other hand, as he notes in his conclusion, even this view has its limits: the stagnation of the Japanese markets in the last five or so years is testament to the perils of ignoring the "number" altogether.

Like most financial authors (with the exception of Michael Lewis, for whom he has considerably less respect than I have) Berenson favours more government regulation as part of the solution to the problem: Congress could limit the number of options companies could grant their CEOs or put restrictions on executive pay, he suggests. Perhaps accountants could be required to bid for audit work to a federal board.

With respect, this is silly: Irrespective of how ridiculous executive compensation may be (and Berenson is certainly convincing that it is), such a Soviet technique is absolutely the last thing that is required. The market has to learn these lessons and discount the stock of profligate companies itself: the government has no means (let alone resources: Berenson is similarly persuasive as to the lack of funding for the SEC) for ascertaining what is reasonable, whereas the market - albeit eventually - will find the charlatans out. I dare say Michael Eisner is finding this out to his discomfort at the moment. At some point short sellers will be able to exploit the arbitrage opportunity. Investors may lose in the short term, but if you aren't able to take a short term loss, you shouldn't be in the market. Like Partnoy does, Berenson concludes his book with recognition of this. Caveat Emptor, indeed. In some ways having the SEC as a comfort blanket for investors in itself fuelled the boom.

Elsewhere Berenson is occasionally guilty of sophistry. He points out the irony of price regulation of the commissions charged for trading on the NYSE, perhaps the most potent symbol of the free market on the planet. But then mixes his examples: "Wall Street has always loved free markets, except when they might cut into its fees. Today, when even real estate agents are being forced to compete on price, the 7 percent commissions charged by big investment banks for initial public offerings are sacrosanct." This is naughty, and I suspect Berenson knows it. Commissions for underwriting IPOs are quite a different thing to commissions for brokering stock sales across the exchange. They have never been subject to any regulation, and if the fees tend to stick at a certain level, that not so much to do with price fixing, as the inherent risks and huge amount of work and expense required to get an IPO away. That is the market level. Given the dearth of IPOs in the last three years, the pitching for them will have been feverish.

I am prattling on. These quibbles are largely that: just quibbles, and in the round this would be the book I would recommend out of the four on the subject I have recently read.

I get asked all the time to write a book about business and investing. Fortunately, I dont have to or want to any longer. The Number is the book about investing I would write. Its not a how too book, its a book that pulls back the covers on Wall Street and shows once and for all that it is not an efficient market, and that indivudal investors and fund managers need to know that they are walking into a world that is far more ponzi scheme than a source of capital for growing companies and returns for investors.

If you buy stocks without reading this book first, you are putting yourself at a disadvantage

I am a professor of finance and economics and must recommend this book for anyone with even a basic interest in corporate markets. I've asked my students to read The Number largely because it presents a fair and in-depth perspective on this fascinating economic fallout without ignoring the historical context. Berenson writes clearly and perceptively while analyzing from both top to bottom as well as left to right the market growth and its subsequent implosion.

I approached this book with deep skeptism.

However, Berenson was often spot on in his observations, and I'd give the book high marks - think a more readable, less detailed, version of Irrational Exuberance.

The strongest parts of the book are his concise review of the history of bubbles and his entertaining descriptions of short sellers. He is clearly a strong writer and has some excellent insights on the events leading up to the bubble. He is dead on about the failures of growth through acquisition. Finally, he provides a balanced view that does not have a strong preset agenda.

While a history lesson would serve most folks on the Street well, financial experts will find it lacking in several areas. In particular, the oversimplification of accounting works well as a writing device but leads to somewhat superficial insights on the challenges managers face in managing to the Number. Moreover, Berenson confuses the dotcom bubble with the telecom bubble - which really ought to be looked at seperately.

In any case, the Number is an excellent read. Berenson's a great writer and a strong historian. I'd recommend it as background meeting for the expert financier so they can see that history repeats itself. And it is a fine introduction for the financial novice.

The Number is first rate!

Berenson provides real analysis for once - rather than the drivel and blather we here from the talking heads and market pundits, on TV and radio. It's a sober assessment of what is really amiss with finance.

Unlike the soundbytes you constantly hear, The Number realizes that the financial mess we're in is a problem 80 years in the making. Here's to hoping some of the guys on wall street, the ceos, and the accountants actually read this book - then maybe things will change...

My son bought me this book because he said that even though I complain about the market all the time I don't know how bad the situation really is. After reading this book I understand the last five years better, but now I'm mad as hell. CEOs and the government were more pigheaded than you even thought. The wife says she's going to read it too.

If you want to truly understand how the markets got haywire - read The Number. Alex Berenson takes a complex and multi-faceted subject and really explains how Wall Street and corporate America ran amuck. The Number is a smooth read with the right mix of details and overview. More importantly, Berenson manages to pull back the covers on corporate America and give the average investor a real explanation of what went wrong - and still is wrong (something you don't see Wall Street, accountants, or companies doing). A great read - any serious investor should check out The Number.

As a student interested in finance, I found The Number illuminating. In clear, insightful prose, Alex Berenson demystifies the markets. I would recommend The Number to anyone interested in business.

Thank you, Alex Berenson - who refers, in print no less, to Larry Ellison as an options "pig" - and gives executives their due in "The Number" as Berenson adeptly explains how we got into the financial mess of today.

What becomes clear when reading this informative and incisive book is that history, especially financial history, is bound to repeat itself. If you don't want to come out on the losing end the next time the bubble begins to look suspiciously big and shiny - then read "The Number,"

You'll walk away from this book a smarter investor.

New York Times investigative reporter Alex Berenson has written a terrific expose on the current mess that is Corporate America, ala Tyco, Enron, Worldcom... The Number is objective and comprehensive - it assigns blame where it is due - leaving no one off the hook: the CEOs, banks, the auditors, the SEC, even the individual investors. A revealing look at how the bubble got so big and why it burst. After reading The Number, I feel like I can say that I have a better sense of what really makes the markets tick.