Roger Lowenstein is one of the best financial reporters around, and he has done a fine job of taking the public information about stock market influences since the 1970s and connecting them to the 2000-2002 stock market crash in the United States.
I know of no book that touches on so many subjects including:
-Retirement money moving into mutual funds
-LBOs creating pressure on CEOs to get their stock prices up
-Leveraging of public companies to improve stock price
-The rise of free market economics as a policy influence
-401(k) plans creating a chase for fast results
-CEO stock options rising through the roof
-Michael Jensen and Joel Stern providing arguments in favor of excessive payments to executives
-Rise of the CFO as a "profit engineer" to produce most of company earnings results
-Lack of e.p.s. hit for stock options
-CEO pay skyrockets in the absence of performance due to lax consultants and boards
-New stock options being granted after stocks drop
-Cozy boards that inappropriately keep CEOs in place
-Managed earnings (especially by GE and Coca-Cola)
-Special Purpose Vehicles (to keep losses and debt hidden from investors)
-Security analysts having conflicts of interest
-SEC didn't do enough
-Accounting firms have conflicts of interest
-Derivatives are too unregulated
-Too much money to Venture Capital funds
-Pro forma earnings
-Overinvestment in telecommunications
-Unrealistic expectations for the Internet and Internet companies
-Fraud by Enron, WorldCom and others.
Mr. Lowenstein also goes on to describe the current reform efforts including Reg FD and the Sarbanes-Oxley legistlation, and finds that we have not really cured the problem. We will inevitably have another bubble and crash ahead. I agree with that view.
At bottom, Mr. Lowenstein understands very well that too much financial incentive for executives is bad for everyone. The temptation is simply too great to bend the line . . . or to cross way over it. The average compensation in major public companies is excessive now, so the ultimate cause of inappropriate behavior is still in place. As a consultant, I have repeatedly seen honorable people make lousy decisions when the size of their bonus and stock option potential was larger than they could deal with in an unemotional way.
The book's main weaknesses come in two areas. First, Mr. Lowenstein views from the problem as an outsider and gets almost all of his information from the media. As a result, he doesn't give you the real pulse of what was going wrong in the companies. It would have been helpful if he had contrasted the Enrons and WorldComs with companies that were led by executives who have done an outstanding job running their companies during the same years (while being exposed to the same temptations and conflicts) such as Michael Dell, Tom Golisano, James Morgan, Jake Gosa, Bob Swanson, and Bob Knutson.
Second, he is sometimes careless about details. Joel Stern's Economic Value Added (EVA) is described as "Equity Value Added." The Innovator's Dilemma by Professor Clayton Christensen is described as being a bad influence on Citicorp by discouraging executives from improving their existing operations (nothing could be further from the truth).
In the end, I was impressed by his understanding that feeding greed with unlimited incentives is a bad idea. That's the bottom line on this crash.
As I finished the book, I was left wondering how we can cure this tendency to provide too many financial incentives to do the wrong thing. Simply policing those who are provided with the incentives more closely will probably not work by itself.
on February 18, 2004
First off, disclosure: Penguin sent me a copy of this book to read & review for free based on an earlier review I wrote of one of Roger Lowenstein's books on this site. So I have a theoretical conflict of interest, though I am doing my best not to allow it to affect - positively or negatively - my view of this book.
That being said it is a somewhat ironic marketing tactic for Penguin to use n this particular case (but one which I heartily encourage, by the way) since Lowenstein's main theme is the mischief arising from conflicts of interest suffered by research analysts when covering the stocks of companies to whom their firms are pitching for investment banking business.
Be that as it may, I've disclosed it now, so you're warned.
Origins of the Crash covers much the same ground as Frank Partnoy's Infectious Greed and John Cassidy's Dot Con. As usual, Partnoy can't resist hopping on his moral high-horse, or mentioning 10+ year old derivatives scandals that have nothing to do at all with the recent market turmoil; Cassidy is more measured but restricts himself very much to the Dot Com phenomenon, adding an interesting history of the internet and computers in finance.
Lowenstein manages deals with the spinning, laddering and corporate governance scandals of the early part of this decade, but as many of the reviewers here have noted, doesn't really add much that you wouldn't know had you been reading the papers for the last few years.
Also, as he was with his book on LTCM, he is good at wisdom after the fact and retains a weakness for the cute aphorism, though he is more circumspect with it here and doesn't allow the neat turn of phrase to undermine his argument in quite the same way. Certainly, Lowenstein writes well; the book moves at a nice clip, and you never really get the chance to be bogged down.
For all that, I thought Origins of the Crash was a far more measured work than Partnoy's Infectious Greed (though not quite so comprehensive), and a better overview of the whole situation than Cassidy's Dot Con, but ultimately short on new insight or analysis.
If you're looking for an entertaining overview, though, this might just be the book for you.
on January 26, 2004
I agree with much of what has been said in the other reviews; particularly, that most of what is said here as already been said by others, often more lucidly and without the vitriol. I much preferred reading the Times' coverage. The book also seemed pretty quickly put together; there were a couple of obvious factual errors, and other sections looked like they were thrown in at the last minute. The overall impression that I received was of a book desperately done on a deadline, which affected both the tone (righteous) and substantive content (often derivative) of the text. I would have much preferred the book had Lowenstein taken the time to do this book right, with a fresh approach and a least a little new insight.
I know that Lowenstein has many loyal readers who would happily declare "brilliant" anything he writes. I like his stuff too, usually. But this book is just not up to standards. I know he could do better if he tried, but he just didn't do so here. And that's the harsh but accurate truth about this book.
on January 24, 2004
In Origins of the Crash, Roger Lowenstein has written a fascinating account of the late 90's stock market bubble and subsequent collapse. The overriding theme of the book is that the culture of "shareholder value" was twisted from creating true long-term value into an obsession with the daily ups and downs of the companies' stock prices. It's an interesting way to view things and should prove thought provoking to many. Lowenstein makes a compelling case that the scandals of the past several years are not the work of just a few bad actors, but rather were symptomatic of widespread failures throughout all levels of business, government and the public. The cast of villains is extensive including the now common ones like Ken Lay (along with Skilling and Fastow), Jack Grubman, Bernie Ebbers (and Scott Sullivan) and Henry Blodget, but also includes the complicity of weak boards (and overall lax corporate governance), conflicted accountants and lawyers and an investing public (both individual and professional) that was too busy making money to worry about any of it.
I am not sure how much new reporting there is in this book... much of it is pulling together various stories that have been widely reported on. But it is put together artfully into a compelling narrative. It was fascinating to watch Michael Jensen, who was one of the earliest advocates of the use of stock options, eventually turn on his own creation. The section on Enron, while obviously not as extensive as some of the works devoted to the subject, is one of the best condensed accounts I have seen.
I do have a few quibbles with the book though. First, it winds up being something of a polemic. Reading Mr. Lowenstein's book, you get the distinct impression that there was not a single positive thing that happened at any time during the 90's. I found myself wondering if any companies managed to get it right... and if so, how and why? Second, in highlighting the abuses of options at the executive level, I think Mr. Lowenstein gives short shrift to the positive effects they can have on the lower levels of an organization. In the same way, he glosses over that there are some justifiable reasons for not expensing options. Finally, I question some of his comments about deregulation. He argues that the deregulation of telecom went to far or was perhaps even a bad thing. And yet, the purpose of regulation is not to protect the value of companies, it is to ensure access at the most reasonable costs possible. By that standard, deregulation of telecom should be seen as a success. Sure, lots of capital was destroyed and many companies failed, but it is not the government's job to prevent that.
But those issues aside, the book will stand as one of the more definitive accounts of the excesses of the 90's and Mr. Lowenstein's case against the culture of shareholder value will hopefully inspire some new thinking amongst executives, boards and investors. In short, I would highly recommend this book to anyone interested in recent market/business history.
Roger Lowenstein does a fine job of reporting the changes in the culture of investment that ended in the evaporation of seven trillion dollars investment valuation. Much of that was real money invested by ordinary folks trying to make money available for their needs later in life. (Not all of it was real money because when on person buys one share of Cisco for $100 then ALL the shares are valued at $100 even if you had purchased yours at $20 - so the $80 added to your invested funds may or may not be available when you try to sell your shares. If they are not you didn't realize a gain, but you didn't lose your investment until the price drops below $20.)
I think that anyone who is invested in or is thinking about investing in equities ought to read this book. It is written concisely and with a pretty good sense of what the responsibilities of a proper corporate management is. That way you can look for good companies with good management and not be blinded by the hype machines in the media that are back at work today as if the past couple of years never happened. It always amazes me that folks are investing significant sums of money into the markets having done less research than they did when they purchased their last refrigerator or car.
My only quibble with the book, and it isn't enough to make me less enthusiastic about recommending it strongly, is that the author tends to throw the baby out with the bath water. He talks as if all public companies had management teams like Enron or Tyco. It isn't true. If he had taken a few pages and shown some management teams still doing it right I think it would have made his case stronger. And though Mr. Lowenstein does place some blame with the investor, I think he lets them off the hook too easily. The reason "The Greater Fool Theory" works is that far too many investors volunteer for the role of fool.
I do not want to let any of the bad and criminal behavior go without punishment. However, I remember that when Yahoo was valued at over $200 BILLION dollars and, at the time, that was more than GM, Ford, and Chrysler TOGETHER. I asked some friends who were rhapsodizing about that and other boom stocks, if they would rather have all the assets of Yahoo or all the auto companies. They all chose Yahoo. I pointed out that with the auto companies they would have real property, machines, buildings, and more that could all be sold. I pointed out that personal transportation is something humans are going to always want. Yahoo is some software that runs on some servers that could be made obsolete tomorrow. (And notice today's power of Google which did not exist at that time.) It made not a dent in their enthusiasm. Such invincible ignorance deserves to be punished rather than protected.
Anyway, this is a fine book and has a useful index. Read it and learn some lessons from this book more than there were some criminals running some big companies and you will be amply rewarded!
on May 2, 2005
This book is called Origins of the Crash. I would think that this would be an all encompassing book describing both the irrationality of all aspects of the stock bubble that burst, relying on firm statistics, polls and the such. However, instead, this book concentrates on just a few corporations and a few select people, and is just left to the reader to extrapolate this to the entire market. While I don't disagree with the actions of a few select people or corporations helped precipitate the decline in stocks, I didn't see how that explained everything, and I see this book as an incomplete exercise.
While the title is huge misnomer, the explanation of corruption, cronyism, false beliefs, lack of credibility and accountability is very well done. He talks about how CEO pay and their pay structure are not aligned with shareholder value. He goes into how the SEC was very lax during this time. He spends a brief amount of time on the conflict of interests between investment houses and corporations (and the media's role). He then delves into the internet fallacies that many saw as gospel in the late nineties. He finally ends with a detailed explanation of the problems of Enron/Anderson and Worldcom.
While detailed and mostly readable (though dry at some points), there was also a sense of smugness and a condescension that I felt hurt his credibility.
All in all, it's a decent, yet incomplete read.
on March 20, 2004
As a regular reader of the Wall Street Journal, I found this book to be too high-level for my liking. There is no real insight here as to what happened during the 1990's in the US financial markets, just a general rehashing of what I read in the WSJ. Given that, if you are unfamiliar with what went on this book would serve as good overview, but don't think you are going to learn anything new if you already have a familiarity with the topic.
One point I did disagree with was how Lowenstein gave Clinton a pass (the scandals did occur on his watch) but seemed to pile on Bush for not being aggressive enough in cleaning them up. A valid argument can be made for the later, but giving the Clinton administration a free pass harks of bias.
I also think Lowenstein fails to link the artificially high stock prices of non dot-com companies with that of dot-com companies. I am of the opinion that one reason many companies inflated their earnings, and subsequently their stock price, was to keep up with the high growth rate of the dot-coms. Why would someone buy Enron growing at 10% a year, when I can have Yahoo growing at 50% a year? To compete with that kind of grow and make their stocks more attractive (aside from enriching themselves on options) executives baked the numbers.
on March 9, 2004
The stock market bubble of the late 1990s represented one of the most intense periods of broad-based irrational behavior since the 1920s, and the fallout from the bursting of the bubble likely kicked off the 2001 recession, cost thousands of employees their jobs, and cost untold investors large amounts of their hard-earned savings (I'd suggest well upwards of $1 trillion). How could something so irrational happen in this day of enlightenment? Roger Lowenstein, one of the best financial authors for the lay person, has done an excellent job of describing and detailing the elixir of half-truths, conflicts of interest, shabby corporate governance and outright fraud that intoxicated many investors. More specifically, Lowenstein provides a highly readable explanation of how too many corporate managers and directors, rather than working in the interests of their shareholders, became looters of shareholder wealth via misleading financial statements, excessive use of stock options and other shenanigans. He also does a good job illustrating how hopelessly conflicted some Wall Street analysts, and even public accounting firms, became during the wild-and-crazy times. The chapter on Enron, a must-read all by itself, will provide a lot answers to those who wonder how such a massive corporation could collapse in this age.
To those who already know about the various roles played by Jack Grubman (a very influential Wall Street analyst), Arthur Levitt (the SEC chair during much of the 1990s), Andy Fastow (Ernon's financial alchemist) and Billy Tauzin (an influential Congressman), you will most likely find this book easy, lively reading. For those who are not already familiar with these people and with what will likely turn out to have been the most intense financial mania of our lifetimes, this highly readable book will open your eyes.
on June 2, 2007
There's quite a lot to like in this book. Lowenstein has the details of the way the 'New Economy' of the '90s was hyped down pat, and how it all, inevitably, fell apart. But there's an important missing dimension. Lowenstein's book suffers from a lack of history.
As I read ORIGINS OF THE CRASH, I couldn't help but think of other books, describing astoundingly similar situtations. EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS by Charles MacKay, UNACOUNTABLE ACCOUNTING by Abraham Briloff, CONTRARIAN INVESTMENT STRATEGIES by David Dreman, ONCE IN GOLCONDA by John Brooks, THE WALL STREET WALTZ by Kenneth Fisher, THE ONLY OTHER INVESTMENT GUIDE YOU'LL EVER NEED by Andrew Tobias, and especially THE MONEY GAME and SUPERMONEY by George 'Adam Smith' Goodman.
The core of the great bubble was the fact that human beings don't naturally think in a logical manner, can't deal with large numbers well, are short term oriented, have a great capacity for believing nonsense, overoptimism, the use of case and other faults being unravelled by the emerging disciplines of behavioral economics and prospect theory, associated especially with Amos Kahneman and Daniel Tversky. Depite Lownstein's belief that this time was different, in fact, the elements of the bubble were exactly the same as the canal and railway manias, the small computer boom of the late 1970s, the 'era of wonderful nonsense' in the 1920s, the Great Electronics and IPO Mania of the 1960s, and the conditions just before the Crash of 1987.
So read this book, but remember the perspective is overly narrow. And especially remember that it will all happen again, in your lifetime. I've already seen it three times in mine.
on February 9, 2004
This book is all right, but not great. It is a descent work of business history. It covers well-known themes, including a business culture increasingly obsessed with short-term gains, a corrupt security analysis industry that boosted share prices to unrealistic levels. It also depicts the evil partnership between CEOs and their accounting firms that cooked the books of their respective companies to deliver phony earnings.
Our financial system was fraught with so many conflicts of interest that the crash was an inevitable accident waiting to happen. The security analysts sold their souls and earned their bonus from the related investment banking fees they helped generate. The accountants did the same thing by marketing associated consulting services to the same clients they delivered auditing services to.
Lowenstein covers in depth all the related villains, including Marcia Meeker, the leading security analyst who bears much responsibility for boosting Internet stocks to unreal levels. Jack Grubman did the same for the telecommunication industry. If these two characters had been taken out of the security analysis game earlier, maybe the Bubble would have been less inflated. Indeed, if you take out Internet and telecommunication stocks, the bubble just about evaporated. The remainder of the stock market sectors was not nearly as inflated, and therefore did not decline nearly as much when the Bubble burst.
So, why is this book not this great? If you have read the financial press during the past decade, you won't get much new insights here. The causes of the Bubble are well known, and have been analyzed thoroughly by other journalists for years. Additionally, Lowenstein underplays the fact that the Bubble really affected, as mentioned above, a very narrow sector of the stock market.
This book is weaker than Lowenstein's previous one: "When Genius Failed." Back then, Lowenstein tackled one of the most complex shock to the capital markets. He analyzed and described in understandable terms how a hedge fund went belly up using pretty sophisticated convergence strategy. He also reported how Greenspan saved the day by coercing large banks to bail out Long Tern Capital Management. This was all fascinating and educating stuff. You won't find that much high intensity gray matter in "The Great Bubble."
A far better book on the Bubble is Robert Shiller's "Irrational Exuberance." Shiller's book is more technical, well researched, and academic (in a positive sense). And, more importantly, Shiller's book was prescient. He wrote it in 1999, it was published in early 2000 just before the Bubble actually burst. It is more impressive to foresee the future as Shiller did vs. narrating the past as Lowenstein is doing.