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19 of 21 people found the following review helpful:
4.0 out of 5 stars
I've got your number, sunshine, March 3, 2004
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.
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