Origins of the Crash: The Great Bubble and Its Undoing

Rating:
Summary: Highly Recommended!
Review: Accomplished financial journalist Roger Lowenstein weaves a captivating tale in this history of the late 1990s market boom and subsequent bust. The story reads like a thriller, complete with powerful bad guys (played here by CEOs), innocent bystanders (ordinary investors) and hapless observers (ineffective government regulators). While it does not offer specific tips on avoiding fraud or implementing change on Wall Street - indeed, the author admits that real change in that bastion of enlightened self-interest may be impossible - this book is a valuable cautionary tale. Lowenstein traces the evolution of creative accounting practices that blossomed into blatant fraud and eventual bankruptcy, finally forcing the notoriously pro-business Bush administration into pushing for corporate governance reform. Along the way, he exposes the myths of the dot-com era and deconstructs the sham of shareholder value. He makes trenchant observations about a financial culture that allowed the ultra rich to get richer, while fully half of Americans never participated in the boom or benefited from it, although everyone paid the price of the bust. We recommend this book to anyone who lost money when the bubble burst - better luck next time.

Rating:
Summary: Good probing of the market crash ...
Review: Am a fan of Lowenstein's books. Read Buffett (5 stars) and When Genius Failed (4.5 stars) ... so I was drawn to this book more from his past successes than a desire to read up on the crash of 2000 ...

Overall, it's a good recap of events and a good probing of the reasons, details, nuances, etc.; but I felt that it was more of a retelling of events that a person would be highly familiar with simply by having read the Wall Street Journal on a daily basis ... I didn't read much on Enron so the book's details shed good insights ... but again, if I had read most of the Enron articles from its heyday, I probably would have been familiar with most of what the author reveals in his book ...

So I give this book 4 stars ... good recap ... for someone who is highly interested in the reasons behind the crash and "did not read the WSJ on a daily basis", then this book will provide a superb backdrop to the financial fiasco that began the new millenium ...

Rating:
Summary: A good overview that lacks new details.
Review: 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.

Rating:
Summary: Could Have Used Some Empiricism
Review: Having read "When Genius Failed", I looked forward to this book. What this book does a great job of is a summation of the market from the 70s forward. It could be a great additional reading book in a college finance class as you will learn quite of what to do and not do.

But where the book may have missed its mark is there is no new ground covered. "When Genius Failed" covered a very intricate subject and went in to great depth to explain. The multitude of subjects did not give Lowenstein that option for this book so it reads similar to long newspaper exposes with some additional commentary.

Overall I enjoyed this book and recommend it. But please make sure it matches what you are looking for. A good history summation is what you have.

Rating:
Summary: The Naked 90's
Review: 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.

Rating:
Summary: Origins of the Crash: The Great Bubble and Its Undoing
Review: Lowenstein, a well-known author and financial columnist, has crafted a lively and readable account of the last 30 years on Wall Street. Starting with the creation of 401(k) accounts, proceeding through the boom years of the 1990s, and then moving to the downfall of Enron and its brethren, he ties in the various factors that have inexorably led us to where we are today. While none of this is new information, Lowenstein includes enough personal details to make it seem fresh and interesting. The last chapters are particularly relevant, covering the fallout when the various deals and compensation scandals came to light. The effect of 9/11 on the government and the country in general is also touched on, particularly with regard to the rising budget deficit. Finally, an epilog discusses the fines and reforms (including the Sarbanes-Oxley Act of 2002) that resulted from the various debacles and opinions about what else must be done. The book is heavily documented throughout with quotes and sources, making it authoritative as well as informative. Recommended for public libraries.-

Rating:
Summary: The Theme Never Changes, Only the Stories
Review: There are only two emotions that motivate the stock market: fear and greed.

In his latest market history, Roger Lowenstein explores how the theme of creating shareholder value morphed into unbridled greed and led to the latest stock market crash.
Delving back to the 1970s and 1980s, Lowenstein spins a compelling narrative, of heavy hitters -- Jack Grubman, Sandy Weill, Frank Quattrone, Henry Blodget, Mary Meeker, Abby Cohen, Bernie Ebbers, Frank Lay, Jeffrey Skilling, Gary Winnick -- who checked their moral scruples, fiduciary responsibility and better judgment at the door in the pursuit of personal wealth. Along the path, they co-opted the system's traditional restraints: full disclosure, public accounts and corporate attorneys.

I was disappointed Lowenstein failed to include the Richard Grasso incident. As the head of the New York Stock Exchange and regulator of virtually every individual mentioned in the book, his pursuit of personal wealth at the expense of those he was charged with regulating would have served as the icing and cherry on top of this tale of greed.

Regardless, this well-researched and powerfully written portrait of the rise and fall of the bull market of the 1990s will studied by market historians for decades to come.

Rating:
Summary: chicken or egg?
Review: This book, well researched and well told, is both informative and misleading. Informative in that it shines a clear light on the dangerous attitudes and corrupt culture that led to the bubble and its burst; misleading in that it presents a limited picture, a partial explanation implicitly represented as complete. If a burned investor wished to understand the great bull's violent death, and had this book as a sole reference, he would likely assume that bubbles are largely the result of lax standards and creeping corruption, and thus likely infer an off base conclusion: that future bubbles can somehow be prevented with a combination of better rules and tighter governance. The stories of Worldcom and Enron are informative and well told, but do they really count as 'origins' of the mania, rather than indirect creations of it?

A student of market history might suggest that most if not all big bull runs end in delusion and creeping corruption, as enthusiasm turns to mania, mania causes normally rational individuals to take leave of their senses, and desperate measures are implemented at the last in vain hope of keeping the dream alive. Does endemic corruption lead to mania, or does the onset of a mania lead to corruption as an inexorable byproduct of the times? The question, as it applies to this book, is whether the gory details matter as much as understanding the age old cycle of boom and bust itself.

Consider Adam Smith's excellent book, "The Money Game," which details dramatic boom and bust in the 1960s (and the all too familiar culture behind it all). Similar stories, similar players, similar reasons for excitement -even the 1960s version of dotcoms and the foreshadowing of Enron- and of course, a violent and painful ending when it all comes crashing down. Going back further, to 1929, or still further to tulipmania and the South Sea bubble, it could be argued that bubbles remain constant in caricature, with only details changing. Perhaps we are travelling along an expanding sine / cosine wave of boom and bust, as the cycles speed up and leverage allows for ever more spectacular highs and lows.

Lowenstein brings forth a number of useful insights: for instance, the notion that the efficient market hypothesis may do more harm than good. To wit, the assumption of rationality makes the markets less rational by functioning as a rubber stamp. If stock prices are assumed always and everywhere rational, then incredible price movements are deemed reasonable by default, and the boosters are given perfect cover. Lowenstein also gives the phrase "shareholder value" a thoroughly sound thrashing, shedding light on insular corporate culture generally and gross CEO excess specifically. Exposing that culture down to the roots is the main aim of this book.

I was quite suprised, though, to see that a book titled "Origins of the Crash" said nothing about so many major factors that came into play. For example, the fact that we were at the tail end of a record period of peacetime expansion that had been going on since 1982, with only one or two brief and limited interruptions. The fact that we were enjoying a "goldilocks economy" in the late 90's as the result of a long-fought battle with inflation that was finally paying dividends. The major role played by the federal reserve vis a vis multiple events that spurred massive liquidity injections: Asian currency crisis, Russian default, LTCM meltdown, preY2K fears. Nothing said of monetary policy, the boom / bust cycle of credit or the hidden inflationary consequences of easy money (namely, the tendency for fed induced liquidity to go directly into stocks and, as of this writing, real estate).

Nor did Lowenstein really address the compelling nature of the dot com story, except in brief passing. He noted that a seachange technology often leaves a vast litany of losers behind (railroads / automobiles etc), and that mass consumer benefits do not equal mass profits for companies riding the risky edge of innovation. He also noted the impossible driver of the mania: the notion that internet traffic was doubling four times a year to infinity. But so much more could be said! Hyperbole aside, the information age really does change things dramatically; just not overnight. That line of thinking could have been, and should have been in my view, more deeply explored. Speaking of which, here are two of my favorite quotes from the book that practically beg for more discussion:

"Finance has its own Peter Principle, by which a successful model will be adapted to progressively riskier causes until it fails."

"There is always a germ of truth, a half-fact or momentary fact that, taken to hyperbole, can justify the most fantastic projections."

For any student of the markets, this is well worth the read (and at 227 compact pages it's a fast read); Lowenstein's book is practically a modern day addendum to Mackay's seminal "Popular Delusions & The Madness of Crowds." But rather than title it "Origins of the Crash," it might be more representative to see it as "A Slice of the Crash" or "Culture of the Crash." In focusing on creeping corruption and chicanery born of desperation, this book is more a cross section of details for a particular late great mania, rather than a chronicle of its origins.

Rating:
Summary: dry, acerbic wit accurately dissects the money culture
Review: This is a really good, introductory book that explains the whole money culture of the 90s, its origins, and many of the seemingly absurd and illogical justifications used by various players to justify the bubble that permeated Wall St.

It is quite informative, always entertaining, and Lowenstein's wit and acerbic sense of humor make one chuckle at the outrageousness of some situations.

That said, the book, while descriptive, is not prescriptive: it does not offer much in the way of solutions to the issues so eloquently raised in its pages. It is quite easy, after all, to determine that a hitter swings his bat too wildly to make contact with the ball; it is much harder to tell the batter how to make contact with the ball. Describing the history and culture that gave rise to some of the more egregious practices of the past ten years is certainly informative; however, such descriptions merely contextualize the problem and do little to advance debate on how to overcome such problems.

For example, Lowenstein quite correctly points out that one big cause of the mania for shares was managers' sudden infatuation with hitting quarterly earnings targets...which fascination these managers fixated on because the Street told them that is the yardstick by which they would be judged. So? Good analysis, good explanation that the logic implied in the relationship between managers, their colleagues on the street, and the maniacal focus on hitting earnings targets is self-referential if not outright incestuous. But Lowenstein does not take this argument to the next step: what do we do to cut off such self-referential silliness as that which is described?

That is a discussion he does not approach, and one that neither he nor anyone else seems to have. History, of course, will judge if the corporate reforms as of late, such as Sarbanes-Oxley and the focus on corporate governance will have the desired effect.

Rating:
Summary: The Clinton boom wasn't a boom - it was a sham.
Review: What really caused the great stock market bubble of the 90s? Who was responsible for the economic growth of that decade? Who are the villains that robbed millions of their life savings?

Lowenstein weaves a stomach turning tale of rampant dishonesty and criminality; individual, corporate and political greed; the willful failure of law enforcement on the federal level; the blindness created by greed and exposes the myth of the so-called Clinton boom years.

In the end, Lowenstein shows how the Depression-era laws intended to protect the public against stock swindles were simply ignored by the Clinton Administration. Sharp-witted corporate executives learned that they could loot the companies they ran in behalf of the shareholders and the shareholders themselves. The investment bankers learned that they could tout stocks with impunity, no longer having to fear being penalized for lying about the companies they cheered and simply turning a blind eye to accounting arcana and bad news. The accounting and legal professions, supposedly self-policing, dedicated themselves to finding ways to make dung look like gold, even if they couldn't remove the smell. The media, with its legions of financial "reporters" and their dependence on the advertising revenue of the very businesses they reported on, did no fact checking of their own, but simply parrotted the lies they were fed.

And the government? Then President Clinton and legislators simply took the donations of the very people who were fomenting the bubble - and turned a blind eye to enforcing the laws.

Several thousand people grew very, very rich from all this chicanery - while millions lost money, sometimes disastrously so.

Lowenstein describes how it all began with the inflation of stock options awarded to executives. It didn't take long for corporate executives with compliant boards, lawyers and accountants to realize that a seemingly unlimited flow of wealth was waiting to be tapped. The investment bankers and stock analysts saw - as it always has been - how stock prices could be run up without a whit of truth supporting their claims. Buy, buy, buy became the mantra to the public - while the folks on the inside saw profit on every transaction.

Enron and Worldcom were but the largest perpetrators of this sham on the company side, assisted by legions of lawyers who sought loopholes, accountants who looked the other way, stockbrokers who didn't care as long as the public kept buying - and regulators and politicians who lined their own pockets.

It's a sad tale of the Clinton boom. It never was what it was publicized as being - it was a sham and millions of ordinary people are the poorer for it. But not the fat cats in the White House, Congress, the brokers or the others who pulled it off. A few may ultimately go to some country club jail, but they'll be able to afford whatever they want from the commissary.

Jerry