Origins of the Crash: The Great Bubble and Its Undoing

Rating:
Summary: Horrible and Boring Book
Review: I bought this expecting to learn something new. It is a huge disappointment. There is virtually nothing in this book that anyone who opens a daily newspaper hasn't already read. It is basically a rehash of old newspaper articles; no investigation, no new thoughts, nothing. Plus, it was boring. I wish I hadn't wasted my time reading it.

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.

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Summary: The bigger picture of the 1990's technology bubble
Review: In retrospect, it is always easy to be right. Of course, now we all know that the Dow Jones is not going to reach 36,000 any time soon and we know that most of those dot.coms were hopeless cases. Back then it was a different story. Back then - that was about a decade ago.

Lots of books have been written about the bubble, many from the "told you so" perspective that not always is too justified (those told-us-sos were amazingly quiet back then - maybe they were also too busy trying to get rich beyond all imagination). Many other books merely describe what happened, often focusing on the dot.coms. Lowenstein's book is a welcome alternative to these two approaches. He traces back some of the seeds of the bubble to the days when stocks were depressed - back in the 1970s and 80s - and when people were wondering how to make them rise. Tying CEO's incomes to stock prices - by giving them generous stock options - seemed like a good idea. Lowenstein shows how this eventually led to the big stock market bubble where stock prices were made to rise at all costs so that CEO's could reap in their fortunes. It's the age old story of greed, hubris and, in the end, disaster and, like in his book about Long Term Capital Management, Lowenstein tells it elegantly.

In retrospect, many of the actors remind us of old acquaintances and many of the stories - which is not to mean all the details - are only too familiar. Enron - the most "popular" disaster. Lowenstein also discusses WorldCom, a bigger disaster in terms of actual numbers. And the list goes on and on and on. Lowenstein shows that the telecoms bubble was actually worse than the dot.com/internet bubble. Those internet startups pretty much all disappeared. But the industry is still struggling with the results of the telecoms bubble.

There is one aspect of this whole story that might not make this book too popular. All this would not have happened if there had been more and better oversight at Wall Street. Deregulation is one of the culprits here. For example, tearing down the barrier between commercial and investment banking - set up as a result of the crash in 1929 - directly led to a series of amazing and entirely predictable disasters. Those same actors who now claim they want to sort out the mess back then were treating everybody who was asking for more regulation like an employee of the devil. Deregulation still is very popular and the Free Market is still treated as if it was some benevolent mythical creature, as if there was no greed that can create monsters like Enron and WorldCom. Have we really learned enough from the bubble? Lowenstein does not delve too deeply into these issues. But there are some pretty interesting comments about a certain best friend of Ken Lay, the head of Enron, or about that Senator from Connecticut who now wants to make us believe he was always in favour of stricter controls.

All in all, this is a very good book about how it all started and you can make it the only book to read about the big 1990's crash.

Rating:
Summary: Could Have Used Some Empiricism
Review: Lowenstein believes, among other things, that the chairman of the board and the CEO of a corporation ought to be two different people.

On that basis, he ought to approve of Enron's decision to separate the two posts, early in 2001. Skilling was never the chairman of the board of Enron. He was the CEO and Kenneth Lay was the chairman.

Lowenstein doesn't connect those dots. But he does ask us to consider "how inappropriate would the description President and Chief Justice sound, or Head Coach and Quarterback. The board's job, like that of the coach, is to monitor those on the field....Indeed, the merging of these roles in America stands out as a unique institutional mistake." In his view it has helped create the star-quality of CEOs which in turn made star-worshipping investors eager to part with their bucks in return for overpriced stocks.

Lowenstein might have done something more than given Ken Lay this accidental pat on the back. He might have offered some empirical evidence of the badness of such merging. He might, for example, have cited two corporations who faced similar circumstances otherwise - one with a chairman who was also CEO, the other with a severance of the two positions. If the former company suffered from a bubble-and-bust that the latter company avoided, that fact would be germane for empiricists. Or he might have referenced corporate earnings or productivity or any other measure of anything valuable tends to increase when the two roles are severed. But he doesn't. One need not expect empiricism from an author pushing a hot thesis.

Instead, there is a good deal of discussion of the absurdly high salaries CEOs make these days, which prove (he thinks) that boardrooms have become excessively chummy places. Indeed, he can play heads-I-win and tails-I-also-win. If Skilling had been chairman as well as CEO, his subsequent indictment would show why those roles should never be combined. But since in his case they weren't combined, the same facts show ... what? Apparently that they should be occupied by non-chums, by people who are wary of one another.

This is a demand that we don't make in the case of a head coach and a quarterback. If they are both sharing in the credit for a winning team performance, they are likely to feel rather chummy. As for their salaries, that will be determined by the supply of people capable of doing their jobs, and the demand for getting those jobs done.

Of course, in the case of Enron in early 2001, they were NOT getting the job done, they were only pretending to. But Lowenstein doesn't have a handle on the whys and hows of that.

Rating:
Summary: Going Strong
Review: Lowenstein is going strong and has actually written meaningfully about the events of 1998-2000. He explains them as an inevitable result of several factors of the 70s-90s. As well written as Buffet.

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.-

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Summary: The Culture that "Led to Prosperity and Enron"
Review: Mr. Lowenstein surveys the principal instances of financial abuse which, together with September 11th, resulted in a steep decline in the U.S. stock market -- with the Dow down almost 40% once Enron's travails began to permeate public awareness. Lowenstein claims that, "if a single corporation could represent the corruption of shareholder value," Enron would be that corporation. Not surprisingly, a significant fraction of this book is focused on Enron, particularly its infamous use of Special Purpose Vehicles. Also prominent in these pages is Worldcom and its colorful, affable CEO, Bernard Ebbers. The underlying lesson from the various cases Lowenstein surveys is that the level of corruption and mismanagement reflects " cultural devolution -- a generalized decline in standards."

One difficulty with this book is that the history it surveys is still very much evolving. Virtually none of the major companies he examines is "out of the legal-woods." In addition, the book reads as though it hastily came together; it lacks a proper introduction, and the final chapter is less tight structurally than it ought to be. With respect to the latter, I drew a different lesson from Lowenstein's book than "cultural devolution." More specifically, I think what Lowenstein documents is that the institutions upon which investors rely for information, integrity and transparency failed miserably, or at least enough of them failed to prompt the market exit and the subsequent drag on values. Analysts became salesmen. Auditors became compromised. Boards went comatose. Neither the SEC, nor Congress, for whatever reasons, acted as the guardian of last resort. In the end it was a general financial publication, Fortune, and the investigative work of Bethany McLean, that turned on the lights and ended the party. What remains uncertain is whether Sarbanes-Oxley and other reform efforts will be provide sufficient future protection. Lowenstein's last chapter suggest some powerful reasons to remain cautious.

Rating:
Summary: Origins of the Crash: the best book on the 90s?
Review: Origins of the Crash is a compelling read, and Lowenstein certainly hits many of high moments (or low, dependending on your perspective) of the most recent Bull run. One of the other reviewers offers two useful (and praiseworthy) observations about this work: Lowenstein's prose is not inflected with a told-you-so attitude, and he casts his net wider than the tech bust. However, while I admire Origins of the Crash, I cannot agree that this is the best book on the 90s. Maggie Mahar's Bull! is arguably a better book for her comprehensiveness, and for the amount of original material that she presents. Mahar also views the crash as more than a dot disaster, and for those of us who lived through it--and followed many of the meltdowns closely--she offers more new information.

Rating:
Summary: Our Character, not the Stars....
Review: Reviewing Roger Lowenstein's highly readable account I am reminded of a Fortune magazine editor's throwaway comment - After the bubble people go to jail. For Lowenstein the ultimate cause of the stock market bubble was an abused interpretation of "shareholder value" that became a mantra for CEO's, accountants, stock analysts, lawyers, bankers, and finally investors. More than an historical footnote, Lowenstein has given us a moral indictment of the culture that produced this costly lesson in excess.

The notion of shareholder value and its devolving emphasis in the 1990's on share price rather than underlying business values proved devastating. "Virtually every transgression [of the period] flowed from this simple corruption." The "misplaced incentive" of lavishly awarded stock options bent the focus of CEO's and senior management to short-term stock price moves. Widespread use of stock options sprang from an academic idea to align the interests of management with shareholders and stimulate American corporate culture. Focusing on short-term quarterly benchmarks simply raised the importance of the stock price at that moment in time to the detriment of the harder job...building the business for the long run. For Lowenstein stock options are the crack cocaine of boardroom culture, the bitten apple of the period's "original sin". It is this perspective that gives coherence and insight to many of the particulars of the period still fresh in our minds. While there are clearly individual villains in Lowenstein's account, he makes the case for a pervasive ethical breakdown and a culture out of touch with its better standards.

Absent to a large degree from this account of the Crash are the dynamics of supply and demand. In the 1990's markets encouraged misallocations in the area of technology and telecommunications. It is easy to forget the urgency behind huge IT capital outlays to update computer systems prior to the stroke of 2000. Serious people considered if lights would go out, ATM's fail. Would there be hoarding of goods and cash? Would there be a recession? Would computers lock-up? Excess capacity and an over-stimulated economy were also major contributions to the bubble, but they get little attention here. This is not Lowenstein's contribution to the discussion. He sees the excesses not as a one-off, inventory event or another turn of the business cycle. His view is less academic, less antiseptic. And it is also a more unsettling view as it is rooted in character and culture.

Rating:
Summary: Fine reporting on what led to the evaporation of $7 trillion
Review: 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!