on June 22, 2004
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.
on April 20, 2004
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.-
on May 31, 2004
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.
on April 2, 2004
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.
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 February 27, 2004
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.
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 February 14, 2004
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!