Origins of the Crash: The Great Bubble and Its Undoing

The author has done an admirable job in identifying the main, root cause of recessions and depressions.The root cause can always be traced back to banker funded, debt leverage finance ,engaged in by both commercial banks and the Wall Street investment banks that are no longer with us.Of course,the speculators need help.The usual rogue's gallery of Wall Street analysts on the take,such as Mary Meeker,Henry Blodgett,and Abby Joseph Cohen ,is again exposed for the nth time.The negative role and impact of the use of financial derivatives on Main Street is duly chronicled,as are the inside traders and hedge fund operators whose game is to extract profit without the production of any good or service,except the euphemistic " financial services " provided a la Ken Lay ,Skilling and the Fastows at Enron Corporation.The author makes a compelling case that Enron -type behavior ,far from being an anomaly,is the norm. There is another benefit to be gained by reading this book.The author makes it clear that Adam Smith's concept of self interest has absolutely nothing to do with greed.The author is one of the very few financial writers to understand this very important fact.

It was already some time I wished to read this essay, both out of interest for the argument and because of the fame of Lowenstein as a very conscientious journalist. I must confess I have been totally satisfied with this work and, while warmly recommending to other readers, I look forward to read some of his other books (specially the one about LTCM collapse). The essay is compact (just 227 pages), easily readable and extremely interesting, since the author has obviously a huge in depth knowledge of the argument and his style is extremely balanced and pleasant. Lowenstein shows a very impartial approach: there's no rhetoric, no overtones, no moralistic attitude (like usual themes of pride punished) but produces many hard data and clever evaluation arranged carefully to build a very powerful case. Because of this approach, the book is probably the best account of the 1990s bubble I have had the chance to read. "The Origins of the Crash" is specially a report of how the financial bubble formed and grew, to ultimately bust at the beginning of the year 2000 in the way everyone knows. Lowenstein traces the origins of the troubles to come in a cultural shift that occurred in the late `80s: - the impact of LBO creating pressure on CEOs, coupled with new theories as "shareholder value" and EVA; - a shift from cash bonuses to stock options (and often not only so) for CEOs and attitudes focused on hard competition, "creative destruction" (stressing more on change than stability) and easy profit, more than self-sustaining quality and long term growth; - governmental deregulation (specially the repeal of Glass-Steagall Act, benign neglect on possible conflicts of interest and globalization of financial markets); - the coming of age of the new free market economics and their easy faith in the self-correcting capacity of markets (but I would add as well theories of risk management, that gave the false belief to be able to overcome and manage financial stresses, and the distortions on stock market prices caused by the use and abuse of derivatives). Given the frame, disaster comes to be almost inevitable: - shareholder value is narrowly interpreted and implemented as the effort to inflate stock prices (the best - and safest - manager is not the one with best result but the one with the best track record of stock prices) - shareholder value, with its emphasis on prices, causes a shift form long term to short term in a hectic chase for steady and consistent business results; - deregulation opens the way to conflicting interests: in corporate governance (internal audit, CEOs, President), outside the company in the balance of mutual checks (external auditing companies offering as well professional consulting to the same customer and pretending, while so doing, to remain "objective"), repeal of Glass Steagall and dismissal of "Chinese walls" between commercial banking and financial analysis). To this explosive mix you just have to add a long

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)-Reduced disclosure-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-IPO boom-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 "Equ

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!

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 b