Origins of the Crash: The Great Bubble and Its Undoing

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.

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.

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.

Roger Lowenstein is a great author and it reflects in this book....just like his previous books viz. When Genius Failed (this rise and fall of LTCM), Buffet (the making of an American Capitalist)

著名な金融ジャーナリストのローウェンシュタイン氏が2001年の株価暴落後に上梓した一冊。2008年までしっかり繋がっていく軌道がコンパクトに詰め込まれていて、今読んでも大変にお勉強になる本。分厚い金融本を何冊も読んだ後で、「皆さん、このコンパクトさを見習って下さい（涙）」とか思ったりする。文章も上手いしナラティブの構築もさすが。マイケル・ジェンセンという経済学者がCEOの過剰給与を如何に正当化したかとか、「経済学者のお仕事」に対する含蓄ある考察もあり、2008年、大銀行を吹っ飛ばし「市場の消滅」を招いた後で大金を貰ってオサラバしていくCEO軍団に一般ビープルが唖然茫然しても遅かったのだとよく分かる。種を巻いて花が咲いたのだ。時代の変遷を追いながら、投資銀行業務をする企業体はパートナーシップに戻って頂きたいものだなあ、との感を強くした。破綻したら自宅の椅子まで持ってかれるってのは素晴らしい抑止力だ。まあ長期的には戻っていく可能性もあるのだろうが。トレーダー文化は近く終焉するだろう。そして「投資銀行家」が銀行の舵取り役として復帰していくのではないか。自浄作用ではなく、自己保存作用である。トレーダーというのは組織の長には向かない。彼らは適者生存思想の人たちだろうが、単純化された「適者生存」は単なる勘違いだし、「コミュニティ全体の適者生存」には長期的には害悪である。ちなみにローウェンシュタイン氏はジョン・コーザイン氏の友人で、LTCM破綻の際に銀行団を上手にまとめた（らしい）コーザイン氏を「素晴らしいバンカーで人格者」と賞賛していたのだった。MFグローバル事件勃発の折にはどんな思いだったのかしらん。システム自体がかくも退廃的・退行的・退嬰的だと（値段が見えないOTC世界は進化の逆行だろう）、おそらく特に悪人でもない人間が悪人になってしまうなあ、と野次馬はボンヤリ見ていたのだが、ジャーナリストが取材対象と親しくなること自体は分野によってはひとえにマイナスではないにしても、どうも金融ジャーナリズムの世界だと魑魅魍魎の徘徊が多過ぎて悲しい事態になるような。金融業界の大物をその時々で持ち上げるのは危険だわ。以上、本書とは無関係のトリビアですいません。