Origins of the Crash: The Great Bubble and Its Undoing

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)

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.

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.

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.

I had an extremely favorable impression of Lowenstein's books, having gone through the classic "When Genius Failed" as well as "Buffett". After having read this, though, I fear to say that I'm pretty disappointed.As some other reviewers have pointed out, the book is pretty detailed, with the exception of a few bloopers. However, I couldn't fail to notice a sense of personal vendetta emanating from each page. Someone seems to have lost a bundle during the Dot Com bust.Among other shortcomings, Clayton Christensen was dismissed as yet another New Economy Guru, and the entire narrative seemed to pivot on CEOs being the epitome of evil. I'm not quite sure I agree with this characterization; it's unnecessarily biased. Also, there was very less attention paid to the fact that, for a particular generation of America, the 90s Bull Run was their own weird corporate version of the Swinging 60s and Free Love. I recognize the fact that, in a book describing the Origins of the Crash, this can be ignored as a first approximation. In my view, though, those social "mob" effects had a vital role to play, especially when they were swinging to the beats of Meeker, Blodget and the Motley Fool brothers.Overall, I much prefer Maggie Mahar's book Bull: A History of the Boom and Bust, 1982-2004 over this book. Sorry RL!