Origins of the Crash: The Great Bubble and Its Undoing [Paperback]

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 (but never makes the case that there was any deception, thus rendering his clever-dick title meaningless), adding an interesting history of the internet and computers in finance.

Lowenstein deals with the spinning, laddering and corporate governance scandals of the early part of this decade but 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.

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 "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.