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The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America Hardcover – Mar 2003


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Product details

  • Hardcover: 304 pages
  • Publisher: Random House; 1 edition (Mar. 2003)
  • Language: English
  • ISBN-10: 0375508805
  • ISBN-13: 978-0375508806
  • Product Dimensions: 24.6 x 16 x 2.9 cm
  • Average Customer Review: 4.8 out of 5 stars  See all reviews (4 customer reviews)
  • Amazon Bestsellers Rank: 1,483,280 in Books (See Top 100 in Books)

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It had been a very long week for J. P. Morgan Jr. Read the first page
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1 of 1 people found the following review helpful By Donald Mitchell HALL OF FAMETOP 500 REVIEWERVINE VOICE on 19 Jun. 2004
Format: Hardcover
How do the financial markets work? How good are the information flows? How far can you trust what you read and hear? Where are there conflicts of interest? Why are these conflicts dangerous? Those are the fundamental questions that Mr. Alex Berenson addresses in his century-long look at how the government, companies, investment banks, brokers and investors have interacted. Unlike other books about the need for reform in the financial markets, this one also looks thoroughly at thoughtful commentary by market experts, academics and regulators over the years. The book is enlivened by entertaining writing, a willingness to say "shame on you" to those who have done wrong and insights into the work that short sellers do to make the market more rational when it isn't.
If you just want to read about the current market or you know a lot about the market history, you can skip over the first 70 pages. If you are new to the market, you may find the first 70 pages to be the most interesting. Stock promotion and trading have always been corrupt. Over time, that corruption finds new ways to manifest itself. What's new now is that the potential financial stakes are so large that they would blow the mind of an ancient Egyptian pharaoh. At the same time, the social cost of corruption is equally large.
I found the book to be quite thorough when it came to the recent market bubble (and partial bursting in 2000-2002). The main area that did not receive enough attention was pointing out why boards go wild with options and CEO pay (even for lousy performance).
The book has two technical weaknesses in its observations that deserve note. First, like almost all financial writers, Mr. Berenson assumes that the current way companies employ stock options is unfixable except through accounting changes.
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Format: Hardcover
In the last few months I have read four accounts of the tech bubble. Glutton for punishment, aren’t I. I’ve just got through Alex Berenson’s “The Number”. I was sent a free copy by the publisher. Alex Berenson himself emailed me to arrange this. So first up, in the spirit of full and fair disclosure, I disclose that I was given this book to review. I feel the need to say that especially in this case because I thought this was rather a good book. By some margin the best of the bunch, actually.
Where Roger Lowenstein’s “Origins of the Crash” had the air of being something of an aggregation of newspaper clippings, and Frank Partnoy’s “Infectious Greed” was less focussed, less penetrating, and in no real sense dispassionate, Mr. Berenson clearly sets out his stall with an interesting (and relevant) history of the regulation of corporate governance and reporting since the 1920s, and an analysis of the issues associated with accounting of any sort. In two short but clear appendices, Berenson explains in lay terms the difference between (and pros and cons of) accrual and sale accounting, and then balance sheets as opposed to income statements. These are fundamentals that one needs to understand what was going on, and not all of the authors who have written on the subject necessarily have a grasp of them.
Where as other authors have targeted (with varying degrees of persuasiveness) bodies such as ISDA, the SEC and the credit rating agencies as the main culprit, Berenson’s focus stays very much with the auditing accountants and the corporate executives.
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Format: Hardcover
'The Number' is something I had thought impossible: an interesting book about accounting. Specifically, it explains how a combination of the American accountancy profession's eagerness to avoid responsibility for bad auditing practice combined with lax, politicised external regulation and the amorality of sections of the business community to produce a toxic environment for investors, in which little supposedly hard information about companies can now be taken on trust. In particular, the author traces the evolution of the modern reliance on a single measure - 'The Number' - as the alpha and omega of the success of a business, and thus of its value as an investment.

The book was published in 2003, after the Enron and Worldcom scandals but before the implosion of the US housing market, the collapse of Bear Stearns and the Bernie Madoff affair. It is remarkably prescient in the way that it shows how far the large accountancy firms have been captured, and government regulators neutered, by large corporations and their political shills.

Vividly written, deeply informative, 'The Number' is well worth reading for anyone who wants to understand the regulatory environment that allowed the housing bubble to develop; disconcerting for anyone who believes it can't happen again, and for the same reasons. I hope at some point to see a new edition, updated to include the events of the last ten years, which seem only to confirm Berenson's insights.
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By Mr. G. Carroll VINE VOICE on 10 July 2004
Format: Hardcover
First of all I can't talk with as much authority as some of the other people who have written articulate and indepth reviews on the book, however:
- Alex writes about the story in an earnest but interesting manner. It has a serious tone throughout that reminded me of Jeffrey Robinson's The Laundrymen
- He writes in an articulate way that explains many subtle and complex processes
- Alex's book isn't just about the tech bubble, its about the market evolved and the way it operates at a level of abstraction from how businesses are doing
- It illuminates the way accountany is not as an exact science as people would perceive it to be. Like many things that involve numbers from engineering to computer programming there is a lot in the interpretation and not all numbers are created equally. Tech companies because of the nature of their products and markets are especially prone to to this. For instance, if you sign a software contract with an eight-year service package when do you book the sale and for how much?
- It illuminates the 'wild ass guess' way that market analysts come up with figures and how clients meet them. That I think is the most powerful aspect of the story that he tells
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Most Helpful Customer Reviews on Amazon.com (beta)

Amazon.com: 32 reviews
51 of 54 people found the following review helpful
Every investor should be forced to read this book 16 Jan. 2004
By mark cuban - Published on Amazon.com
Format: Hardcover
I get asked all the time to write a book about business and investing. Fortunately, I dont have to or want to any longer. The Number is the book about investing I would write. Its not a how too book, its a book that pulls back the covers on Wall Street and shows once and for all that it is not an efficient market, and that indivudal investors and fund managers need to know that they are walking into a world that is far more ponzi scheme than a source of capital for growing companies and returns for investors.
If you buy stocks without reading this book first, you are putting yourself at a disadvantage
27 of 29 people found the following review helpful
I've got your number, sunshine 4 Mar. 2004
By Olly Buxton - Published on Amazon.com
Format: Hardcover
In the last few months I have read four accounts of the tech bubble. Glutton for punishment, aren't I. I've just got through Alex Berenson's "The Number". I was sent a free copy by the publisher. Alex Berenson himself emailed me to arrange this. So first up, in the spirit of full and fair disclosure, I disclose that I was given this book to review. I feel the need to say that especially in this case because I thought this was rather a good book. By some margin the best of the bunch, actually.
Where Roger Lowenstein's "Origins of the Crash" had the air of being something of an aggregation of newspaper clippings, and Frank Partnoy's "Infectious Greed" was less focussed, less penetrating, and in no real sense dispassionate, Mr. Berenson clearly sets out his stall with an interesting (and relevant) history of the regulation of corporate governance and reporting since the 1920s, and an analysis of the issues associated with accounting of any sort. In two short but clear appendices, Berenson explains in lay terms the difference between (and pros and cons of) accrual and sale accounting, and then balance sheets as opposed to income statements. These are fundamentals that one needs to understand what was going on, and not all of the authors who have written on the subject necessarily have a grasp of them.
Where as other authors have targeted (with varying degrees of persuasiveness) bodies such as ISDA, the SEC and the credit rating agencies as the main culprit, Berenson's focus stays very much with the auditing accountants and the corporate executives. A number of sectors in the financial system (in fact pretty much all of them) took their eye off the ball at the critical stages of the bubble, but were it not for the vagaries and flexibilities of accounting policy and sheer out-and-out greed of executives, this might not have happened, at least perhaps not quite so dreadfully. Berenson is convincing on both these scores.
That said, I don't subscribe to all Berenson's views. While the actions of some auditors (notably Andersen) are indefensible, Berenson supplies a pretty solid excuse for the profession generally: the preparation of company accounts, he notes, necessarily involves hundreds of assumptions, approximations and best guesses, and as even with the best will in the world these can be wrong, and "those who want to cheat have an almost infinite number of ways to do so". Given that the auditing function can only cost so much before it drives a company out of business by itself, there must be limits to what any auditor can be expected to detect. But Berenson still holds the profession to book. This isn't always consistent with Berenson's other view, which he expresses convincingly, that the "number" is intrinsically unreliable and should be much less of a determinant for market sentiment than it currently is. On the other hand, as he notes in his conclusion, even this view has its limits: the stagnation of the Japanese markets in the last five or so years is testament to the perils of ignoring the "number" altogether.
Like most financial authors (with the exception of Michael Lewis, for whom he has considerably less respect than I have) Berenson favours more government regulation as part of the solution to the problem: Congress could limit the number of options companies could grant their CEOs or put restrictions on executive pay, he suggests. Perhaps accountants could be required to bid for audit work to a federal board.
With respect, this is silly: Irrespective of how ridiculous executive compensation may be (and Berenson is certainly convincing that it is), such a Soviet technique is absolutely the last thing that is required. The market has to learn these lessons and discount the stock of profligate companies itself: the government has no means (let alone resources: Berenson is similarly persuasive as to the lack of funding for the SEC) for ascertaining what is reasonable, whereas the market - albeit eventually - will find the charlatans out. I dare say Michael Eisner is finding this out to his discomfort at the moment. At some point short sellers will be able to exploit the arbitrage opportunity. Investors may lose in the short term, but if you aren't able to take a short term loss, you shouldn't be in the market. Like Partnoy does, Berenson concludes his book with recognition of this. Caveat Emptor, indeed. In some ways having the SEC as a comfort blanket for investors in itself fuelled the boom.
Elsewhere Berenson is occasionally guilty of sophistry. He points out the irony of price regulation of the commissions charged for trading on the NYSE, perhaps the most potent symbol of the free market on the planet. But then mixes his examples: "Wall Street has always loved free markets, except when they might cut into its fees. Today, when even real estate agents are being forced to compete on price, the 7 percent commissions charged by big investment banks for initial public offerings are sacrosanct." This is naughty, and I suspect Berenson knows it. Commissions for underwriting IPOs are quite a different thing to commissions for brokering stock sales across the exchange. They have never been subject to any regulation, and if the fees tend to stick at a certain level, that not so much to do with price fixing, as the inherent risks and huge amount of work and expense required to get an IPO away. That is the market level. Given the dearth of IPOs in the last three years, the pitching for them will have been feverish.
I am prattling on. These quibbles are largely that: just quibbles, and in the round this would be the book I would recommend out of the four on the subject I have recently read.
9 of 9 people found the following review helpful
More painful in retrospect 30 April 2009
By D. Alexander - Published on Amazon.com
Format: Paperback Verified Purchase
I wrote this review in late 2007 for a class:

Greed. Unparalleled greed. One might assume from the title of his book that Alex Berenson wrote a mathematical treatise. He did not. The Number is a study of how independent, rational investors can and do throw their experience to the wind in a desperate money-grab, couched in business suits and financial statements, but unremoved from a freewheeling gold rush. Berenson writes in a comfortable, easy style refined through editorial experience as an author for [...], a Wall Street financial publication, but he is not measured or sanguine here. In this book, published shortly after the implosive demise of Enron, WorldCom, and hundreds of smaller companies that would not survive the market bust of 2000, Berenson's prose has the cynical, bitter flavor of a man who just cannot believe how far the mighty have fallen.

The Number has eleven chapters and crescendos to a peak with a recounting of the end of the bull market of the 1990s. The first four chapters cover the history of the stock market; the crash of 1929, the evolution of investment theory, the rock-and-hard-place alignment of accountants, and the creation of the Securities and Exchange Commission. In part two, Berenson explores 1987's Black Monday, and the conception of a new metric of company performance: earnings per share, the number that entitles this book and that would lead indirectly to financial meltdown in 2000. Short sellers, those that bet that a stock will fall based on flaws in public filings, make an appearance in the later chapters. It's charitable that Berenson gives them the limelight here, because they would be ignored completely from 1995 to 2000. The Number pauses in chapter ten for a breath of air as Alan Greenspan, chairman of the Federal Reserve, ponders how to respond to the failure of the enormous hedge fund Long Term Capital in 1998. The markets were overvalued, but had yet to reach the unrestrained delirium that would envelop them a year later. Should he lower the short-term lending rates to promote investing, or let the market find its own way? Greenspan chose the former, a move that Berenson likens to pouring vodka in the communal punchbowl. The rest of the chapter is a whirlwind, a eulogy to the insane.

And then he comes to the aftermath, a survey of the damage wrought. Berenson talks of Enron, Sarbanes-Oxley, and the slow struggle for reform in the SEC. The last chapter is downcast. There is no catharsis. In 2003 at the time of writing, the Bush administration was already trying to reverse the regulations called for by the public just a year prior. The market had rallied as investors turned their attention to the looming specter of the Iraq War. Now in 2007, just five years after two of the largest bankruptcies in corporate history, after accounting fraud on a scale so enormous that it boggles the imagination, the Dow hovers at 13,500, a gain of twenty percent over the peak in April 2000. What have we learned? Apparently, nothing at all. As Berenson concludes, "The buyers remain as blissfully unaware as ever."

Berenson's thesis is that investors rely to excess on earnings per share figures. Companies should operate with an eye toward the future, but having stock prices and corporate options tied to quarterly earnings provides a tremendous incentive to cook the books. This seems so obvious in hindsight that Berenson has no trouble deftly illustrating his case. He draws from his own experience with [...], public records of other papers, interviews with prominent members of the financial community, and a vast working knowledge of the history of Wall Street. And he is right, of course, but solutions are slow in coming. The last few pages implore the reader to be skeptical, to keep the market in context; in short, to keep one's head in an atmosphere that smells overwhelmingly of dollar stock. That's all Berenson can offer. The book makes a strong case that the SEC should have more funding and that accountants should be held to higher standards, but he explicitly rejects discarding earnings per share. We need the number, Berenson says. We just don't need so much of it.

When he isn't lamenting the obsession with quarterly earnings, Berenson gives a withering indictment of the would-be fiduciaries of the financial community and their contribution to the bull market of the 1990s. The accountants lost their independence and with it their dignity, bedding the corporate executives that provided their fees. The SEC, perennially underfunded and led by men unwilling or unable to stand against the combined interests of their wards, was less a shotgun behind a door than a slingshot with a fractured band. Stock options corrupted company leadership and led to an incestuous relationship with analysts, with financial fraud as the inevitable result. With a market predicated on lies, a collapse was inevitable. Of the investors themselves, Berenson's tone is moderate. He does not chastise, but their behavior seems to baffle him at times. Why, when they discovered that America Online had lied about their profits, did investors continue to drive up AOL stock?

A seminal book on trading theory is A Random Walk Down Wall Street, by Princeton economist Burt Mikhael. He proposes that stock prices vary at random in the short term, and that investors would do best to put their money in index funds because it isn't possible to consistently beat the market average. A Random Walk and The Number both explore the efficient market hypothesis, wherein the prices of stocks are assumed to reflect all available information. A market that follows the stronger forms of EMH is difficult or impossible to beat, because historical information, private information, and analysis are reflected instantly in share prices.

There is an unstated presumption underlying EMH of a rational entity, of investing decisions that have a logical framework when viewed through the impartial lens of hindsight. After reading The Number, I concluded that the market is efficient in the way that EMH supposes. New, public information does impact share prices immediately. The problem is that it does not do so rationally. The investors, as a group, do not act rationally. Group psychology disproportionately magnifies the market response to small changes, like a trailer swinging behind a truck. Why did the market crumble in 2000? Berenson suggests, "As in 1929, no single profit report or piece of economic data caused the sell-off; investors simply decided en masse they could no longer justify owning stocks that traded at two hundred or three hundred or five hundred times earnings, or had no earnings at all and no prospect of making any." That's his entire explanation. After five years of euphoria on a heroin high, the market became suddenly sane. That Berenson does not explore this psychology is perhaps the only unsatisfying facet of The Number.

If there's a lesson here, it's that greed is the universal language, and people never, ever, change. There is nothing more galvanizing to the will of an investor than the notion that his neighbor is making money and he is not. This book is a case study of the disastrous consequences of unrestrained capitalism. In such an environment, only the firm hand of the Federal Reserve and the threat of the SEC can hold the corporate machine in line, and prevent investors from losing their confidence, their shirts, and their minds.
15 of 17 people found the following review helpful
Solid introduction for the financial novice 21 April 2003
By A Customer - Published on Amazon.com
Format: Hardcover
I approached this book with deep skeptism.
However, Berenson was often spot on in his observations, and I'd give the book high marks - think a more readable, less detailed, version of Irrational Exuberance.
The strongest parts of the book are his concise review of the history of bubbles and his entertaining descriptions of short sellers. He is clearly a strong writer and has some excellent insights on the events leading up to the bubble. He is dead on about the failures of growth through acquisition. Finally, he provides a balanced view that does not have a strong preset agenda.
While a history lesson would serve most folks on the Street well, financial experts will find it lacking in several areas. In particular, the oversimplification of accounting works well as a writing device but leads to somewhat superficial insights on the challenges managers face in managing to the Number. Moreover, Berenson confuses the dotcom bubble with the telecom bubble - which really ought to be looked at seperately.
In any case, the Number is an excellent read. Berenson's a great writer and a strong historian. I'd recommend it as background meeting for the expert financier so they can see that history repeats itself. And it is a fine introduction for the financial novice.
16 of 19 people found the following review helpful
Insightful and easy to understand 13 Mar. 2003
By Ari Sakoyan - Published on Amazon.com
Format: Hardcover
I am a professor of finance and economics and must recommend this book for anyone with even a basic interest in corporate markets. I've asked my students to read The Number largely because it presents a fair and in-depth perspective on this fascinating economic fallout without ignoring the historical context. Berenson writes clearly and perceptively while analyzing from both top to bottom as well as left to right the market growth and its subsequent implosion.
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