Review of Origins of the Crash: The Great Bubble and Its Undoing (Hardcover)

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 "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.



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Review of The Age of Turbulence: Adventures in a New World (Hardcover)

Greenspan calls "The Age of Turbulence" a "psychoanalysis of himself."It begins (first half) with his early life, describing the events that provided his learning experiences (including his desire to become a baseball player, then a jazz musician), and then goes to his life of implementing those lessons.

Undoubtedly the most interesting material included Greenspan's evaluations of the Presidents he had worked with. His observations were not the platitudes one might have expected."Nixon was very smart, paranoid," and was an equal-opportunity disparager of all ethnic groups. Ford was the most normal, and sometimes looked past politics to focus on the ethics of an issue.Reagan's ability to spout seemingless endless one-liners and stories was an "odd form of intelligence," according to Greenspan.Greenspan felt his relationship with Bush I was a disaster, with the President eventually blaming Greenspan for his losing the election to Clinton.Clinton, however, was most like a soul-mate to Greenspan - very intelligent, and one constantly working to soak up knowledge and understanding.Greenspan also labeled Clinton's '93 economic plan that focused on reducing the deficit as an "act of political courage."Finally, Greenspan's assessment of Bush II was that he was incurious about the effects of his own economic policy, and that Greenspan's biggest frustration with Bush II was his failure to veto any spending bills.

Greenspan was told that Bush thought he could better control Speaker Hastert and Whip Delay by signing the spending bills; they, however, were never reticent to spend more money to help assure more Republican congressmen.Greenspan also added that he disagreed with Bush II's supply-side economic thinking, and that his endorsement of "A" tax cut during 2001 was just that - not an endorsement of Bush's plan.Another problem was that the plan had no adjustment mechanism in the event assumptions did not pan out and the deficit began to rear up again.

On the other hand, Greenspan does not tell the whole story.According to Paul Krugman (New York Times, 9/17/07), he could have clarified himself a few weeks later when he appeared before a Senate committee on the same topic and evaded questions on whether the proposed tax cuts were too large.Two years later when more cuts were proposed, Greenspan did not object, and in 2004 he expressed support for making the Bush cuts permanent - accompanied by cuts in Social Security beneifts that he assured Congress in 2001 would not be threatened by the cuts.

The most incendiary comment in the book was clearly Greenspan's conclusion that the Iraq War II was all about oil.However, Greenspan is now "clarifying" his statement to Greenspan having told the White House that removing Saddam was "essential" to secure world oil supplies, and now stating (Washington Post interview, 9/17/07) that securing global oil supplies was "not the administration's motive."

Greenspan was initially elated when Bush II won, and brought in his old friends Cheney and Rumsfeld.However, he noted that "they changed," and that he did not agree with Cheney's "deficit's don't matter." There also seemed to be little value placed on rigorous economic policy debate or weighing long-term policy consequences - policy-making was firmly in the hands of White House staff (Rove, et al).A result was that Bush II's first two Treasury Secretaries (O-Neill, Snow) were essentially powerless.Summarizing, Greenspan saw the Republicans in '04 as having swapped principle for power, ending up with neither, and deserving to lose in '06.The "good news" was that they did not try to interfere with monetary policy.

Greenspan has come under increasing criticism himself for the current housing collapse and preceding bubble.His defense, in "The Age of Turbulence," was that the risk of broadening home ownership was worth the risk, that he didn't realize shady practices had grown so prevalent, and had tried raising mortgage rates in '04 and '05 by hiking rates on ten-year Federal notes (no impact).

Finally, looking to the future, Greenspan sees a need to raise taxes on energy to encourage conservation, and a risk of increased inflation - already prices are rising in China.As for ethanol, even if all U.S. corn was converted to ethanol, it would only provide less than 20% of our current oil usage.

An interesting and timely book!



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Review of The Partnership: The Making of Goldman Sachs (Hardcover)

Why does Goldman Sachs still have a $40 billion market capitalization while Lehman and Bear Stearns have become extinct?Charles Ellis answers that question and more in his latest book, The Partnership, as well as giving the reader an insider's view of what gave Goldman Sachs such an advantage.Like McKinsey & Company in consulting, Goldman Sachs walks the talk in hiring the right people and creating a culture that rewards long-term success.

This book takes an honest look at some of Goldman Sachs' missteps along the way, such as Long Term Capital Management, but also the considerable focus and discipline demonstrated in avoiding the easy short-term buck that seems to consistently blow up in our faces.Need I say more than AAA rated insured sub-prime derivative instruments?

It remains to be seen what the impact of the current financial crisis will be on Goldman Sachs.Regardless, this book shows why the death of investment banking may be a bit premature.

Charlie Ellis writes in his usual substantive yet engaging style.If you're looking for a great read with some very useful takeaways, I highly recommend reading this book.





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Review of The Ascent of Money: A Financial History of the World (Hardcover)

Niall Ferguson has written an easily accessible and very entertaining history of finance, ranging from the clay tokens of Mesopotamia 5,000 years ago to the hedge funds of today.The title of this book has apparently been modelled on Jacob Bronowski's "The Ascent of Man,"and like that book it will be made into a television series.Being a television celebrity is not something that wins the admiration of one's peers in the history profession, to say the least.But those little rebukes are relatively mild compared to the scorn he received for his political views in Empire: The Rise and Demise of the British World Order and the Lessons for Global Power and Colossus: The Rise and Fall of the American Empire.In those works he argued that empire was beneficial not only to the mother country but the dominated countries as well.In this work he chronicles not only the history of money but also makes a case for liberalized finance.

Ferguson examines the financial subplot behind some of the major historical powers such as the role of money in ancient Mesopotamia, the denarius in Roman society, and gold and silver in the civilization of the Incas.He is very good in his descriptions of financial families like the Medicis and the Rothchilds, and how they became banking dynasties.Another memorable episode was the rise of Amsterdam as the world's financial center and the center's subsequent shift to London.

History is also filled with financial disasters of which we are well aware today.Ferguson tells the story of John Law and how he became France's head of finance.He engineered a financial bubble that took them several generations to overcome.Making matters worse, it occurred at the same time as the British South Sea Bubble.

Also instructive is the history of the first great globalization (1870-1914).(For this period also read Jeffrey Frieden's Global Capitalism: Its Fall and Rise in the Twentieth Century.)The world had become so economically interdependent that the pundits believed the possibility of war between great powers had been eliminated.This sentiment was famously expressed in "The Great Illusion" by Norman Angell.

Although this book was written before the current economic crisis, the last chapter is very prescient."From Empire to Chimerica" tells of the symbiotic relationship between China and America.The combined country "accounts for just over a 10th of the world's land surface, a quarter of its population, and a third of its economic output, and more than half of the global economic growth of the last eight years".This relationship, in which China saves and America spends, and in which China's savings is used to enable America to spend even more, is clearly unsustainable.Ferguson sees this savings glut as the cause of the current subprime crisis.That, in my humble opinion, was one of the causes; there were many bad actors involved in this catastrophe, citizen-borrowers included.

Although it is not obvious to everyone in the midst of a crisis,Ferguson correctly points out that financial engineering is one of the great forces behind human progress.The history of finance is a process of creative destruction.Financial risk-taking is necessary for economic expansion and human development, and Ferguson does a good job in making the case.Too bad it reads like a script made for the History Channel.



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Review of The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes (Hardcover)

This book takes on a subject that has been neglected for far too long.To understand conservative Texas today, you really need an education on the men that shaped it, namely ..Hunt, Cullen, Murchison, and Richardson.All four of these men are uniquely Texan, good and bad.Cullen is by far the most philanthropic, but in many ways the least enteresting, he lived a mostly quite life in Houston's enclave of wealth, River Oaks, and gave away 90 percent of his fortune.What I find most interesting, is that this most conservative of men, gave millions to Texas Southern, Houston's traditionally African American university; he also funded the University of Houston, it's not an understatement to call him Mr. Houston.H.L. Hunt is by far the most interesting, but by far the least philanthropic, Im not sure he ever gave to anything but the Klan, but his three families and all his silly ideas are so hilarious, you really have to give it to the guy for being colorful..Hurt's book on H.L. Hunt is fantastic..his meantion of H.L.'s "creeping" is the limit.As for Richardson, he was in may ways the quenticential Wildcatter, he had the look, the charm, and the bravado, and his collection of Western memorabilia is amazing.Murchison, on the other hand, was more like a brilliant accountant, and look liked one, he was the least like a traditional Wildcatter.This book also delves into the lives of the offspring of these iconic men.Murchisons son, of course founded the Dallas Cowboys, the subsequently, partied all the money away, Richardson's Bass family, has had their share of scandel, divorces et.al. and of course Hunts son's tried to corner the silver market in the 80's..talk about chutzpa and his son Lamar co founded the American Football League and owned the Kansas City Chiefs. Even the staid Cullen had an interesting grandson, the simply ridiculous Baron "Ricky" Di Portenova, he claimed to be an Italian Count on his father side, nobody bought it in Houston, but alas he was colorful, and threw some amazing parties at his mansion in River Oaks and his palace on a hill in Acapulco.Overall, this is a fun read, well written and researched, if you have any interest in Texas history and the Texas Oil Rich, then I cant imagine you not loving this book...as for the unhelpful vote..it just shows that on Amazon there is always at least one person who will find a black cloud on a sunny day..I mean how on earth is this review not helpful?



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