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Origins of the Crash
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Origins of the Crash

The Great Bubble and Its Undoing

Roger Lowenstein
Penguin Group (USA), 2004
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8

Recommendation

Accomplished financial journalist Roger Lowenstein weaves a captivating tale in this history of the late 1990s market boom and subsequent bust. The story reads like a thriller, complete with powerful bad guys (played here by CEOs), innocent bystanders (ordinary investors) and hapless observers (ineffective government regulators). While it does not offer specific tips on avoiding fraud or implementing change on Wall Street – indeed, the author admits that real change in that bastion of enlightened self-interest may be impossible – this book is a valuable cautionary tale. Lowenstein traces the evolution of creative accounting practices that blossomed into blatant fraud and eventual bankruptcy, finally forcing the notoriously pro-business Bush administration into pushing for corporate governance reform. Along the way, he exposes the myths of the dot-com era and deconstructs the sham of shareholder value. He makes trenchant observations about a financial culture that allowed the ultra rich to get richer, while fully half of Americans never participated in the boom or benefited from it, although everyone paid the price of the bust. getAbstract recommends this book to anyone who lost money when the bubble burst – better luck next time.

Summary

The Roots of Market Mania

From the great crash of 1929 until the early 1980s, the stock market was fairly distant from the daily lives of most Americans. The financial reforms implemented in the wake of the crash, including the creation of the Securities and Exchange Commission and stricter disclosure laws, were designed to prevent a recurrence of the excesses and corruption of the roaring 20s. Yet unfortunately, crony capitalism remained the norm, and corporate boards continued to be stacked with the CEO's pals. The new disclosure requirements did prevent blatant fraud, but top executives were in no danger of losing their jobs due to mediocre or poor performance.

In the 1970s, with the market falling and inflation rising, hostile takeovers became increasingly common. In the early 1980s a new variation, the leveraged buyout (LBO), emerged. These tactics were most powerful when the target's stock price was stagnating or falling. Corporate executives, their jobs threatened by corporate raiders, suddenly had a strong incentive to raise their stock prices. The market praised companies that engaged in layoffs, selling off divisions and artificially stimulating demand and...

About the Author

Roger Lowenstein is the author of the bestselling Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-term Capital Management. He reported for The Wall Street Journal for more than a decade and wrote the Journal’s "Heard on the Street" and "Intrinsic Value" columns. He still writes for the Journal as well as The New York Times Magazine, and is a columnist for SmartMoney magazine.

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