When The Market Went Mad


The Great Bubble and Its Undoing

By Roger Lowenstein; Penguin Press

270 pp; $24.95

Think back on the stock market bubble of the 1990s. If for even a moment you then believed that most Internet stocks were sound investments and the analysts who pushed them were above-board -- or that most companies practiced honest accounting, or that most CEOs deserved their fat paychecks -- here is a book that will call into question your very sanity. Origins of the Crash: The Great Bubble and Its Undoing by former Wall Street Journal reporter Roger Lowenstein masterfully dissects the late-1990s stock boom and how it came to be.

Like a deft chemist in a laboratory, Lowenstein explores each component fueling the bubble. He then synthesizes them to show how, together, they became a lethal combination resulting in the biggest stock market crash since the Great Depression. This is far from a fresh story -- accounts of the tech bust and ensuing corporate scandals are fast proliferating -- and there are times when Lowenstein's writing is less than zippy. But because of the author's sharp historical analysis and clarity in the face of complexity, Origins of the Crash will stand as a crucial account of an era of excess and folly.

Much of Lowenstein's best stuff is pre-bubble. He begins in the 1970s, when there was a clear "distance between the [stock] market and people's ordinary lives." He then documents a gradual but momentous shift toward stock ownership that began in the 1980s. As sluggish U.S. companies struggled with competition from Japan, leveraged buyout firms targeted the weak. To defend themselves, CEOs saw that they had to prop up companies' stocks. By the early '90s, many execs had begun to focus more on the price of shares rather than on day-to-day business. Motivated by executives' pledges to boost "shareholder value" and by the emergence of mutual funds and 401(k) plans, ordinary investors also became infatuated with the market, which obliged by climbing ever upward. Meanwhile, lush pay packages -- and, of course, stock options -- became the door prizes for CEOs who performed the necessary alchemy on their shares. All too often, that meant cooking the books, sometimes on the advice of complicit outside accountants.

By the mid-'90s, about half of Americans were invested in stocks, vs. only one-fifth in the 1960s. But it wasn't until the advent of the Internet, which spawned "a combination of childlike euphoria and not so innocent greed," that investor delirium appeared. Cries for reform were ignored. And, as Lowenstein writes: "The magical rise of...profitless companies distorted the scales of traditional business, now derisively referred to as the old economy." He documents how investment bankers, entrepreneurs, and venture capitalists -- Frank Quattrone, Jeff Bezos, and John Doerr to name just three -- wielded unprecedented influence over both inexperienced and sophisticated investors. "By the late 1990s, America had become more sensitive to markets, more ruled by markets, than any country on earth," he writes.

Along the way, the author tosses some darts at media that celebrated the market, and he rightfully tars certain stock analysts. Morgan Stanley's (MWD ) Mary Meeker, he says, had become "remarkably cavalier," prone to dissing the little matter of profitability. In a report on Amazon.com Inc. (AMZN ), she wrote: "We have one general response to the word 'valuation' these days: 'Bull market."'

Lowenstein has demonstrated great prowess as a writer. His When Genius Failed (2000) was a riveting account of the downfall of hedge fund Long-Term Capital Management. In Buffett: The Making of an American Capitalist (1995), he put a human face on the legendary investor. Both volumes offered copious detail, fresh information, and original perspectives.

Can the same be said for Origins of the Crash, which treats many subjects that have been amply covered? Some of Lowenstein's recounting of the Enron Corp. saga is riveting -- including an examination of Jeff Skilling's "haughty arrogance." But other parts, including his renderings of Salomon Smith Barney's (C ) Jack Grubman and the WorldCom mess, and much of his post-bubble material, seem familiar.

But Lowenstein compensates with good bottom-line analysis, sometimes flecked with sarcasm. When writing about the doomed CMGI (CMGI )/USA Networks (USAI ) merger, for instance, he quips: "Why would an Internet company want to merge with somebody that sold kitchen appliances or costume jewelry over the telephone? Why cash out an Internet dream for mere profits?"

Moreover, reading Origins of the Crash seems akin to taking a class with a favorite history professor. Lowenstein is the right man for a refresher course on how executives came to be obscenely overpaid and on the woes facing regulators during the bubble. This book has the power to keep readers burning the Itty Bitty book light until the wee hours -- and the account will only seem fresher with time.

By Marcia Vickers

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