Origins of the (.Com and Telecom) Crash

After a long pause I am writing another blog. Last week I happen to borrow another book of Roger Lowenstein-- Origins of the Crash (ISBN:159420-003-3) where he talked about the .com and telecommunication bubble, and its bust.

Just the way I anticipated , Roger has explained the factors those eventually manifested in another financial crash of the 20^th century. As the publisher put it very well “Lowenstein explains that it is the boom that needs to be explained; the crash is simply the natural consequence.”

Roger sited reasons, going back in 20 years (in ‘80s) where LBOs created pressure on mgmt to keep their stock prices up to hid any takeover attempt by LBOs. The stock options were unreasonably used as an incentive to CEO, CFO and board members to increase the so called stockholder value. This lead to myopic view of mgmt as well as WallStreet, and all the actions were driven to increase the stock value in short run. Free hand from Govt. regulators, company board and auditors allowed various kind of accounting manipulation to flourish. Company’s mgmt, who has the obligation of long term valuation of the company were busy promoting short term value of the stock. Company executives were awarded huge compensations which were independent of company’s performance.

There was irrational euphoria about every company’s valuation irrespective of their revenue and profit potential. There were earning manipulation using SPV (Special Purpose Vehicles), special accounting methods and various derivatives. The quarterly and yearly financial statement become irrelevant, and even security analyst failed to use their critical thinking to flag the alarm. Overall market failed the “efficient value hypotheses”. Market left with redundant products (in the energy, telecommunication, internet) wit over capacity.

None of the govt/regulator bodies – SEC, Fed, Congress, Board of Directors played needed role to flag the alarm signal, and eventually when they did it was too late to fix anything. As a result small investors and employees lost billions and trillions of dollars, however, company executives made hefty money from there stocks options as well as severance package. General market (once again) lost the faith in the equity market. Though congress came up with Sarbanes-Oxley legislation to make executives and auditors accountable for their actions, huge damage was already done. The US accounting standards were manipulated to a great extend.

It seems as long as there will be greed (which is generally not good) there will be market manipulation. The most recent housing bubble bust and financial firm’s credit trouble suppose that. Over use of SPV (Special Purpose Vehicles) and complex derivatives had let window open for fraud.

Overall Roger made an interesting account of .Com and telecom bubble and bust. Just like his other book on "Buffett", even in this book I had to skip few sentences where I couldn't make great sense; but probably I might be missing some context there. I would give 4-stars to this book.

Table of Contents

	Acknowledgments	ix
1	Origins of a Culture	1
2	Early Nineties--A Culture Is Rich	15
3	Enlightenment Gets out of Hand	35
4	Number Games	55
5	Doormen at Noon	79
6	New Economy, Old Errors	101
7	Enron	127
8	Bankrupt	157
9	Year of the Locusts	189
10	Epilogue	217
	Notes	227
	Index	259