Roger Lowenstein

This book was a fascinating glimpse into what caused the dot com bubble (and subsequent burst). If you changed a few of the names, it could honestly describe any of the myriad economic f-ckups of the last two decades: the great recession, hedge funds buying up and destroying beloved companies, fallouts after IPOs like Theranos, Uber, WeWork, even crypto.

It's truly amazing how little the moneyed classes have allowed the US government to regulate finance, and how much the 99% have suffered as show more a result. I mean, no less than 4 years after this book was published, banks destroyed the economy *AGAIN* (and to a much larger extent than in the dot com crash) and we bailed them out. Nothing was learned.

And the creative accounting that fueled Enron was only a preview of what the next generation of tech IPOs would do. I think the author makes an important point that a company needs to have actual value to support their share price, but when CEOs are allowed to lie about new paradigms of technology (even though they really just run a cab company), then stock prices are going to become inflated. In the absence of honest accounting and disclosures that humans can meaningfully read, I fear we're going to keep witnessing this occur any time a new type of tech is developed. (The Internet, apps, crypto, AI, whatever the next thing is...)

While the book is 20 years old, it's still worth reading. The only part of the book that suffers is that the names may be unfamiliar to readers. And if you were born in the 90s, that probably applies to corporation names as well (at least the ones that didn't stick around). I remember enough news about Enron and WorldCom that I didn't need to do any Googling, but if you're younger than me you may not be familiar with them. show less

This book traces the rise, fall, and rescue of Long-Term Capital Management, perhaps the most celebrated (and infamous) hedge fund in history. It is a remarkable account of how a lot of really smart people—from the fund’s partners to its bankers to the regulators charged with protecting the public’s interest—did some things that, with the luxury of hindsight, proved to be very foolish.

It is a story with few heroes, but one with many lessons to be learned. However, beyond merely show more offering a cautionary tale of how greed, hubris, and myopia almost brought down the entire financial system, Lowenstein also provides the reader with an excellent description of the myriad investment strategies that continue to be employed by the hedge fund industry today. At the very least, this is a book that will challenge what you think you know about leverage, liquidity, and diversification. show less

Many people have strong opinions about the Federal Reserve, despite not having a clear idea of what it is, what it does, how it's structured, or who's in charge. However, even if that describes you, don't feel so bad, because ignorance has been practically a second father to the Fed since the beginning. America's allergy to central banking has endured from the founding, through multiple painful financial crises and recessions, and even through to the relatively peaceful and prosperous show more present. As Lowenstein ably demonstrates through his description of the Federal Reserve Act's drafting, debate, and passage, the Federal Reserve's complex structure and arcane operations are less a product of smoke-filled rooms than the unavoidably complicated nature of high finance, as well as the often-terrible political compromises necessary to shepherd such a controversial piece of legislation through the drama of the Progressive Era. Since the "End the Fed" movement is still with us, as it most likely will be for some time, it's worth reading on why the Fed exists, what problems its creators were trying to solve, and how it ended up quite the way it did.

Nowadays, central banks are a given in the international financial landscape - less a feature than the foundation. Yet despite the best efforts of Alexander Hamilton and many other government officials during the early years, the US did not get a truly permanent central bank until just before World War I. Despite otherwise rapid economic growth, in comparison to European nations the US had an unusually fragile monetary system that was vulnerable to frequent panics and recessions. Individual banks issued their own notes, which made taking out loans and redeeming debts across state lines difficult. Rural banks in particular had asset flows that tracked the harvests, which could leave their reserves critically low if too many farmers needed to withdraw at once. Local banks had to rely on public perception of their stability and trustworthiness, which meant often that they went bust very suddenly, completely wiping out deposits. Many banks had deep ties to corruption-intense industries like railroads that were subject to intense, unstable bursts of speculation. And, since nothing travels faster than bad news, nationwide financial contagions could spread in a flash but take years to recover from. Yet public mistrust of centralized government, which was even shared by Presidents such as Andrew Jackson, meant that America more or less muddled through recession after recession, relying on the private sector to clean up its own messes.

The low point was the Panic of 1907, a particularly harsh but certainly not the only bank crisis/recession around the turn of the 20th century. Borne of a misbegotten attempt to corner the market on copper, the collapse of the instigator's firm led to a wave of bank closures. In normal conditions in a fractional reserve system, it isn't an issue when banks owe each other large sums of money, since only a small percentage of deposits will ever be withdrawn at a time. But when credit becomes scarce, each bank tries to call in its debts from all the others, and with a sufficiently leveraged system where the total amount of loans outstanding can be greater than the total amount of reserves, everyone goes bankrupt. In most European countries at the time, the central bank would step in and, in the words of Economist editor Walter Bagehot, "lend freely, at a penalty rate, against good collateral", but in the US, Wall Street was forced to rely on the person of JP Morgan to coordinate relief as the banking crisis became particularly pronounced. Thanks to his personal reputation and his powers of persuasion, Morgan was able to calm the markets and arrange for some measure of stability, but it was clear that this state of affairs couldn't continue. The United States needed a central bank, and so Senator Nelson Aldrich and banker Paul Warburg began their efforts to design one.

For conspiracy theorists, this is where the story really begins. There are plenty of books out there with titles like "The Creature From Jekyll Island" that imply that the creation of the Federal Reserve was some kind of sinister plot foisted on an unwary public to debauch the currency/tighten the grip of Wall Street/empower a tyrannical federal government/extend the tentacles of international banks/destroy freedom/etc. However, as Lowenstein shows, the eventual passage of the Federal Reserve Act in 1913 was only one step, though the crucial one, in the long struggle to give the United States a modern banking system with the powers of crisis-prevention that we now take for granted. Many of the peculiarities of the Federal Reserve that intrigue people - its quasi-public/private structure, its dispersion into regional banks, its insulation from direct public accountability, its somewhat circuitous control over the money supply, the fact that dollar bills say "Federal Reserve Note" instead of "U.S. Government note" - are less the product of deliberate conspiracies than the many rounds of bitter negotiations and painful compromises it took to get a bill through Congress during an unusually turbulent period in American governance.

The Progressive Era's expansion on the powers of the federal government is under-appreciated today, maybe because the similar expansions in the Civil War/Reconstruction and the New Deal are easier to explain to high schoolers. It's easy to see why the federal government would assume new responsibilities when during a civil war or economic calamity, less easy when the catalyst is monetary and administrative structural reform. However, you can't understand the Federal Reserve without understanding something about where its progenitors were coming from. Senators like Nelson Aldrich (patrician Rhode Islander, a pawn of Big Sugar), Carter Glass (conservative Virginian, of later Glass-Steagall fame), and Latham Owen (populist Oklahoman) had their own motives for pursuing reform, but in trying to draft a passable bill, each had to face some tough political questions:

- Ordinary people might not like a government bank because it's the government, unless they're farmers, who will love it, but banks will hate it because it's competition - what should its powers be?
- Conservatives want Federal Reserve directors appointed by bankers, but Progressives want them appointed by the President - what's the best way to balance independence with accountability?
- Many people hate the idea of a single central bank, but splitting it into several regional banks (as many as 20 in some drafts) could be dangerous in a crisis, and that still leaves no direct involvement by states themselves - how should it be structured?
- Notes issued by the federal government directly and backed by "full faith and credit" would involve the least corporate control, but notes issued by the Federal Reserve and backed by member banks reserves would quiet inflation worries - what legal status should money issued by this bank have?
- The original plan was outlined by Senator Aldrich, a backer of the hated tariff and a notorious tool of the sugar trust in his home state, as well as Paul Warburg, a foreign banker - can the people trust anything about it?
- And what would the creation of a central bank imply about other important issues of the day, such as the gold standard vs free coinage of silver, or about high tariffs?

Unfortunately, all of these touchy questions were debated in an unusually turbulent political environment. The election of 1912 featured a three-way race between incumbent Republican William Howard Taft, Democrat Woodrow Wilson, and Progressive Theodore Roosevelt, whose friendship with Taft was ended by Roosevelt's disappointment at his conservativism. The election exposed the limitations of the two-party system to accommodate all of the different disputes at play: the ideological battle of conservatism vs populism vs progressivism, the economic struggle of bankers vs farmers vs merchants, and the regional arguments of Northeast vs South vs West. And in many ways, the victorious Democrats might have been the last party you'd expect to lead a successful banking reform initiative, not only because their base of support in the South was hostile, but also because notorious anti-banker and perennial candidate William Jennings Bryan became Secretary of State in the Wilson administration. Yet Wilson, whose background as a Princeton professor included political science and public administration, was convinced that America needed a legitimate central bank.

While the later part of the book can seem tedious unless you're interested in the minutiae of historical lobbying efforts, Lowenstein highlights Wilson's direct involvement as a major factor in getting the bill passed. It's a fascinating counter-example to many other instances of successful reform, such as Barack Obama's more hands-off approach to the Affordable Care Act, but is more in line with other historical examples such as LBJ and the Great Society legislation. While some of Wilson's other initiatives such as the League of Nations failed despite him ruining his health over it, his shepherding of the bill in this instance made the difference. The legislative horse-trading also makes you appreciate the fine line between pandering to special interests and speaking up for forgotten voices - there's no logical reason for the Fed's 12 branches as opposed to 11 or 13, but sometimes you have to buy some votes, and the true alternative to a flawed bill isn't a better bill, but no bill at all. The Federal Reserve's mandate would be enlarged and expanded by successive bills, but the foundation was finally set.

The Federal Reserve has not always done a great job, as even its staunchest supporters would recognize. Whether you buy Milton Friedman's theory in A Monetary History of the United States that the severity of Great Depression was the Fed's fault or not, it's indisputable that its twin missions of price stability and full employment have been heavy burdens, and its responsibilities have only increased over time. Many people would like to get rid of it entirely, and technology has produced possible alternatives like bitcoins that seem worthy of exploration. Certainly there's a debate to be had over the proper method of ensuring accountability for individuals who wield such dangerous power. However, you can dislike how something is run without wanting to blow it up entirely, and contemporary accounts like Neil Irwin's The Alchemists suggest that for all its flaws, the Fed is about the best institution you could expect, given its history, its mission, and the political and social constraints that it operates under. Seeing the messy story of its origin, recounted by Lowenstein with his typical skill and diligence, reminds us that the American political system is designed to produce compromise, not perfection. Ultimately we get the Federal Reserve we deserve. show less

Warren Buffett is an accomplished enough guy that a full account of his career probably deserves several volumes of rather larger size, but this is a good introduction to his life, career, and general investment philosophy. While it suffers from having been published in 1995, meaning that it includes nothing on the last third of his career (though the 2008 edition contains an updated Afterword), it's useful enough to be worth picking up for anyone who's interested in his investment history, show more a broad overview of his strategies, or simply curious about his personal life.

What should an investor, or anyone interested in finance, make of Buffett's career? He didn't invent value investing, which was pioneered by his mentor Ben Graham, but he's been its most famous and successful practitioner so consistently over the decades that it seems like there must be some trick beyond simply looking at P/E ratios and book values. It seems implausible that Buffett has simply been lucky - he's just way too rich - and yet it's hard to explain his run of success using common views of how finance works. The history of finance is replete with the corpses of investors who tried to beat the market too consistently and by too much (keep an eye out for Salomon Brothers executive John Meriwether, whose spectacularly doomed hedge fund Long-Term Capital Management would be the subject of Lowenstein's next book, When Genius Failed), and yet despite a recent spate of poor performance, Buffett has been beating the market regularly for 63 years, longer than a majority of investors have been alive. Has he been exploiting some kind of glitch in the Efficient Markets Hypothesis? Does his particular variant of buy-and-hold have a hidden advantage over index funds? Is value investing exempt from law of large numbers/diminishing returns issues? Will a strict avoidance of conflict and hostility be a superior strategy in an environment of leveraged buyouts and junk bonds? Lowenstein can't completely settle these questions (if it were that easy to replicate Buffett's success, surely there would be more than one Buffett by now), but his accounts of how Buffett viewed his strategic issues offers a lot of insight into what motivated each particular investment decision.

And there are plenty of decisions. Going into the book, I knew that Berkshire Hathaway was his investment vehicle, but I had no idea of its history as a gradually declining textile conglomerate before Buffett transformed it beyond all recognition. As he was gradually nudging the company away from its roots in the New England cotton mills that had been its livelihood, I was reminded of Danny DeVito's speech in Other People's Money about not letting sentimentality about old business models holding back future growth, though Buffett's later adventures like getting into a circulation war as owner of the Buffalo News showed his emotional side. Buffett himself considers his purchase of Berkshire Hathaway a mistake, given that his initial large share purchase was motivated in large part by spite after a counterparty at the firm tried to chisel him out of 1/8 of a point on the share price; if he had simply invested directly in the insurance businesses rather than buy them through Berkshire, he would have made about twice as much money. Lowenstein quotes from "The Joys of Compounding", where Buffett makes the same point in a different way:

"I have it from unreliable sources that the cost of the voyage Isabella originally underwrote for Columbus was approximately $30,000. This has been considered at least a moderately successful utilization of venture capital. Without attempting to evaluate the psychic income derived from finding a new hemisphere, it must be pointed out that even had squatter's rights prevailed, the whole deal was not exactly another IBM. Figured very roughly, the $30,000 invested at 4% compounded annually would have amounted to something like $2,000,000,000,000 (that’s $2 trillion for those of you who are not government statisticians) by 1962."

In other words, always pay attention to the opportunity cost of money, and realize that even seemingly very successful purchases might have foreclosed even more profitable, if more subtle, options. Of course, Buffett's actual record doesn't look so bad - GEICO, Coca-Cola, American Express, Wells Fargo, Salomon Brothers, etc. - yet it seems like there's a consistent theme, that being bearish when everyone else is bullish, and vice versa, is a consistently safe strategy, particularly when investing in large brands with stable fundamentals. For lack of a better way to put it, other investors who tried to be as cautious as Buffett were never as bold when the situation called for it, and investors who tried to match him in boldness usually lacked sufficient caution at key moments.

Whether that's a philosophy that can be sufficiently mathematically rigorized is beyond me, and Lowenstein doesn't attempt to quantify Buffett's strategies. That's fine for a short volume, because it leaves room for the biographical information that most readers will want. The book covers his childhood in Omaha, his college years, his study under value investor Ben Graham, his partnership with like-minded investor Charlie Munger, his marriage and mistress, and his often-strained relationships with his children. Buffett has been famously miserly and uninclined towards charity, which the book explores. Whether you agree with Milton Friedman's infamous paper that "The Social Responsibility of Business Is to Increase Its Profits" or not, the contrast between Buffett's repeated statements that he plans to give all his money away and his actual record of relatively minor philanthropic activity is striking, especially also given his refusal to establish a Rockefeller-type dynasty and his advocacy for higher taxation of the rich. Yet even if there's a philosophical contradiction in there somewhere, Buffett's integrity is unquestionable, particularly when he's sharing the stage with characters like Ivan Boesky or Michael Milken.

Overall Lowenstein does a great job of condensing Buffett's life, ideas, and career into a single manageable book, and though I often wished he would expand more on topics, doing so would have made the book less accessible. He's a more sensible and less sensationalist writer than someone like Michael Lewis (whose misrepresentations of Buffett's record come in for some criticism), and while this book probably won't be the last stop for anyone curious about one of the greatest investors in history, it's an excellent first one. show less