A Critical Review of Origins of the Crash: The Great Bubble and its Undoing

By James Smith




Professor Nolan
AMH2020
6 March 2014
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In Origins of the Crash, Roger Lowenstein pieces together the causes of the so-called
Internet Bubble or Dot.com Bubble of the 1990s that led to the stock market crash in 2000-
2002. Lowenstein argues that contrary to what many people think, the crash was not simply
attributed to worthless internet companies being over-valued. He points out that centered in-
between all of the greed, was a combination of three principle faults which preceded the crash:
Investor optimism about the stock market got separated from the underlying businesses,
management effectiveness was measured by the stock performance in the short term, and stock-
based compensation encouraged gambling with shareholders money. Quite simply though, the
author centers the books on the single quote, People demand an explanation for crashes, but
their origins are invariably to be found in the boom years that precede them.
1

The author makes effective use of a chronological presentation that clearly shows a
reader not only why the stock market crashed the way it did but how it was inevitable given the
events that came before it. The way those events are seamlessly woven together makes the reader
ponder how the crash was not prevented. The juxtaposition of events makes it very clear to a
reader why things unfolded the way they did. As one CEO went on a talk show to talk up his
company, the accounting firm at said company was busy at work bending the real reporting of
finances into something that investors would actually like to see (Alex, 2003). Bringing those
two things together really helped demonstrate the extent of the greediness and deception that
went on in the 1990s.

1
Lowenstein, Roger. Origins of the Crash: The Great Bubble and Its Undoing, New York:
Penguin, 2005 p. 218
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Being as the Internet Bubble was relatively recent, one finds no surprise with the vast
amount of primary sources that the author cites. Of the 433 sources the author cites, at least 15%
of them are primary. From interviews with former Enron employees, to news clippings from
when everything was unfolding (Alexei, 2002), there is no skimping on primary sources. The
authors use of these types of primary sources gives the reader a glimpse not only into the
wrongdoing of that time period, but the realness of it. Lowenstein even includes the Security
Exchange Commission reports (SEC, 2002) that detailed the breaking of laws by now dissolved
companies and even some companies that are still in operation. One should note that there are an
extensive amount of government documents cited that aid in seeing the amount of crime that was
committed.
Some highlights of the text lie in the three principles mentioned above. First, people were
coming out of the 1970s, where they feared the uncertainty of the stock market. Lowenstein
noted, most of the money held in pension funds was in bonds, bills, and cash, which was
practically like stuffing it under a mattress
2
. Coming off of this, people began to embrace the
market and the fears of going back to that same uncertainty prompted the whole world of finance
to change. Auditors and accountants were put under intense pressure to lie and twist the reality of
their financial reporting, and the lack of reform within federal watchdog agencies in some way
encouraged them to do so. In a nutshell, this wasnt a very honest time in history and the scary
part was that it was becoming rare to find truly accurate finance reports at the time. The author

2
Ibd. P. 132
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noted that, As long as the culture tolerates lying, even in seemingly marginal ways, the great
humbling of 2002 may foretoken worse to come.
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Continuing with the dishonesty, the author attributes quite a bit of it to company
management. If a stock was doing great, then everything was fine. But once the stock dipped,
management was in a terrible position. Since everything revolved around a stock price, decisions
would be based on what Wall Street (investors) wanted to see. That meant companies going out
and spending more money than they had on acquiring new ventures or markets. It would be the
equivalent of Comcast spending half of their cash assets to buy Johnson & Johnson, because
body lotion is all the rage on Wall Street in 2014.
Last but not least, a big chunk of the book is spent explaining how stock options were an
evil thing for management. Simply put, if agents of a company could create temporary
enthusiasm that generated a jump in the stock price, they could just sell their options and make
money. Then when the equivalent of a publicity stunt ended, they would be offered more shares
for less of a price and could repeat the cycle again as shown when the author discusses his
interviews with former Enron employees. Manipulation played a key role in leading to the boom,
and eventually crash of the stock market in the 1990s-2000.
Readers of this book will benefit from what is has to offer, which in short is all of the
reasons why things happened the way they did in 2000-2002. In a way, its a warning to all new
investors. This book teaches readers why it is important to not always act on impulse when
investing, and why they should be careful if they ever work in the industry. This book shows that

3
Ibd. P. 204
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lying and cheating will not benefit anyone in the long term, and that people have to be careful
with it. This book proved to be very useful to a history student who struggled to see the real
reason behind the studying of Americas past. It would help the reader of this book to have a
very balanced and objective professor who leads with logic and intelligently connects current
events to things that happened many years ago, which he does.













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Bibliography
Alexei Barrionueveo, Jonathan Weil, and John R. Wilke, Enrons Fastow Charged with Fraud.
The Wall Street Journal, Oct. 3, 2002.
Alex Berenson, A U.S Push on Accounting Fraud. The New York Times, Apr. 9, 2003.
Record Number of Financial-Reporting Cases Opened by SEC Staff in January, February.
Securities Regulation & Law Report, Apr. 8, 2002.
SEC release 2002-92, SEC Announces Fraud Charges Against Former Rite Aid Senior
Management, June 21, 2002.