The Hindu Business Line : What goes up must come down

Eric J. Weiner's What Goes Up is intriguingly sub-titled `The uncensored history of modern Wall Street as told by the bankers, brokers, CEOs and scoundrels who made it happen'. A racy read for the weekend, says D. Murali, especially if you want to make sense of the big tumbles in the bourses during the week.

BEN Barnanke and Donald L. Kohn are the best candidates to succeed the retiring Fed chairman, Mr Alan Greenspan, one learns from www.webcpa.com that cites a survey of economists conducted by the Wall Street Journal. "The public worships Alan Greenspan for his oracular wisdom, but what is his legacy?" asks Forbes in an hour-old posting titled `O Sage! O Confidence Man!'

John Kenneth Galbraith, whose 97th birthday falls today, may only chuckle; for, to him, Alan `is extremely good at drawing attention to the Federal Reserve's lending rates', since the rate of interest is `within the simple range of public understanding'. To Galbraith, it is `simplification of economics' and `a very attractive escape from a very difficult subject'. It is a game in which Alan excels as a master-player, performing "one of the brilliant theatrical exercises of all time," as one learns from a quote of his cited in Eric J. Weiner's What Goes Up, from Little, Brown (www.twbookmark.com).

The book is intriguingly sub-titled `The uncensored history of modern Wall Street as told by the bankers, brokers, CEOs and scoundrels who made it happen'. Inside are capsules of quotes arranged helpfully in chapters.

Begin, therefore, with Charlie Merrill, who was `the most responsible for bringing individual investors to Wall Street', bringing in retail concepts from his grocery stores background. "Demystification had been the key to his own great success," remembers his son James, while Donald Regan, former Merrill Lynch chairman, recounts how Charlie was a great ladies' man, with `four wives and about 16 mistresses'.

One of the images in the book is the full-page ad the firm had run in 1948. It was "a 6,000-word treatise without any pictures" to aggressively search for customers, "a practice considered `gauche' in most Wall Street circles." It was an instant sensation, and generated enormous amounts of new business for the firm, informs the book about what is considered "the most influential advertisement in Wall Street history."

The polar opposite of Merrill Lynch in the 1950s was Morgan Stanley, notes Weiner. Its centre of activity was `the platform' — "the area where the partners sat behind the same distinguished roll-top desks used at the old J.P. Morgan bank" and "charted the course for corporate America's growth plans".

At that time, the firm was just an underwriter of stock and bond issues, with no mechanism to distribute the same. "It didn't have an army of traders to move the blocks of stock that were starting to hit the market, so taking positions wasn't easy," narrates the book. "And it didn't have a pile of permanent capital to build its business because the partnership structure enabled the partners to withdraw their capital every year."

About Lehman Brothers, Weiner writes how Bobbie Lehman ran the firm like a virtuoso piano player, with "a number of extremely bright, talented, competitive men as partners". The partnership agreement was very simple, explains the author. Bobbie was partner of the first part and everybody else was partner of the second part, so he could `fire anybody with or without cause whatsoever'. Peter Solomon, a former partner, remembers: "The dining room was the centre of activity. But the partners of Lehman were very bad investors, and you could lose more money listening to their ideas than any group of people. They had an unerring sense of disaster."

Just the right time, I'd say, to meet Benjamin Graham in the chapter that follows, `intrinsic value'. Irving Kahn, chairman of the value-investing firm Kahn Brothers, shares his experience of how the big Ben thought long: "I would come to him and I would say, `Ben, I think we should buy this for Graham-Newman.' He'd say, `What are the earnings?' I'd say, `Two dollars.' He'd say, `For five years?'"

Another focus of Ben's was: `How much do they owe?' For, as Irving notes, with a big debt, `they might be unable to buy out a competition, which could be the best thing to do.' Useful insights, these are, for investors.

An interesting piece of information that the former chairman of the SEC, Mr Arthur Levitt Jr, shares with Weiner is that he had started life as a drama critic for the Berkshire Eagle, gone off then to work for Life and thereafter for Time. "In 1959, when I was making $12,000 a year, I received an offer to go to work for a cattle company... for $25,000. I accepted that offer and for the next few years, I bought and sold herds of breeding cattle and ranch land with people who were very well-to-do and could afford those investments."

The experience taught him `a great deal about investments and how to deal with people making investment decisions,' he'd add. Snatches such as this, straight from the horses' mouth, page after page, are what add great value to the book.

Thus, you can hear, in a chapter titled `power to the people', Jerry Gentilella, "a barber at the New York Stock Exchange since 1963", telling Weiner about `those days' when "people wore their hair very short" and came "maybe every week or ten days". "But, then, the Beatles came up with the long hair and they all started growing their hair. Naturally, we started to lose some business. Suddenly people were coming every two weeks, or three weeks, or once every month."

The author plugs in the context for each chapter with a dramatic flourish. Such as, "The clock was ticking and the market was on the brink of disaster. Something had to be done", in "the paper crunch". And with comments as a wrap-up of the quotes, as: "Through the early 1970s, countless Wall Street partnerships went out of business or were bought at fire-sale prices before they collapsed."

Technology, transparency

Part Two of the book begins with `high-tech market', on Nasdaq Stock Market, launched in 1971. "It was completely different from anything that had ever come before. Nasdaq was an electronic stock exchange. It had no trading floors or posts, just a bunch of brokers called market-makers out in cyberspace repeatedly updating stock quotes on a computer screen," chronicles Weiner.

"Nasdaq was revolutionary because it provided transparency in pricing. That's at the heart of what the market wants to do," says Alfred R. Berkeley III, former president and vice-chairman of Nasdaq.

Microsoft, Intel and many more such `solid companies' began on Nasdaq, points out Michael Barone, head of Nasdaq trading at William Blair and Co in Chicago. The NYSE's listing requirements were much higher than anything these companies could bring to the table, he adds. An example of how regulation can be short-sighted.

The greatest bull market began in the summer of 1982 and ran till the end of the 20th century, notes Weiner, and hastens to mention the notable hiccup of 1987, the Black Monday that created as much pandemonium as when the news of President Kennedy's assassination trickled in. "US Steel was selling for three different prices because there was so much confusion," recapitulates Peter Low about the JFK killing in 1963.

About the 1980s, Galbraith is forthright, calling the investing public `the speculative public'. It has a short-run intelligence of its own, he says. "That is something that you must always keep in mind when looking at periods of financial euphoria. The problem is not poor economics — it is poor history."

To observe the frailty that is human nature, Paul Steiger, managing editor of the Wall Street Journal, suggests a simple exercise: "You can talk to a hundred people on Wall Street today, 98 of them will tell you that they saw the 1987 crash coming and that they had taken all their money out of the market." To Peter Lynch, former manager of Fidelity Magellan Fund, what was scarier than 1987 was 1990. "In 1987, you had big companies taking a hit, but the fundamentals were fine. It actually created opportunities. In 1990, banks were failing. The savings and loans were in trouble," he explains. "Like a great professional athlete who stops playing before fans can see his skills diminish, Peter Lynch went out on top and kept the mythology that surrounded him intact. He never returned to running a mutual fund," comments Weiner.

Bubble bath

`The Technology Age' dawns in part three of the book, where you can read about `digital Babylon' on the market after Netscape, `a riskless transaction' on the Black-Scholes options pricing model, and `bubble bath'.

Peter Fisher, former head of the Federal Reserve Bank of New York's market group, narrates how on September 21, 1998, Asian and European markets were selling off dramatically and Dow was downhill; "the talking heads were saying that this was because of the videotape of Bill Clinton's deposition in the Monica Lewinsky affair," but the problem was with LTCM's implosion.

Weiner devotes a chapter to the media, `market messengers', with a focus on CNBC. The channel attacked business news full-time, he notes. "Because we didn't have a lot of money, the programming relied on phone-call interviews, where we would put up a full-screen graphic or some old video," recounts Ron Insana, a CNBC anchor. "A lot of what we do today we did then, but we did it with far fewer resources and a lot less grace and sophistication."

One of the many black and white photographs in the book is `Money Honey' Maria Bartiromo, `the first journalist to broadcast from the floor of the NYSE'.

The last chapter completes the title phrase; for, it is `must come down'. The book wraps with this quote of John Jakobson, a member of the NYSE since 1955: "The game never changes, just the players. The more there is to steal, the more it will be stolen. This isn't just at the New York Stock Exchange or on Wall Street; it's in the entire financial world. It's a gene flaw, I think. You know, whenever they say it's not the money — it's the money."

An unputdownable read for the weekend, especially if you want to make sense of the big tumbles in the bourses during the week.

Economics@TheHindu.co.in

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