I think I’ve read every book that Michael Lewis has ever written going all the way back to Liar’s Poker: Rising Through the Wreckage on Wall Street . While Lewis merely edited Panic: The Story of Modern Financial Insanity , it’s a brilliant book and a good start to my year end "16 days of books" (where I read a book a day while I’m up in Keystone.)
Panic covers five modern financial crashes:
- The Crash of 1987
- The Russian Default / Collapse of Long Term Capital Management
- The Asian Currency Crisis of 1999
- The Internet Bubble
- The Subprime Mortgage Disaster
Each section has a perfect setup – a few articles preceding the actual crash followed by articles that are written as the crash is happening. Lewis finishes off each section with at least one post crash article. Taken as a bundle, each of the five crashes are very symmetric, generating a very cynical set of reactions from this particular reader about the nature of modern finance.
I stumbled on some interesting characters throughout the book at odd spots. My two favorite examples from The Internet Bubble section are Bernard Madoff (yup – the one everyone has been talking about for the past week) and Albert Vilar (yup – the one whose name used to be on the Grand Tier at the NY Metropolitan Opera and is awaiting sentencing on securities fraud charges.) And of course John Meriwether (Salomon Brothers, Long-Term Capital Management, and now head of JWM Partners) makes several appearances throughout and is one of the central characters in the Collapse of Long Term Capital Management.
Bernard Madoff: (1999) "The same volatility and heavy trading by individuals convinced a market veteran, Bernard L. Madoff, that his trading firm should stop making a market in four wild Web stocks. ‘You’re literally seeing hundreds of thousands of orders in the stocks,’ Mr. Madoff says. ‘That puts a strain on everybody’s systems. And on the way down, it’s always more extreme.’ To Mr. Madoff, "it was insanity. This thing was getting out of control.’ In January, his New York firm, which bears his name, dropped Amazon, Yahoo!, Infoseek and Egghead, even though trading in them had been very profitable."
If you lived through the Internet bubble like I did, you probably remember the Barron’s article by Jack Willoughby that came out on 3/20/2000 titled "Burning Up." In it, Willoughby listed the "months until burnout" of 207 Internet stocks. He specifically called out 51 that "are likely to run out of cash, according to year-end 1999 data. Some can raise more funds through stock and bond offerings. Others will be forced to merge or go out of business. It’s Darwinian capitalism at work." I remember this article (which Lewis reprints) like it came out yesterday – I was co-chairman of two companies on the list (company #15: Interliant and company #88: MessageMedia) and was an investor (via my VC investments – either in funds I was involved in or funds I was an investor in) in #5:VerticalNet, #31: ELoan, #33: Ask Jeeves, #48: Multex.com, #49: eToys, #67: Critical Path, #110: TheStreet.com, #118: StarMedia, #120: iXL Enterprises, #147: ITXC, and #181: Exodus Communications.) I probably missed a few, but I remember almost every company that was on the list.
Albert Vilar: (2000) "On Monday, March 20, many of the stocks on Barron’s list fell sharply: it was another bad day for technology stocks generally. The Nasdaq fell 188 points, nearly 4 percent, to 4,610. During the next few days, there was a predictable attempt to discredit the Barron’s piece. ‘I didn’t set my performance record, which is about the best in the business, with any help from Barron’s,’ Albert Vilar, head of the $700 million Amerindo Technology Fund, declared. Investors who avoided Internet stocks during the next five or ten years would miss ‘the biggest explosion of profits and growth ever seen."
Every crash has an index case (or "patient zero") equivalent. The Barron’s article was the one I remember most clearly from the Internet bubble. Even the dotcom advertising at the 2000 Superbowl fades like a distant memory. AutoTrader.com, Britannica.com, Computer.com, Epidemic.com (a Colorado-based startup), E-Trade.com, Hotjobs.com, kforce.com, LastMinuteTravel.com, LifeMinders.com, Monster.com, Netpliance.com, OnMoney.com, Oxygen.com, OurBeginning.com, Pets.com, Webex.com, and WebMD.com. Several survived, but most didn’t. When I reflect on the Barron’s article, it marked the peak for me.
I was a grad student MIT and running my first company during the 1987 Crash and remember listening to it on a portable radio in my Feld Technologies office at 875 Main Street. I then took the T home to downtown Boston with my business partner Dave Jilk. I didn’t really know what to make of it (Dave regularly reminds me that when I showed up at MIT in the fall of 1983 I made the insane statement that "real estate in Texas will never go down in value.") I’m sure I was unsettled by it, but I woke up the next day and went back to work (and school).
I remember each of these crashes and, with appropriate emotional detachment, rethought some of the lessons I’ve learned in the past 20+ years as I read Panic: The Story of Modern Financial Insanity. Not "fun", but important stuff extremely well edited.