Tales of financial greed and gullibility
The Number
How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America
Alex Berenson
Random House: 278 pp., $24.95
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The rather dry title and subtitle of Alex Berenson’s book do not begin to convey its scope, which goes way beyond the corrupting effect of quarterly earnings reports on corporate behavior. In fact, the central subject of “The Number” is the unreliability of financial reporting and accounting in modern corporate America. Because the numbers aren’t to be trusted, the several tens of millions of people who own stocks in one fashion or another can’t know how secure their investments really are.
But there is more. The confusion over the numbers makes them easy to manipulate. And manipulators there have been, throughout the history of the stock markets. Berenson, a reporter for the New York Times, takes us on a lively tour of that history, focusing on the period from the boom and bust of the 1920s to the spectacular boom and bust now just ended.
“1999,” Berenson writes, “was at once inevitable and impossible. It was by any standard the biggest bubble ever -- the South Sea Bubble and 1929 and the Gold Rush in one. Even in retrospect, the market’s insanity defies belief. The Nasdaq soared 86%, the biggest-ever one-year gain for a major market index. The S&P; 500 rose 20%; the Dow jumped 25%, breaking not just 10,000, but 11,000.”
It was, Berenson writes, “the greatest wave of speculation in history.” In his view, there was plenty of blame to pass around. He thinks the Federal Reserve Bank and its chairman, Alan Greenspan, cut interest rates too fast, too often. He thinks that the Securities and Exchange Commission, established in the 1930s to police the markets, was, and is, too weak, too underfunded and understaffed to do the job.
But essentially “The Number” is a tale of greed and gullibility. Some corporate leaders found new and satisfying ways to enrich themselves, and thousands and thousands of unwitting investors -- hoping against hope that history would not repeat itself -- went along for the ride.
In all of this, stock price was the great thing, and the stock price of a company had come to depend more and more on its quarterly earnings reports. Earnings reports are necessary, Berenson writes, because in a capitalist system one needs to know how well a firm is doing.
But slavish devotion to them breeds irrational or destructive behavior. A quarterly report might indicate that a company is doing quite well, but not as well as expected, so a stock might actually fall on the issuance of a solid earnings report. As an absurd but by no means uncommon example, Berenson cites Hewlett-Packard’s quarterly report for April 1996. Its earnings had risen from $1.10 a share in the same quarter of 1995 to $1.37, and revenue had soared by a third. But the “consensus” predicted by stock analysts was for earnings of $1.45, so the stock dropped by 8%.
And more and more frequently in the 1990s, quarterly earnings reports were tweaked, stretched and then downright concocted, made up of phony numbers, just so it would look as if the company was doing well. “By overstating their profits,” Berenson writes, “Cisco and Nortel and Lucent and WorldCom and Global Crossing and Motorola and Computer Associates and Microstrategy and America Online and all the rest encouraged investors to pour trillions of dollars into other technology and telecom companies. Much of that money was simply wasted, and the U.S. economy is suffering as a result.”
As the world now knows, and as Berenson recounts, indifferent or complicit accountants were a major part of the cooked-books problem. The discovery of the serious problems at Enron led to the undoing of the once proud Arthur Andersen accounting firm.
Running throughout Berenson’s “The Number” is one constant theme: chief executives and other executives enriching themselves, more and more fabulously, at the expense of their companies and their shareholders. The story of HealthSouth and its former CEO, Richard M. Scrushy, came too late for inclusion in “The Number.” Too bad. It would have fit nicely. From the point of view of the ordinary stockholder of the 1990s, the subtitle of “The Number” might well have been “Never Give a Sucker an Even Break.”
