My Amazon Review of Michael Lewis' "Going Infinite: The Rise and Fall of a New Tycoon"

Crypto Kid

 

Sam Bankman-Fried (SBF) viewed himself as the J.P. Morgan of crypto currency, instead he was far more like P.T. Barnum; a huckster of the first order. He is now on trial for multiple counts of fraud. I didn’t like crypto currency before I read this book; I now like it even less. Author Michael Lewis really let me down in his trying to make a hero out of SBF. Nothing could be further from the truth as SBF comes off as the pampered child of the Stanford bubble he grew up in with his too indulgent law professor parents. Even at age 31 he held on to his childhood stuffed animal.

 

Lewis chronicles his career from MIT to Jane Street Capital where he earns his trader chops and then on to trading crypto currency in Hong Kong. He then formed his Alameda Research and his market maker FTX. Because there were no financial controls it was very easy to intermix customer deposits at FTX with his hedge fund which was nominally run by his on and off paramour Caroline Ellison, another piece of work.

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Some of that money was invested in Bahamas real estate for his firm and for a fancy house for his parents. The money also found its way to Washington D.C. where SBF became a leading contributor to the Democratic Party and anti-Trump Republicans and boy did that buy him access.

 

SBF had an unusually high degree of tolerance for risk. All he cared about was a positive expected value, no matter how high the probability of losing was. Thus, he totally ignored the Kelly Criterion for the proper sizing of investments. His goal was to get as rich as possible so that he could give away his fortune to save the world. He operated under the principal of “effective altruism” in order to maximize the greatest good for the maximum number of people. He professes to love humanity, by he really doesn’t like people as individuals. Further he virtue signals by his vegan diet, unruly hair, and dressing in shorts.

 

To me his effective altruism is nothing but a marketing hype to justify the huge fortune he was creating which peaked at around $40 billion before the collapse. Somehow, he managed to lose $8 billion of client funds and therein lies the core of his fraud.

 

Too conclude Michael Lewis was snowed by Sam Bankman Fried. A more critical look would really have improved this book.

For the full Amazon Review see:  Crypto Kid (amazon.com)

My Amazon Review of Ted Mann's and Thomas Gryta's "Lights Out: Pride, Delusion and the Fall of General Electric"

 

The Tragedy of General Electric

 

For a century General Electric was one of America’s most iconic corporations with roots going back to Thomas Edison and J.P. Morgan. Yet over the past two decades it has shriveled up into a shadow of its former self. Wall Street Journal reporters Ted Mann and Thomas Gryta  vividly tell a deeply researched story of GE’s slow motion collapse that began at the at the start of this century. Let me say at the outset that several years ago I was a preliminary Loeb Awards judge for the best business book of the year. Although they no longer offer an award for books, if they did, this book would most assuredly be a finalist.

 

The seeds of GE’s demise starts with their rock star CEO of the 1980’s and 1990’s, Jack Welch. Wall Street uniformly admired the house that Jack built, but in many respects its foundation was shaky. Specifically Welch created a “make the numbers” culture and he used the ever growing GE Capital subsidiary to meet his quarterly earnings target by coming up last minute financial transactions. Thus by 2000, 40% of GE’s earning were coming finance; not generators, jet engines and appliances.

 

During that era GE kept a close watch on the analysts who covered GE stock. Mann and Gryta’s comments on this process ring true to me. It 1997 as Chief Equity Strategist for Salomon Brothers I remover GE from the firm’s recommended list of stocks. Within minutes Russ Leavitt, Salomon’s analyst covering GE, received a complaining call from investor relations. He had to grovel before them by saying it wasn’t him, but rather it was me.

 

Welch wanted to end his career with the mega-acquisition of Honeywell. That would have created an even bigger electric behemoth, reduced the role of GE Capital as a relative source of earnings and in, my opinion, it would have created accounting opportunities to sweep under the rug past mistakes via a special charge that analyst usually ignore. This last proposition is mine, not the authors.

 

After a drawn out selection process, Welch selects Jeff Immelt to be the new CEO. Those passed over include David Cote who would soon run Honeywell, Bob Nardelli who would go on to Home Depot and Jim McNerney who would run both 3M and Boeing. Yes, GE’s vaunted management had a very deep bench. In picking Immelt Welch got probably the best salesperson in the company. I met Immelt once at a charity function, and in a very short conversation his sales personality came through and that experience was very consistent with what you get from the book.

 

Unfortunately Immelt was not really strong on finance; he didn’t really understand GE Capital and he was a deal junkie with a penchant to overpay for acquisitions. He did that when he ran the health care equipment division in the 1990s and would do that in spades later with acquisitions in media, oilfield equipment and power generation when he ran the whole company.

 

Immelt had the misfortune of starting to run GE just a few days before 9/11 which signaled the end of the 1990’s boom that so propelled the Welch era. The environment made it more difficult for GE to reach its earnings targets and the passage of the Sarbanes-Oxley accounting reforms in 2003 made it much harder to generate earnings with the stroke of a pen. Thus Immelt had to rely more and more on GE Capital expanding its balance sheet, so much so that by 2007 it accounted for half the company’s earnings. Then in 2008 as the financial crisis hit with full force, GE could not roll over its commercial paper and had to be bailed out by the Fed. With that GE became known as a finance company that made industrial equipment and its multiple suffered.

 

To get out of this fix, Immelt began to slim down GE Capital and went on an ill-timed acquisition binge buying into oilfield equipment at the top of the market and grossly overpaying for the French generator company Alstom. The deal was predicated on cost synergies that the French government wouldn’t allow, but Immelt when ahead anyway. Much of the details on this transaction comes from the author’s version of “deep throat,” a deal team member they identify as “Adam Smith.” To make things worse the conventional power market was entering a secular decline as wind and solar were gaining market share.

 

It is downhill from there. In order to make their numbers the power division rejiggers its service contracts to generate accounting earnings as opposed to cash earnings. It seems that GE was utilizing something akin to gain on sale accounting for their service contracts where they booked earnings upfront rather than over the life of the contract. It this accounting that triggered a very negative analyst report from J.P. Morgan’s Steven Tusa that opened up the gates of hell for GE.

 

Then, of a sudden, GE discovers it had a long term care insurance problem that the executive team, the board and market thought was behind them with the spin-off of Gentworth in 2004. Yet it was there to the tune of $15 billion. That was the end of Immelt. In his place John Flannery was appointed in 2018. He tried his best, but he was gone in 18 months. Then the board appointed Larry Culp, GE’s lead director and formerly a very successful CEO at Danaher. He had his work cut out for him.

 

Perhaps what is most staggering is that from 2004-2018 GE bought back $108 billion worth of stock as the market value collapsed to $56 billion at this writing. All the while GE’s board was mindlessly approving the share buybacks and Immelt’s acquisitions. You could say that that it was complete abdication of authority while they were collecting their $300k a year annual retainers. They weren’t the only ones who missed the mark. I too owned shares of GE during most of Immelt’s reign as I was blinded by the firm’s iconic image and reputation for good management.

 

As I said at the outset, Mann and Gyrta have written an important book and should be read as a case study for investment professionals and corporate managements alike. My one quibble would be that an annotated stock chart would have been very helpful in visualizing the history presented here.  

For the full Amazon URL see: https://www.amazon.com/review/REM986Q7TZ4RO/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Graham Moore's "The Last Days of Night: A Novel"

Westinghouse v. Edison

It is very hard to write an enjoyable book about a 1880s patent dispute, but screen writer (The Imitation Game”) Graham Moore brings to light the titanic struggle over U.S Patent Number 223898, Edison’s electric lamp. “The Last Days of Night” is a historical novel of the first order, mostly true with more than a few embellishments. Moore’s hero is the 26 year old lawyer Paul Cravath who goes on to found the very white shoe law firm, Cravath, Swaine and Moore. He also invents in real life the associate system that drives today’s giant law practices.

Cravath represents George Westinghouse in his fight to overturn Edison’s patent. The patent fight goes on against the backdrop of what was called the “current wars”. It was a war over Edison’s DC current versus Westinghouse’s AC current. Spoiler alert, as we know AC current wins largely because of its enormous distance advantage over DC current.

His portrait of Edison as both an inventor and avaricious businessman is acute and Westinghouse comes off as an aggressive “bet the company” businessman focused on product quality. We also meet the very mercurial scientist/inventor Nikola Tesla the prophet of AC current and of power of electromagnetic waves. It is not for nothing that Elon Musk named his electric car after him.

Because this will soon be a major motion picture Moore introduces Cravath’s love interest, the opera star, Agnes Huntington. Much of her role in the book is fictitious, but she does in real life marry Cravath.

There are cameo appearances for J.P. Morgan and Alexander Graham Bell. With them Moore brings out the merger between science and business that will literally power the American economy after the 1880s. I highly recommend the book and can’t wait for the movie.

The full Amazon URL is at: https://www.amazon.com/gp/customer-reviews/R2WM8GD9U8YQOG/ref=cm_cr_getr_d_rvw_ttl?ie=UTF8&ASIN=B01A4AXM3W

My Amazon Review of Roger Lowenstein's "America's Bank: The Epic Struggle to Create the Federal Reserve"

The Making of the Fed

The “money question” is as old as the Republic. In “America’s Bank” Roger Lowenstein tells the story as to how the United States in 1913 brought into being its first central bank since 1837. Recall that the Second Bank of the United States came to an end when President Andrew Jackson refused to renew its charter. This triumph of Jacksonian Democracy would come back to haunt the Democrats who supported the creation of the Federal Reserve.  

To be sure there were panics and crashes in those intervening years, but absent a central bank the U.S. still grew to become the largest economy in the world. What triggered the need for a central bank was the Panic of 1907 which nearly brought the economy to its knees and it required the rescue of a bankers syndicate led by one James Pierpont Morgan. In response to the panic, Congress passed the Aldrich-Vreeland Act which authorized the Secretary of the Treasury to issue emergency currency and it established a National Monetary Commission to investigate the causes of the panic and to recommend policy changes. Unlike the 2008 financial crash Congress acted first with the Dodd-Frank Law and then created a financial inquiry commission whose work is already forgotten.

It here where we begin to see the leading players involved in the creation of the Fed. First and foremost is Rhode Island Senator Nelson Aldrich who chairs the commission, studies European central banks and becomes convinced of the need for a central bank in the U.S. Next is Paul Warburg, a German immigrant and scion of the Warburg banking family who worked for their U.S. affiliate Kuhn Loeb. He is rightfully called by most historians and Lowenstein as the father of the Federal Reserve as he becomes the most knowledgeable and tireless advocate for a central bank.  It is Warburg and Aldrich who organize the famous Jekyll Island bankers’ retreat where all of the essential elements of the Federal Reserve Act are written in secret. Sometimes transparency isn’t such a good idea.

After the Democrats sweep the 1912 elections Republican Aldrich is moved to the sidelines and the new key players are President Wilson who deftly works around his party’s Jacksonian traditions and Representative Carter Glass of Richmond, Virginia, who though a Jacksonian becomes the leading advocate for a central bank. Glass would later as a Senator, be the coauthor of the Glass-Steagall Act separating commercial banking from investment banking. Lowenstein spends a great deal of time dealing with both Wilson’s and Glass’ maneuverings to bring about passage of the act. He tells a good story especially in regard to how the U.S., in deference to its Jacksonian traditions, doesn’t have one central bank but rather a national board with 12 district banks.

I have a few quibbles with this otherwise wonderful book. First he doesn’t’ really tell us why there is a district bank in Richmond, Virginia, perhaps it is Carter Glass’ hometown or why there are two district banks in Missouri. Is it because the Speaker of the House Champ Clark was from Missouri or was it out of concern with supplying credit to agriculture in the Midwest? Finally, although he mentions it in passing, he doesn’t really go into how successful the pre-Fed Aldrich Vreeland Act was in the summer of 1914 in supplying needed cash to the banking system after the outbreak of World War 1. Remember although enacted in 1913, the Fed did not open its doors until December 1914. Friedman and Schwartz note in their “Monetary History…” that the use of Aldrich-Vreeland money in 1914 did a far better job in protecting the banking system than what the Fed did in 1930-31. 

For the full Amazon URL see:

https://www.amazon.com/review/RNFCDSOKADSJH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv