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LOAD-DATE: December 28, 2008
GRAPHIC: PHOTO: FULCRUM: Markets including this seasonal gifts fair draw crowds to Union Square Park throughout the year. The park and its environs have a checkered past and eclectic architecture. (PHOTOGRAPH BY MICHELLE V. AGINS/THE NEW YORK TIMES) MAP: UNION SQUARE

Copyright 2008 The New York Times Company

20 of 1231 DOCUMENTS

The New York Times
December 28, 2008 Sunday

Late Edition - Final

Boom, Bust, Repeat

Daniel Gross, a columnist at Newsweek and Slate, is working on an electronic book about the credit mess.

SECTION: Section BR; Column 0; Book Review Desk; Pg. 8
LENGTH: 1211 words

The Story of Modern Financial Insanity

Edited by Michael Lewis

391 pp. W. W. Norton & Company. $27.95

For the past two decades, Michael Lewis, the most charming and one of the shrewdest guides to America's raucous money culture, has displayed a knack for being at the right place at the right time. He was a young trader on the Salomon Brothers bond desk during the 1987 crash; the experience led to ''Liar's Poker.'' His boss at Salomon, John Meriwether, a decade later became a central figure in the downfall of the hedge fund Long-Term Capital Management. Lewis spent a chunk of the 1990s in Silicon Valley, where he profiled the serial entrepreneur Jim Clark in ''The New New Thing'' and happened on to his next great subject, the Oakland A's (''Moneyball''). Now, just in time for the Great Credit Debacle of 2008, Lewis has curated ''Panic,'' a prose exhibition on the past 20 years of monetary madness.

The new book, Lewis writes, is an effort ''to recreate the more recent financial panics, in an attempt to show how financial markets now operate.'' Of course, after reading this lively, frequently fine collection of newspaper articles, magazine features, academic post-mortems and the odd blog entry, you'll find the markets are still something of a mystery. The volatility and gut-wrenching jolts seem to defy any rational expectation. ''The bottom line is, no one knows,'' the economist Franklin Edwards wrote in his introduction to a collection of studies on the crash of 1987.

Still, paging through ''Panic'' is like wandering through an eclectic museum that houses old masters (Nobel laureates like Paul Krugman and Joseph Stiglitz), but also folk artists (the satirist Dave Barry), artisans (beat reporters) and figurative painters (magazine writers like Lewis, John Cassidy and Roger Lowenstein).

''Panic'' covers four major episodes: the 1987 United States stock market crash, the 1997-98 emerging-market bust-ups (called ''Foreigners Gone Wild''), the dot-com meltdown and the current housing/credit/stock market collapse. Each is a triptych -- the first panel is a brief essay by Lewis, the second is filled with contemporaneous newspaper or magazine articles that set up the boom, and the third presents sober analysis of why it happened. While being anthologized is usually a badge of honor for writers, some of the articles were plainly chosen for the way in which they typified the dangerous pre-panic zeitgeist, capturing ''the feeling in the air immediately before things went wrong,'' as Lewis puts it. I suspect the authors of the Time article from July 1987 on how individual investors were riding the bull market, and of the January 1996 New York Times article extolling emerging market mutual funds, now regard these works the way my brothers and I regard bell-bottom pants -- signs of youthful indiscretion that are best forgotten.

But there are plenty of gems, especially involving the 1987 crash, which now seems quaint. An excerpt from a book by the former Wall Street Journal reporter Tim Metz sheds light on the chaos in the markets then. More broadly, the entries remind us that before CNBC, Yahoo Finance and E*Trade, those not sufficiently with it to possess a hand-held Quotron had to visit brokerage offices to check stock quotes.

What else is noteworthy? Paul Krugman's dissection in Fortune of what went wrong in Asia in 1998, a Jeffrey Sachs interview on what went wrong in Russia. The Wall Street Journal's 1998 article on how the stock of the second-tier book retailer Books-A-Million went on a wild rise after the company introduced its new Web site and Katharine Mieszkowski's May 2000 Salon account on dot-coms' blowing millions of dollars on Super Bowl advertisements don't taste as good as Proust's madeleine. But they sure take you back. Mark Gimein's July 2000 Fortune article on AllAdvantage, which paid people 53 cents an hour to surf the Net with a special advertising bar on their screens, is a howler. The headline: ''Meet the Dumbest Dot-Com in the World.''

The most recent episode, which Lewis calls ''The People's Panic,'' is less funny -- it's too close, it roped in many more people, and the costs to the public are likely to be huge. The bailouts are especially galling given the ample warnings, like those sounded by John Cassidy of The New Yorker, who warned in November 2002 that housing would be the next crash. A single entry from the Irvine Housing Blog, which shows how a person in January 2005 bought a $1.157 million house with $270 down, refinanced with a funky teaser-rate mortgage and then proceeded to open up a $491,000 home equity line of credit by 2007, neatly encapsulates the lunacy.

Some of the best entries are Lewis's own, including his January 1999 New York Times Magazine article on the failed hedge fund Long-Term Capital Management. The quantitative geniuses who designed this vehicle had a tough time grappling with the fact that their model had failed. ''It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world,'' Lewis writes. In each of the episodes, the bottom fell out because a bedrock belief held by many participants -- smart professionals, not the perennially stupid individual investor -- suddenly evaporated. ''Panic'' is to a large degree a chronicle of the capacity of highly paid professionals for self-delusion.

This volume could just as easily have been titled ''Complacency.'' As Lewis shows, there's something distinctly American in our propensity to blow bubbles until they pop, spend a few months licking our wounds and then hit replay. ''Yuppies' Last Rites Readied,'' declared the headline on a New York Times article of Oct. 21, 1987, which documented how the stock market crash was causing materialist, money-soaked urban dwellers to reduce conspicuous consumption and focus more on human relationships. Of course, that moral awakening lasted only as long as the downturn. And the same business publications that do such a great job of dissecting the bubbles once they've popped are the same ones that help promote and sustain the next one. What drives this? It's not simply greed, or stupidity, but a kind of learned naivete. We convince ourselves, over and over again, that nothing can go wrong, and that even if it does the smart ones among us will be insulated from any ill effects. Despite Suze Orman's pleas, as financial beings we lack self-awareness and irony. In October 2000, Jerry Useem of Fortune called prominent players and asked what they had learned from the dot-com bust. James Cramer, hedge fund manager, media personality and founder of, declared the Internet over and spoke of spending his time coaching soccer. ''I'm done with the material stuff.'' Riiight.

In these times, $27.95 may seem a steep price to pay for a collection of articles, many of which can be found online. But there are good reasons to splurge. The book's profits are going to charity. And as of mid-December, used copies were trading hands on the secondary market (Amazon) for $13. In other words, after a few weeks of ownership, this book still retains about half its value. Which is more than can be said for Citigroup stock.

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Copyright 2008 The New York Times Company

21 of 1231 DOCUMENTS

The New York Times
December 27, 2008 Saturday

The New York Times on the Web

Advice for Obama From Ernst & Young's Chief

An extended version of this interview:

SECTION: Section B; Column 0; Business/Financial Desk; SATURDAY INTERVIEW; Pg. 2
LENGTH: 971 words
JAMES S. TURLEY, chairman and chief executive of the auditing firm Ernst & Young, says one danger facing the Obama administration is that it will overreach with sweeping new regulations and maintain government ownership of failed firms like the American International Group for too long.

He also argues that banks and other financial institutions should be required by the government to mark all their assets to their current value, a hotly debated practice that others in the industry are resisting because it might set off a new round of loss write-downs.

Ernst & Young, one of the Big Four auditing and accounting firms, is advising the Treasury Department in the management of the Troubled Asset Relief Program (TARP). Here are excerpts from a recent conversation:

Q.How will Americans to know when it's safe to go back into the financial markets?

A. Trust builds up on a long period of time and gets shattered pretty quickly. I think what investors can look to is the capital strengthening that's been going into these institutions. Leadership and management have been strengthening as have governance functions. I think transparency has been increasing. All those things should give investors a great sense of optimism and confidence that these institutions can be trusted.

Compared to a few months ago, the capital injections are having their positive effect. The financial pieces of this crisis have turned the corner. Clearly, however, economies around the globe are still terribly challenged.

Q.If the auditing profession is supposed to act as a watchdog, how come you didn't see it as it was happening?

A. Everyone wishes they could foretell the future on when a loan is going to go bad or when the value of real estate or any other asset will turn around in value. The profession wishes we could have seen that, too. But what the profession is now working on is to help companies bring to light the declines in fair value that are there.

Q.When you say ''fair value,'' you're referring to the debate about whether companies should ''mark to market'' or carry assets on their balance sheets at their current value, rather than some theoretical value?

A. As I look at it, reported fair value is the best answer possible for investors. It gives them the most realistic, real-time assessment of values. But it's very challenging to do that in distressed times. That's what the accounting standard-setters are looking at today. Moving away from fair value can't be the right answer. Keeping someone in the dark on what's going to happen is not the best way to build confidence.

Q.Is the federal government properly equipped to manage hundreds of billions of dollars in toxic assets and to run major pieces of the financial system?

A. Both the current and future administrations surround themselves with people who have that talent. You're seeing new talent being hired by the government and you're seeing the government use the services of outside professionals, including Ernst & Young. We were hired as advisers to the Treasury Department for the TARP.

Q.So auditing firms that missed something -- your firm was in charge of auditing Lehman Brothers, for example -- are now going to advise the government on solving the problem?

A. I'm not sure I'd agree with the statement that the auditing profession missed something. What we've seen is a substantial and very rapid decline in the fair value of assets, both financial and nonfinancial, like real estate, all around the world. The financial reporting of these institutions has recognized those losses when those losses were taking place. The profession has been working very diligently to insure that the right values were ascribed to these assets.

Q.But somebody missed the inherent risks involved in bringing the subprime mortgage instruments to the market, right?

A. There were an array of places where the underlying risks were not well understood, in some cases by managements, in some cases by boards and audit committees, in some cases by regulators and, perhaps, in other cases even by audit firms. The risks of real estate declines that had not happened in decades were not well understood by an array of stakeholders.

Q.What's your advice to the Obama administration about how to manage all this?

A. I think the incoming administration has been dealt a tough hand. In the re-regulation of not just the financial markets but the entirety of business that will certainly take place, it's important not to regulate so strongly that we stifle innovation and entrepreneurship. And I would caution administrations here or elsewhere against feeling that state ownership of financial institutions is the right long-term answer. These should be viewed as short-term fixes.

Q.Do you think the American economy will need to be restructured, away from a reliance on debt, to other forms of activity?

A.. Yes, I do. If you look at the economy in the United States compared to our peers around the world, there is clearly much more reliance on debt at the consumer level. I was in Mumbai in the days leading up to the terrorist attacks. Global economic shocks have had less of an overall impact on the Indian economy because a smaller percentage of their people were overleveraged or overinvested in the stock market. When you see the level of debt carried by homeowners in this country, it's out of balance with the rest of the world.

Q.What do you say to Americans who may feel that people at the very top of the financial system made huge mistakes but are walking away with tens of millions of dollars?

A. Without question, the compensation issues are front and center. That's particularly true on Wall Street and in the financial sector, where a large amount of public money has been committed to bailing out some of these institutions.

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Copyright 2008 The New York Times Company

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The New York Times
December 26, 2008 Friday

Late Edition - Final

Fiscal Chaos Aside, Entrepreneurial Spirit Grows in Argentina
SECTION: Section B; Column 0; Business/Financial Desk; Pg. 1
LENGTH: 1292 words
Even in the best of times, Felix Racca faced a formidable task -- trying to build a new class of entrepreneurs in a country known for cozy cronyism and political melodrama. And now, the Argentine angel investor is trying to do it in the middle of a global storm that has sucked billions of investor dollars out of emerging markets.

So while the Buenos Aires stock exchange was tumbling to a five-year low in October after the government announced it would nationalize private pension savings, Mr. Racca was 600 miles away, coolly discussing the prospects of a start-up with Daniel Caselles.

Mr. Racca had provided the seed capital for Mr. Caselles's brainchild, AuthenWare, a company that makes biometrics software with security applications for banks and insurance companies.

To outsiders this may seem like an unusual time and place for entrepreneurship. The pension grab was widely seen as an admission that Argentina might not meet 2009's debt payments, approximately $20 billion.

After the government's 2001 default, lack of access to credit became a way of life here. The country remained largely cut off from global capital markets and foreign investment.

As a result, Argentine entrepreneurs started looking inward, and over time created a nascent start-up ecosystem with local venture capital funds and angel investors.

According to the 2008 Venture Capital Observatory Report, $25 million is available this year from those funds and investors. Gabriel Jacobsohn, the report's author and a business professor at the University of Buenos Aires, expects that figure to hold steady next year despite current economic uncertainty.

The volume is small, much less than 1 percent of Argentina's gross domestic product, but it represents a sharp cultural shift. In the past, family inheritance and government contacts often determined who started a business. Now, slowly, Argentines are beginning to trust and invest in each other.

The IAE Angels Club is an example. Its October meeting took place on the day when the Brazilian and Russian stock exchanges had to suspend operations in response to collapsing stocks. But the club's middle-aged members attentively listened to two business pitches by complete strangers in their 20s and 30s. Several new angels attended, one announcing he was starting a sister group in Cordoba province, in the center of Argentina, about 400 miles northwest of Buenos Aires.

The Angels Club has grown to 100 members, from six, in three years and has invested $3 million in 17 projects. Silvia de Torres Carbonell, the group's founder, said that without the club, ''their money would go elsewhere, and most likely out of Argentina.'' Investments are usually not recovered for eight to 10 years.

Argentina's new financiers are also providing expertise. Several began their own start-ups during past crises and not only survived but thrived, with little support.

Mr. Racca is one such veteran. He and his partner, Emilio Lopez-Gabeiras, founded Intersoft, Argentina's most successful software company, in the early 1990s, surviving hyperinflation, stagnation and multiple currencies.

When they developed a spinoff with the hope of competing globally, they could not find investment partners here. So Mr. Racca moved to the United States. He visited 120 potential suitors over three years before finding Sevin Rosen, a venture capital fund based in Dallas.

The general managing partner, Jon Bayless, said that his first impression of Mr. Racca was that ''he was a technical visionary, but terribly naive in terms of how to run a business.''

Nonetheless, the fund gave him a management team, led by Ron Brittian, a former Texas Instruments executive, and $9 million, its first investment in a company originating in South America. Three days later, Mr. Racca suffered a heart attack.

Still, he pressed forward with the company, Fuego Inc., a pioneer in developing business process management systems to help companies streamline operations. BEA Systems acquired Fuego in 2006 for $87 million. This year Oracle acquired BEA.

Mr. Racca says he wants to ensure that his compatriots ''do not have to go through what I did.''

In Daniel Caselles, he saw a technical genius. Mr. Racca invested in him before they had defined a product and after knowing him for barely three years, virtually unheard of in Argentina.

The company, still in its infancy, expects to generate $5 million in revenue by the end of 2009. It has drawn additional investors -- Mr. Racca said he received a new commitment of $300,000 last month. Another is Mr. Brittian, who now lives in Argentina.

He and Mr. Racca have begun a venture capital fund that plans to raise $100 million by the end of 2009.

In addition to financing Mr. Caselles, Mr. Racca is grooming him to be a future investor and business leader, practicing English with him and pushing him to take the lead on calls.

This is another break from the past, when Argentines viewed potential financiers with suspicion. Mr. Caselles says he does not worry about his ownership stake being diluted because ''our investors take better care of us than we do.''

Other pioneers include Emiliano Kargieman and Jony Altszul, who started Core Security Technologies, a software company, in Buenos Aires in the mid-1990s. They succeeded in the United States, landing customers from NASA to the United States Army.

Today they run a venture capital fund back home, Aconcagua Ventures. Their first investment, Popego, was founded by a 24-year-old college dropout, Santiago Siri, who has since become the only Latin American selected to participate in both Le Web, one of Europe's most elite technology conferences, and Silicon Valley's TechCrunch50. A catalyst for the evolving start-up culture here was Endeavor, the United States nonprofit that fosters entrepreneurial networking in the developing world. Endeavor's first success was in Argentina 10 years ago, just before the country's last financial collapse.

Today it remains a strong presence here. But the entrepreneurial ecosystem here is now entirely locally run, mostly by people with middle-class backgrounds.

For instance, Santiago Bilinkis and his partner, Andy Freire, founded Officenet, an office supply catalog service in Argentina, before the last crisis. Staples acquired it in 2004. Mr. Bilinkis has since invested in three start-ups. He said that what he called serial entrepreneurship was ''the only way to change the country.''

The founders of Globant, an information technology services company based in Buenos Aires, concur. They estimate they will take in $40 million in revenue this year, and last week completed their second acquisition.

Indicative of the changing values in Argentina, Alejandro Mashad, Endeavor Argentina's director, said, ''Globant's four founders could sell their company today and each have a private jet, but they want to build a company in Argentina.''

Google, a Globant client, cited Argentina's emerging entrepreneurial spirit as a main justification for its decision last year to base its Latin American operations in Buenos Aires.

Alberto Arebalos, Google's Latin American spokesman, says this developing culture ''will not change despite the ups and downs of the economy.''

An Argentine, Mr. Arebalos listed some of the tumult that Argentine business has endured in the last decades: ''We have had at least five or six different economic plans, with completely different politics, a closed economy, an open economy, privatization, nonprivatization, a fixed dollar, a floating dollar, a controlled dollar, an uncontrolled dollar, brutal devaluations, increases in tariffs and frozentariffs.''

The lesson, he said, is ''one goes nuts or one becomes a survivor.''

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