Friday, May 18, 2018

Business Books From Wapner On Activist Investors & Henriques on the 1987 Crash

The floor of the New York Stock Exchange during the crash of 1987.

By Scott Wapner
Public Affairs, 256 pages, $27.00

A FIRST-CLASS CATASTROPHE: The Road to Black Monday, the Worst Day in Wall Street History
By Diana B. Henriques
Henry Holt and Company, 416 pages, $32.00

In When The Wolves Bite, Scott Wapner, host of CNBC's Halftime Report, examines the battle between activist investors Carl Icahn and Bill Ackman for control of Herbalife.

Wapner had a front-row seat, as Ackman and Icahn engaged in an uninterrupted, twenty-seven minute televised war of accusations and insults regarding their opposing bets on Herbalife on his show on January 25, 2013.

The story quickly went viral, and the unexpected event was called "the best business television ever" by Jim Cramer, host of CNBC's Mad Money.

Wapner writes of it, "Consider the moment: Here are two billionaires hurling insults while the world watched a trading stopped. CEOs from Davos to Dallas dropped what they were doing to watch it. It was a moment in time - organic, bizarre, and completely unplanned."

Icahn and Ackman's very public clash on live television was just the beginning, and in fact, their war over Herbalife still rages on. Their feud became a years-long saga, complete with secret backroom deals, public accusations, and billions of dollars in stock trades.

Wapner breaks down the story with unprecedented access to all the players, unraveling this remarkable war of egos and showing the extreme measures the participants were willing to take.

For this landmark work, Wapner conducted on the record exclusive interviews with Icahn, Ackman, and Herbalife's now former CEO Michael Johnson.

There is a human side to activist investing, as Wapner analyzes the profound impact it has on the workers of a particular company, the individuals who may find themselves promoted or out of a job entirely at the whim of a billionaire investor they will never meet.

When The Wolves Bite is a fast-paced and cautionary tale about the power that, ten years after the financial crisis, is still held by a precious few on Wall Street.

Wapner writes, "Not since the Rockefellers and Vanderbilts has one group of investors exerted more influence on Wall Street than does the current class of financiers known as shareholder activists.

"This class of super-investors, which includes Carl C. Icahn, William C. Ackman, Daniel S. Loeb, Nelson Peltz, and others, is defined by an interest not just in owning a piece of a company, but also in using their influence and money to change the way it operates. And no company, large or small, is beyond their reach. Apple, PepsiCo, Yahoo, DuPont, JC Penney, and Macy's are among the businesses that have been targeted in recent years.

"While the 1970s and 1980s marked the rise, dominance, and ultimate fall of the corporate raiders, arbitrageurs, and junk bond kings of the day, during the current Era of the Activist, barely a week goes by  without one of the aforementioned financiers revealing a stake in a company's stock and an ambitious plan to propel it higher.

"Activism isn't just proliferating - it's exploding.

"In 2012 there were seventy-one activist campaigns with a total of $12 billion invested, according to the new regulatory filings with the Securities and Exchange Commission. By 2015 the numbers had surged to eighty-three filings totaling nearly $31 billion and counting. As the number of dollars has grown, so has the size of the targets, with the average market caps of their companies increasing from more than $2.3 billions in 2012 to nearly $6 billion in 2015.

Another moment the history of the business world that people will never forget is the stock market crash of 1987.

October 19, 1987 is known as Black Monday, when the Dow jones industrial Average plummeted 508 points, 22 percent, in one day, still the largest drop in Wall Street history. It was more than twice the decline of the worst day of 1929, and the equivalent of around 5,000 points today.

Diana B. Henriques, an award-winning Wall Street reporter for The New York Times, gives a "tick tock" account of the this event that shook a generation of investors and bare the core elements of future financial crises in A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History.

Henriques opens her story with the earliest rumblings of disruptive change, as regulatory barriers began to fall and titan investors (including some of the ones featured in Wapner's work) began to rise in the early 1980s. She then takes us through a series of mounting financial crises, each worse than the last, that provided unheeded warnings of the catastrophe to come.

Finally she presents the heart-stopping drama of the harrowing days of October 1987, as regulators and financial leaders struggled to prevent a total meltdown of the American financial system.

Henriques draws on more than a hundred interviews with front-line participants in the 1987 crisis and superb archival research to provide the best analysis to date of this landmark crash and its far-reaching consequences.

A First-Class Catastrophe is written in a way that is unique for most business books, in that the story is told in an immersive, character-driven narrative style, as the book weaves fresh background information with original reporting and access to well-placed sources, some of whom are speaking of the crash for the first time.

The suspense of the story builds up as time runs out for a small community of financial innovators and market traditionalist, derivatives traders, and academic theorists, regulators, and investors, people who believe they had mastered the risks of investing and had reinvented the modern marketplace, only to see it all slide toward total collapse.

While this book is a history of that historic crash 20 years ago, it also offers a poweful warning: to understand the financial world of today, we must understand the forces that produced Black Monday and what was done, and even more so, what was not done, in response to the lessons of that epic market meltdown.

Black Monday was the crystal-ball crach, as it let us look into a future dominated by financial titans using robot strategies at lightning speed in multiple markets governed by tribes of squabbling regulators.

The risks exposed in 1987 were the early ancestors of those that fed the financial crisis in 2008, when poorly understood derivatives wielded by gigantic institutions lit fires that quickly spread from market to market, beyond any single regulator's control.

These same risks are even more dominant and dangerous today. The panicky telephone gossip between traders in New York and Chicago in 1987 has been replaced by the nanosecond news of social media. Banks deemed "too big to fail"in the 1980s are astronomically bigger and more global. An already crowded field of competing regulators has grown bigger and less coordinated. Herd-like institutional investors now control, not billions, but trillions of dollars. New derivatives and untested investment strategies continue to flood the marketplace, with little attention paid to the risks they entail.

If you are interested in learning about two of the biggest stories in the world of finance over the past three decades, these works by Wapner and Henriques, two well-respected financial journalists, are well worth reading.

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