Red-Blooded Risk: The Secret History of Wall Street

The Summer of My Discontent

It wasn't just in Cambridge and Washington. Consider accounting numbers. Until 1970 the book value of a company, its assets minus its liabilities, corresponded pretty closely to the price of its stock. Some companies were higher and some were lower, but the average price-book ratio never got too far from 1 for long. When companies went bankrupt, creditors collected something close to book value in most cases, minus about 20 percent on average for lawyers' fees. But starting in the 1970s and to an increasing degree thereafter, the relationship between book value and market value broke. The two are basically unrelated today; in fact, it's rare to find a company selling near book value. And about half the time when a company goes bankrupt, recovery for creditors is near zero. That means not only does the entire net value vanish overnight, but the assets turn out to be worth close to zero. The accounting numbers are still useful as indicators, but they have long since lost any connection to tangible economic reality, to the real prices real people pay for real things. Accounting makes it all add up nicely and neatly, but what's being added isn't real.

Now, the reason I had come to Washington was not to work on the gas-rationing plan. That was my cover story. I really wanted to play poker. Washington is one of the best poker cities because people come from all over the country—and all over the world—with their local attitudes and strategies. Today you find ...