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Actors
This page considers the interaction of analysts, brokers,
investors and other participants in the 1990s boom.
It covers -
Particular
actors are discussed in more detail in the Information
Economy guide on this site.
introduction
It is traditional to characterise relationships in a bubble
as those of the confidence man and his victims. The entrepreneur
or broker spruiks investments to stupid (or merely greedy)
investors until there is a crisis of confidence and everything
ends in tears, with vultures (accountants, lawyers, officials,
journalists, other investors) picking over the remains.
In practice is is more effective to consider the dot-com
and telco bubbles as the result of interaction between
analysts, brokers and financiers, a range of government
agencies (including regulators), the media and investors.
In other words the bubbles were integral parts of the
economy and involved the 'usual suspects', rather than
being unprecedented aberrations with a new cast of actors.
A similar interaction will presumably energise future
'irrational exuberance'.
the analysts
The bubbles were driven by assessments of innate value,
projections of market growth (eg uptake of broadband,
wireless and B2C
electronic commerce) and forecasts that the price of telco/dot-com
stocks would rise as revenue grew and impediments to market
increased.
Assessments of current value are contentious. Predicting
future value is more of a dark art, reflecting the unavailability
of information (or uncertainty about its interpretation)
and analyst self interest.
Reshaping of financial services in Australia, the US and
elsewhere during the 1980s and 1990s (eg convergence of
wholesale and retail banking, substantial deregulation
and emphasis on market analysis as a revenue centre in
major financial institutions) was reflected in upbeat
analysis by
- accounting
firms (which increasingly extended beyond traditional
audit activity to embrace the provision of management
consulting and even legal services)
- experts
associated with major broking houses
- consultancies
such as Gartner or Jupiter that claimed to offer insights
into markets through special access to information,
analytical tools or the experience of key staff.
In
essence, consumers do not pay analysts to hear that the
crystal-ball is murky
or that it is advisable to stay out of the market when
a boom appears to be underway. The major corporate analysts
- and individuals such as Henry Blodgett - thus had an
incentive to look on the bright side and, in some instances,
to gain media/client attention by badging unexceptional
insights with funky prose about imminent developments
or sky-high projections.
Metrics specialists - in some cases more appropriately
considered as metrics factories - were under similar pressure,
responding with oracular statements by gurus ("the
death of the web", the rise of "the x-internet"),
frequent media releases and research that on close examination
was often strikingly thin.
In 2002 major Wall Street houses such as Morgan Stanley
agreed to a US$1.4 billion settlement over charges that
their analysts published misleading stock research. 'Star'
analyst Jack Grubman was accused of changing his rating
on AT&T's stock in return for assistance in getting
his children into a top Manhattan nursery school. That
and other scandals eventually cost Citigroup US$5 billion
in fines and court settlements.
The record of many analysts later in the decade was not
much better. In Australia Allco Finance Group, ABC Learning
Centres and Babcock & Brown were rated "buy"
at the start of 2009 by most analysts. By the end of the
year Allco and ABC Learning were in receivership, with
Babcock is struggling to stay afloat. Its shares had plummeted
99% during the 12 months.
Starting points in considering valuation are Aswath Damodaran's
The Dark Side of Valuation (New York: Wiley 2001)
and 2000 paper The Dark Side of Valuation: Firms with
no Earnings, no History and no Comparables: Can Amazon.com
be valued? (PDF),
the 2005 paper
by William Goetzmann & Ravi Dhar on Bubble Investors:
What Were They Thinking? and somewhat disingenuous
The Wall Street Self-Defense Manual: A Consumer’s
Guide to Intelligent Investing (New York: Atlas Books
2007) by Henry Blodget.
financiers and brokers
In introducing this profile we suggested that bubbles
reflect the availability of cheap capital and the expectation
that investment in a particular sector or enterprise will
result in capital growth that is greater than that of
the overall economy.
The 1990s bubbles occurred in part because of the availability
of venture capital, acceptance of IPOs and the willingness
of service providers such as brokers to get enterprises
to market and thereafter promote the shares. In retrospect
it is clear that some major institutions behaved less
than admirably, spruiking particular shares to mum-&-dad
investors while offloading their own holdings or accepting
inducements for executives that are ethically/legally
problematical.
Others appear to a jaundiced observer to have been simply
incompetent: despite the best advice that money could
supposedly buy 16 of the 17 largest US brokers for example
were recommending purchase of Enron shares in September
2001, after that firm had announced an alarming loss of
US$600 million.
Daniel Defoe, in The Anatomy of Exchange Alley,
accused brokers of practicing "a trade founded in
fraud, born in deceit, and nourished by trick, cheat,
wheedle, forgeries, falsehoods, and all sorts of delusions''.
Perspectives are provided by Take On The Street
(New York: Pantheon 2002) by former SEC chair Arthur Levitt
and in The Roaring Nineties: A New History of the
World's Most Prosperous Decade (New York: Norton
2003) by überbanker Joseph Stiglitz, who laments
that
what
happened in the Roaring Nineties was that a set of longstanding
checks and balances - a balance between Wall Street,
Main Street (or High Street, as it is called in the
United Kingdom), and labor; between Old Industry and
New Technology, government and the market - was upset,
in some essential ways, by the new ascendancy of Finance
... The new mantra was what is good for Goldman Sachs,
or Wall Street, is good for America and the world.
Others
are found in Infectious Greed: How Deceit and Risk
Corrupted the Financial Markets (New York: Times
Books 2003) by Frank Partnoy and Blood on the Street:
The Sensational Inside Story of How Wall Street Analysts
Duped a Generation of Investors (New York: Free Press
2005) by Charles Gasparino, Confessions of a Wall
Street Analyst: A True Story of Inside Information and
Corruption in the Stock Market (New York: HarperCollins
2006) by Daniel Reingold & Jennifer Reingold, Trading
with the Enemy: Seduction & Betrayal on Jim Cramer's
Wall Street (New York: HarperBusiness 2002) by Nicholas
Maier, How Companies Lie: why Enron is just the tip
of the iceberg (New York: Crown 2002) by A Larry
Elliott, Buy, lie, and sell: high how investors lost
out on Enron and the Internet bubble (London: FT
Prentice Hall 2002) by D Quinn Mills, Corporate irresponsibility:
Americas newest export (New Haven: Yale Uni Press
2001) by LE Mitchell, Confessions of a Wall Street
Analyst: A True Story of Inside Information and Corruption
in the Stock Market (New York: HarperCollins 2006)
by Dan Reingold and the fashionably retardaire Fat
cats and running dogs: the Enron stage of capitalism
(London: Zed 2002) by Vijay Prashad.
Reference to works about preceding scandals such as Levine
& Co: Wall Street's Insider Trading Scandal (New
York: Holt 1987) by Douglas Frantz, Inside Out: An
Insider's Account of Wall Street (New York: Putnam
1991) by Dennis Levine, A License to Steal: The Untold
Story of Michael Milken and the Conspiracy to Bilk the
Nation (New York: Simon & Schuster 1992) by Benjamin
Stein suggest that the problem may be inept regulation
and human nature rather than the terminal stage of capital,
something diagnosed every 20 years since the 1860s.
investors
Ultimate responsibility for the dot-com and telco bubbles
rests with investors, the people who put their own money
into the market (whether directly or through mechanisms
such as mutual funds) and who - as voters - have some
control over government regulators such as ASIC.
As in past bubbles some investors funded expansion because
it seemed like a good idea at the time, because they'd
been wowed by noise from the media and their financial
advisers or because they'd been lulled by cheering from
government.
exits
The number of people burned when the dotcom and subprime
bubbles collapsed is unknown. One indicator is provided
by inventories of litigants in class action against investment
advisers.
The mass media have preferred to concentrate on the physical
demise of leading figures, including -
- Adolf
Merckle - 74 year old German billionaire (rail)
- Kirk
Stephenson - 47 year old CEO of private equity firm
Olivant (rail)
- René-Thierry
Magon de la Villehuchet - 65 year old financier (barbiturates
and knife)
-
Patrick Rocca - 41 year old Irish property developer
(gunshot)
Crash-related
suicide is of course
a useful plot device for the removal of figures such as
Melmotte.
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