tech bubble

a link i found entertaining

i traded some internet stuff when they were flyin high. ive received several offers in the mail to join in share holder, class action lawsuits. i usually just throw em away because my holding period was very short. i got one the other day and it included copy of the filed pleading. defendents are merrill lynch and henry blodgett who was an internet analyst. among other things pleading claims that companies who merrill was doing investment banking for that were going public got to write their own recommendation and blodgett would just sign it. also claimed that blodgetts compensation grew from $1 million a year to $12 million a year due to bonuses from investment banking side of merrill operation. interesting document that pleading.


i also got to thinking about investment bankers, analysts, ceos, and market makers playing the game of bilk the investing public. to me this is how it went down.


-- wall street firms see that investing public has made a lot of money during early to mid nineties due to great stock market run.


-- wall street firms see that investing public is hot on companies like amzn which was one of the first "internet" companies.


-- wall street firms see a lot of potential investment banking business through ipos taking internet companies public. they get the analysts to start pumping these ipos by giving strong buy ratings. wall stree firms make a fortune in investment banking fees by takin em public but it doesnt stop there.


-- a lot of capital is raised for these companies and they start buying lots of gear. companies like csco,sunw, others profits get a monster boost due to the purchase of all this gear. analysts start gettin on board the bandwagon say that its hard to tell who the companies on the internet will be but the tech companies sellin the gear are a sure bet no matter who wins the battle over internet turf. ceos of course love it because they're making a ton of money off of options. market makers love it because theyre making big bucks. the firms love it because theyre sellin all the infrastructure stock floating around to their retail customers. thats not the end either. theres more.


-- all these rinky dink internet companies that arent makin a dime and never have a hope of makin a dime start running into trouble. wall street investment bankers to the rescue again. secondaries and bonds are sold and even reap more investment banking fees. the companies use this new capital to buy even more gear (gotta get market share). this keeps the infrastructure stocks profits soaring.


-- soon the money spigget drys up for these companies as investors get unsure about internet company profits. investors start balking at putting up $ for bogus companies. wall street firms maintain strong buy ratings and start selling the hell of this stuff. There's still more.


-- sucker rallies abound many investors chasing last bull market. wall stree firms jam them too and make lots of money off the NAS collapse.

Anony- yes. "put lipsick on a pig" and it is still a pig. Blodgett and Mary Meeker were both recommending stocks to the public which they knew were junk. That is why Merrill just paid a humongous fine and is suffering severe damage to its "credibility". Morgan Stanley would not admit the "first lady of the internet" (MM) did anything "wrong". Morgan would not fire her because it would look like an admission of guilt on their part and they were (are) terrified of lawsuits. The whole thing was a farce and a disgrace. Babe

Excellent analysis, but don't forget what I think was a highly underrated yet very important part of the bubble. This was the part that the bankers played the biggest role in. What they did was intentionally limit the market for any hot stocks. Remember that most IPOs were really limited, maybe 15% of a company was put up for sale. The remainder was kept in the pockets of the founders, the VCs, the managers, the banks...very little went to the public. I thought it funny to call a company "public" when only 12% of it was really controlled by the public. This retention of interest created a false market, one in which supply and demand was extremely skewed. A road show would be put on for a company and their names might already have been heard. People wanted the stock because they liked the idea AND of course they thought they could get rich on it. So limited supply drove the prices up by those 100% rises in day one of the IPO. Also people remember how they would intentionally be underpriced, to create that bubble from day one. In an oversubscribed offering you can easily raise the price, but the bankers didn't want to do that because a big pop on day one created buzz and even more demand. In a big picture sense of course no of it had any sensibility. If you were rich you would pay these outrageous aggregate sums for a mere piece of a company, yet if you have thousands of individuals clamoring for it the price is artificially high. This was a real travesty because these companies could easily have sold additional shares at higher prices and earned double or triple the capital to use for their businesses. Had some of these companies done that, they might have survived better and some of these companies would still be operating today. Greed was indeed the root of it, but simple economics would have explained the disconnect between reality, hype and supply/demand in the IPOs.