Mike, I just ran across your thread for the first time. I like it.
This article is out of todays SJ Mercury I thought you might enjoy it.
>BY DAN GILLMOR
Mercury News Technology Columnist
The technology boom has been called the largest legal creation of wealth in the history of the planet. Maybe so, but that's not the whole story.
As the events of 2000 have shown, it's also been the greatest legal con game of all time.
I stress the word ``legal'' -- even though we're likely to learn in coming months and years about significant criminal activity accompanying the tech-stock bubble that began deflating last April.
The violations of law will be the exceptions. They will only highlight the uglier truth. As commentator Michael Kinsley has pointed out in another context, the real scandal is often what's legal.
This time, countless investors lost vast amounts of money in technology investments. Yes, they were greedy. They bet stupidly, even blindly, as suckers tend to do when they join a stampeding herd.
So yes, to some degree, they conned themselves. But they had plenty of help.
A daisy chain of entrepreneurs, venture capitalists, Wall Street investment bankers and stock brokerages pulled off something unprecedented. They transferred almost all risk into the public markets.
The people with the least amount of information were sold the most speculative investments. The sellers were insiders who fully understood the reality.
In older days, venture capitalists took big risks. They'd invest in start-up companies, hoping to hit an occasional home run to make up for the losers. If a portfolio company did go public or get sold, their payback would be many times the original investment, because they'd have bought in at pennies per share.
In older days, investment banks looked carefully at companies before taking them into the public markets or selling follow-on offerings, asking about mundane things like reliable earnings. Equity analysts did serious homework on the companies they followed.
For about 18 months to two years, everything changed. The Internet mania swept away common sense and old-fashioned ethics.
At the heart of the mania, as always, were kernels of truth. Technology was plainly changing the economy. Early risk-takers had gotten incredibly rich, and so had some late-comers who had truly great new ideas or who bet on market momentum.
Investors wanted a piece of the action. The ones who hadn't joined the stampede began to feel like suckers. That was the most dangerous time.
I don't know if the venture capitalists and investment banks created the craze, but they definitely fueled it. Hype, not profits, took over. Analysts became little more than shills. No deal was too crazy to make. No company was too speculative to take public.
In a market like that, there was almost no risk for the early investors and investment banks. They could sell anything, and they did.
What this meant, though, was that public investors were now taking the kind of risks that venture capitalists had borne just a few years earlier. Yet the public investors were buying shares that were far more expensive than the VCs were ever willing to touch.
My own profession bears a share of responsibility for the debacle. Journalists served more as stenographers than skeptical observers while technology executives, public-relations people, market ``analysts'' and other self-serving participants in the con talked up the New Economy and insisted that some fundamental laws of economics had been repealed.
We celebrated the 21-year-old billionare of the week. We raved about companies with tiny revenues and no prospect of earnings as the harbinger of a new world, when the newly rediscovered reality was firmly rooted in old truths.
One headline last year asked, evidently with a straight face, ``Does P/E Matter Anymore?'' Think about that. This was asking if earnings mattered. Of course they do. Investors don't put money into enterprises unless they expect to make money at some point. Some companies get sold before they make a dime. Some investors sell their holdings to greater fools. Yet actual profits from running businesses do matter eventually, because they are the basis of business.
I don't doubt for a second that technology will ultimately lead to massive and, for the most part, positive changes in our economy and society. We're already feeling some of the beneficial impacts.
Nor do I doubt that technology-related investments are smart in the long run. What I don't know is whether the current crop of companies, with a few exceptions, will be the long-range survivors in a revolution that is just beginning.
Capitalism is all about risk and excess. People make money on new ideas, and others follow. Markets get saturated and business cycles turn down. People lose money. Just as a stopped clock is precisely accurate twice a day, markets hit equalibrium briefly on the way up and the way down, because investor sentiment is a blunt instrument. The overall trajectory trends up, but the market oscillates and always will.
The losers in the debacle of 2000 are part of the capitalist system. So are the winners, who made their money from greater fools.
In a world where shame still had meaning, the participants in that cynical gravy chain would contemplate the carnage they helped engineer. They might even hint at regret.
I'm not going to hold my breath. |
