3 of 3 people found the following review helpful
Douglas C. Childers
- Published on Amazon.com
I read "Dot.con" after reading an excerpt of it in Michael Lewis' "Panic". I was excited to get a comprehensive account of the internet stock speculative bubble and relate it to the current subprime housing mess. While I can't speak for some of the technical points that other reviewers have pointed out to be erroneous, it was interesting to read this account nearly 7 years after it was published.
John Cassidy points out numerous times throughout the book that the speculation of these internet stocks was perpetuated by Wall Street. Virtually every internet IPO was based on potential earnings and income growth. Therefore, no one had any idea on how to value the stocks because there were no earnings or even a consistent revenue stream to for that matter. However, Wall Street just started creating new valuation models based on number of web-page hits and current revenue and extrapolated out into the future assuming that web traffic would continue to increase exponentially, while costs would decrease due to these websites not incurring the typical costs that traditional firms were saddled with. While web traffic has continued to increase and more and more people are connected to the Internet than ever before, the costs of acquiring these customers, through significant price reductions and huge marketing budgets never waivered, bankrupting mostly all of these websites.
In addition to haphazardly marketing the IPOs for these websites, each investment bank on Wall Street and Silicon Valley were using their analysts to justify these IPO valuations. The research divisions within the investment banks were traditionally independent of the sales and brokerage division. During this era, the supposed "Chinese Wall" was torn down. What resulted was an environment where independent analysts were hyping the stocks the investment banks were marketing to their clients and ultimately, individual investors.
While Cassidy does place a significant amount of blame on Wall Street, he also implies that Alan Greenspan could have done much more by raising interest rates while the speculative bubble was forming. This would have slowed capital into the equity markets and potentially prevented the bubble from popping.
Looking at the parallels between the internet stock crash and the housing market crash is pretty remarkable. In each instance, individual investors are the ones who are suffering. During each IPO, the investment banks would sale the first offerings of their stocks to their preferred customers, typically institutional investors (mutual funds, pension funds, etc,). Through the marketing machine that hyped these investment vehicles, individual investors were eager to get their hands on these shares as they wanted to benefit from the coming technological age. Therefore, individual investors were not able to access shares until after the institutional investors sold theirs. For example, if Pets.com issued 5 million shares at $5 a piece, the institutional investors might get them at $5 a share, but as demand in the markets increased, they would then sale them at say, $10. Inevitably, once the markets realized the company had no real earnings potential, the stock would plummet and it would end up below the initial IPO. During that chain, the investment bank raked in their huge fees for the IPO, their best clients realized huge gains by being able to buy these stocks before the rest of the public and then, by the time the public had access to these stocks, they were overpriced but since everyone else was doing it, the public continued to snatch up any shares.
Compared to the housing mess, we had Wall Street peddling Residential Mortgage Backed Security (RMBS) bonds as safe investments. The demand for these investment vehicles increased, creating a situation where banks were focused on generating loans. Basic underwriting principles were ignored and housing prices continued to increase. Eventually the good times ended and when owners get in over their heads and foreclosures started increasing resulting in the crash of the housing market.
In both instances, critics have charged that Wall Street and the Federal Reserve, still chaired by Alan Greenspan, could have prevented this. As a free-market economist, I believe that, unfortunately, things like this can never be prevented and as we enter an age where globalization has intertwined the economies of nearly every nation, these panics an crashes will tend to be the norm. It was very ironic to read Cassidy's epilogue where the implication is that this might never happen again and it only took five years for the next speculative crash.
2 of 2 people found the following review helpful
Giuseppe A. Paleologo
- Published on Amazon.com
Dot.con is a book that reads like a long "New Yorker" article. I view this as a quality, given the subject matter. Despite the size of the ".com" bubble, its explanation is not as elusive as other speculative frenzies (e.g., 1929). The recent speculation is the outcome of "herd behavior" on a massive scale, favored by unique historical conditions, such as the development of a new technology, the liquidity excess in the american markets, and a favorable economic environment. There are plenty of quantitative models and historical studies of such behavior. Cassidy spells out this early (quoting in the process Charles Mackay's seminal treatise), and gets it out of the way. What makes the book interesting is the intricate relationship--and amplification of speculative behavior--among the actors of the bubble: investment banks, venture capitalists, the media, the Federal Bank, entrepreneurs, and finally the american public. Taken individually, the actions of each group may appear greedy, dishonest, stupid. Placed in the proper context however, the judgement is more nuanced. Cassidy shows how the skeptical VCs, financiers and journalists were repeatedly proven wrong in the early stages of the speculation and decreased in number, to the point of extinction. Nowhere is the pressure to imitate the crowds more evident than in Mary Meeker's case, the poster boy of Wall Street hype. Cassidy partially exculpates for her behavior, based on the environment in which she operated. But the examples in the book abound. Noone gets out scot-free, save one or two honest Wall Street stock strategists on the verge of retirement. Cassidy is relatively lenient toward the individual investor, the world of finance, and the entepreneurs: after all, these people had an incentive in feeding the bubble. The author uses his venom for the media and the fed. These are two actor whose role was to inform and vigilate, not to speculate; hence they were failing in their most important role. With all the qualifications of the case, Cassidy heavily criticizes Greenspan, and stigmatizes Wired, CNBC, and Time. His point is well taken, and I would recommend the book because it takes the time and effort to spell out the whys and hows.
A final remark: in my edition (2003, with a post-9/11 afterward) there were very few typos and glaring mistake. For example, Altair was named after a star mentioned in Star Trek, not Star Wars, as mentioned by a reviewer. The early history of the internet is sketchy, but appropriately succint, given that the topic has been eviscerated in thousands of articles and books. On the other side, the events between 1993 and 2001 are covered in detail.