The Internet Bust:
A Love Story
Dot.Con:
The Greatest Story Ever Sold
It's hard to imagine that anyone in the rarefied upper echelons of American capital formation would see any cause for cheer in the ever-metastasizing Enron scandal. But isn't it at least possible that some of the erstwhile heroes of the dot-com age, who last summer were being made over into a gang of whipping boys and rogues, are secretly breathing a sigh of relief? Oh, sure, there's still grumbling about Wall Street analysts who hyped ill-fated ventures from Pets.com to, well, Enron. But none of the failed dot-commers has had to take out a series of defensive full-page ads in major newspapers in a desperate attempt to salvage its reputation, as the pilloried accounting firm Arthur Andersen has done.
There's very little mention of creative accounting in Dot.con, John Cassidy's recap of the Internet-stock boom and bust. And no wonder: Some firms may have used numbers to stretch the truth, but there was not much need for earnings-boosting trickery when the markets were willing to award multibillion-dollar valuations to enterprises that made no claims to any earnings at all.
These days, separated from the dot-bust not only by Enron but also by the tragedy of Sept. 11, it's tempting to simply wave away all thoughts of the Internet fiasco as a kind of foolish and vaguely embarrassing tryst. That would be a mistake. The story that Cassidy, a New Yorker writer, tells in Dot.con is one that's very much worth remembering.
There are two main strands to it. One is the growth of the Internet and related technologies from edgy obscurity into mainstream American life. The other is the development of mass participation in the stock markets on an unprecedented scale — "popular capitalism," as Cassidy calls it. His most interesting observation here is that this was largely an accident, coming about chiefly because a benefits consultant in Pennsylvania noticed, in 1980, that clause 401(k) of the Tax Reform Act of 1978 could be used to create a new kind of retirement savings plan. The rise of 401(k) plans stoked the mutual fund business. By the end of 2000, stock funds held $4 trillion.
These two narratives came together in the initial public offering of Netscape Communications on Aug. 9, 1995. Netscape's browser was a breakthrough in popularizing the World Wide Web, but the offering was unusual because the firm had no profits. The stock went out at $28 a share and closed that day at more than $58. From there, the utopianism of Net culture, the ingrained boosterism of Wall Street and the wishful thinking of millions of investors all fed on each other until a phenomenon became a simple frenzy. Soon venture capitalists and entrepreneurs, Cassidy says, stopped "using the stock market to build companies" and were instead "using companies to create stocks." The Nasdaq, where many Internet and other tech issues trade, soared from 750 at the beginning of 1995 to more than 5,000 in March 2000, covering the last 2,000 points or so in just four months. That was the peak. Today the index stands at around 1,900 (of course that's still more than double what it was was seven years ago).
If none of this sounds particularly new, that's because the book, engagingly written as it is, contains little in the way of fresh revelation or against-the-grain argument; Dot.con doesn't so much tell as remind. And compared with some of the artful and human stories that have been told about this period — Michael Lewis's The New New Thing, Po Bronson's The Nudist on the Late Shift, the documentary Startup.com — it's a bit bloodless. On the other hand, Dot.con marshals a great range of facts (with a few minor gaffes, such as referring to iVillage's Candice Carpenter as Claudia and to Microsoft's co-founder as Paul Allaire, instead of Allen) into a clear-eyed and uncluttered chronology, and there's certainly value in that.
As its title suggests, Dot.con does make some effort to fix blame. Stock analysts are criticized, and one interesting subplot involves Mary Meeker, the Morgan Stanley analyst, as she seemed to lower her standards over the course of the boom. The financial news media also get knocked around, particularly CNBC. And Cassidy raps the "greed and gullibility" of the American public. Perhaps the most surprising villain is Alan Greenspan, accused here of failing to take action (such as raising the Fed funds rate) that might have stopped the madness earlier. "If anybody had the legal, moral and intellectual authority to prick the bubble, it was Alan Greenspan, but he refused to exercise this power until too late," Cassidy contends. Perhaps.
He wraps up his story with Americans, post-Sept. 11, switching off CNBC and focusing on "things in life apart from the stock market." But now, of course, Americans are riveted by business stories again — only this time it's earnings restatements, not rocket IPOs, that dominate the news. The other day, writing about Enron in the context of the Internet bust, Steve Forbes suggested that speculative bubbles are a bit like love, since both require "a willing suspension of disbelief." Whatever this might say about Forbes's capacity for romance, it's actually not a bad way to think about the relationship between investors and the markets in recent years: What's been really surprising is that Americans have not abandoned stocks in the numbers you might expect. Perhaps investors remain in a sort of denial phase, hoping Mr. Market can be made to change enough to rekindle the spark.
We all know how hard it is to change a romantic partner. But even after so much heartbreak, plenty of investors still seem unwilling to break things off — for the moment, at least. .
A similar version of this review appeared in the March 2, 2002 edition of the The Washington Post.
