Agree. Also, the Casino is heavily tilted toward the house.
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To view the entire article, go to
http://www.washingtonpost.com/wp-dyn/articles/A6788-2001Mar14.html
Why Market Insiders Don't Feel Your Pain
Last March the tech-heavy Nasdaq index reached a staggering 5048, prompting
venture capitalist John Doerr to claim that we were witnessing "the greatest
ever legal creation of wealth in the history of the world."
This week, the Nasdaq fell below 2000. Someone is out a lot of money, and
that someone is primarily the small retail investor. Why? Because the
insiders -- entrepreneurs, venture capital firms, investment banks and large
institutional investors -- pulled out their capital long before the fall,
leaving mom and pop investors holding the bag.
Instead of the greatest ever legal creation of wealth, the high-tech
financial bubble represented the greatest ever legal <em>transfer</em> of
wealth -- from retail investors to insiders. For example, between November
1998 and July 2000, Goldman Sachs, Morgan Stanley Dean Witter and Credit
Suisse First Boston each pocketed more than $500 million in underwriting
fees for Internet companies. And over the past two years, technolog!
y underwriting as a whole brought in close to $1 billion for each bank.
According to Thomson Financial Securities Data, this was the most lucrative
streak investment banks have ever seen in a single sector.
Some insiders would argue that they too have been hurt by the stock
market's decline. And in fairness, it should be noted that not every insider
pulled out early. Some held their stock and took a hit. But the fact is not
all stock losses are the same, because the insiders get their stock for
pennies a share, if that. Thus, while an insider may have recently seen his
portfolio slip from $50 million to $5 million, he probably paid only
$100,000 for his stock to begin with, so he's still ahead in terms of real
money. But when individual investors see their stock portfolios plummet,
it's real.
The truth is, little investors never stood a chance, because they simply
don't have the same access, both to key information and to early deals, as
big investors. One reason is the "q!
uiet period" mandated by the Securities and Exchange Commission, which
requires a startup company to shun any publicity regarding its finances for
at least three months before its initial public offering. The law was
intended to keep a company from hyping its stock, but in reality its main
effect is to keep small investors in the dark.
Big institutional investors such as Fidelity and Vanguard are never in the
dark. They're treated to what's known as a "road show" just days before an
IPO. In this private meeting with company executives, institutional
investors are updated on the startup's financial situation. Thus the big
investors know if a stock has recently become more risky and can pass on it.
Or they may decide to buy it anyway, knowing they can resell the stock on
the first day of trading before any bad news about the company is reported.
This practice, known as "flipping," became common in an era when Internet
stocks were routinely tripling in value on their first day !
of trading.
Institutional investors weren't the only ones flipping stock during the hot
market. Individual insiders did it too. During the Nasdaq bubble, investment
banks would routinely give hot new IPO stocks -- free -- to corporate
executives, venture capitalists and other decision-makers sitting on the
boards of companies whose business the banks wanted. These privileged
decision-makers would then flip their shares on the first day of the IPO for
quick profits.
And while the investment banks were giving out free stock to their favored
clients, they were also giving out bad advice to their mom and pop
customers. In a recent study of high-tech stocks, Roni Michaely of Cornell
University and Kent Womack of Dartmouth College found that investment banks
rarely downgrade a company's stock to a "sell" rating if they have a
business relationship with the company. "There is a bias in brokers'
recommendations when they have an underwriting affiliation with a company,"
says Micha!
ely. "But the public doesn't recognize it." In fact, during the Internet
bubble, it wasn't unheard of for a bank to issue a "buy" recommendation on a
stock that the bank's own fund managers were betting would drop.
But despite these shenanigans, the savvy retail investor could at least
take comfort in Rule 144, the SEC regulation that bars a company's owners
from selling their stock for 180 days after an IPO. (This type of stock is
sometimes referred to as "locked stock.") So if the stock did tank three
months after it was issued, at least the small investor could find solace in
the fact that the entrepreneur and his venture capital backers had taken a
loss on their stock as well.
Or did they?
Actually, during the high-flying days of the tech bubble, few insiders were
required to take risks. The investment banks devised a new financial
service: They would promise to buy a venture capitalist's or tech
executive's locked stock as soon as the 180 days were up -- but at the !
stock's higher early issue price. This special service for favored customers
didn't cost the banks a thing, since they would then use a combination of
sophisticated financial instruments to "short" the stock. That is, the banks
would make money if the stock dropped in value, which it almost always
eventually did.
The technology stock bubble is already being compared to previous financial
manias: Dutch tulips in the 1600s, U.S. railroads in the late 1800s, etc.
But what sets this most recent mania apart is its Ponzi scheme quality.
Never before has so much wealth been transferred from one group of people to
another in such a short time. Maybe if the Securities and Exchange
Commission steps in to restore fairness it never will again.
<em>Michael C. Perkins is a founding editor of Red Herring magazine and
co-author of "The Internet Bubble." He and Celia Nunez are authors of "A
Cool Billion," a novel about Silicon Valley.</em>
-----Original Message-----
From: Timework Web [mailto:[EMAIL PROTECTED]]
Sent: March 16, 2001 9:49 AM
To: Cordell, Arthur: ECOM
Cc: [EMAIL PROTECTED]
Subject: Re: FW: Capitalism's Casino (the stock market) - The Guardian
Except that calling it a "casino" is too kind by far. In the summer
of 1998, when the "Asian flu" was hitting the markets hard, a number of
prominent market analysts pointed to the huge amount of new money flowing
into the market through retirement accounts. They concluded that the money
provided a bulwark against a market catastrophe -- "it has to go
somewhere."
At that point I downloaded some demographic breakdowns of the U.S. labour
force and some historical profiles of participation rates by age and
loaded them into a spreadsheet program to project when the inflow could be
expected to peak. The answer was right about now. What this means is that,
potentially at least, money is still flowing in to buy stocks but not at
an increasing rate anymore. The rate of inflow may even be declining
(leaving aside all subjective decisions about whether to "invest" it in
stocks, municipal bonds or pork bellies).
A ponzi scheme requires an increasing inflow of new money to keep going.
Tom Walker
(604) 947-2213
