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It's Time to Investigate Those Who Inflated the Bubble

By Ben Stein Special to 09/05/2001 11:46 AM EDT

"I sit in one of the dives On Fifty-Second Street Uncertain and afraid As the clever hopes expire Of a low dishonest decade: Waves of anger and fear Circulate over the bright And darkened lands of the earth..."

These great lines are from the poem, September 1, 1939, by W. H. Auden -- his ruminations as World War II began with the Nazi invasion of Poland.

I came upon them totally by chance as I was taking time from studying the stock and bond markets. They are in a must-have compendium called The Faber Book of English History in Verse, edited by Kenneth Baker. Although the words refer to another time, they apply with blazing ferocity to the stock market crash on the Nasdaq and the charlatanism that led up to it. Not so much "a low dishonest decade," but a very, very low dishonest 1998, 1999 and early 2000.

Clearly, the worst stock market debacle in the history of postwar America did not just happen by chance or by the greed of the masses, but it happened in large part because of conspiracy, incredible ignorance and greed in high places, and a federal regulatory failure of unique proportions.

Let's start with the ignorance and the greed, a combustible mixture. The stock market is supposed to be a way of buying the earnings of America's public companies. Thus, stocks with no earnings -- and no prospects of earnings -- should either not be on the exchange at all, or be shunned as unclean.

Instead, completely worthless companies that existed as no more than dreams and fantasies were brought to market and touted as multi-billion-dollar entities by people and investment houses whose job was to defend against exactly such viruses. This sucked in multitudes of little guys, making the bubble look like a sure thing, and then even cautious people came into the market.

Among the worst offenders were the managers of mutual funds. Supposed to look for value and intrinsic merit, enjoined by law and custom to be prudent with their investors' funds, they instead joined wildly in the raillery, got their own rewards for buying the garbage and then ran ads about their great success to suck in still more money from the unwary.

None of this happened by accident. Some people got fantastically rich from the fraud, and people do not usually get rich from fraud by accident.

At the same time, the insiders were also amazingly ignorant of the ways of markets and of simple laws of gravity. When I appeared on many panels with Wall Street movers and shakers in the past five years, I was appalled at what they did not know, and far worse, at what they thought they knew that was not so. They really thought an Internet portal like Yahoo! (YHOO:Nasdaq - news - commentary) should be priced at thousands of times earnings -- even as it was being pushed into obscurity by AOL (AOL:NYSE - news - commentary). They really thought that AT&T (T:NYSE - news - commentary) did not sell itself into oblivion by buying cable systems at three or four times their value with the pipe dream of using them for local telephony -- even as the whole business became a commodity enterprise.

Powerful Wall Street players really did believe that there was a "new paradigm" in which earnings would grow 10 times as fast as national income forever. They not only did not know history, they did not know simple arithmetic. And they pretended that they knew more than the old hands, when they knew less.

Warren Buffett said a few years ago that he would like to give a business school exam asking students to value an Internet company. Anyone who gave an answer other than "I don't know" would fail.

Most of the people one saw daily on CNBC touting worthless Internet junk would have failed miserably -- and did. They took the little guy's money with them ... but the Wall Street players are still rich, and some got rich exactly from touting garbage, from stock options, cheap stock, or other conflict of interest payments.

While all this was happening, where was the Securities and Exchange Commission? The SEC, with unequivocal broad oversight powers over brokers and investment bankers to stop any scheme or artifice to defraud, to supervise illegal payoffs and bar them, to make sure all lawful disclosures are made, slept soundly.

There is much that bears SEC scrutiny: failure to disclose improper connections between issuers and investment banks, failure to disclose payments to analysts, failure to disclose specific as opposed to boilerplate risks, routine placement of the interests of the fiduciary -- the bank or broker -- ahead of the interests of the customer.

Where is Congress? Where are any friends of the little guy? Where is Congressman John Dingell? Where is Congressman Billy Tauzin? Where is Congressman Edward Markey?

One thing we did learn that was positive: The ordinary investor, by reading and studying and applying basic rules of common sense, can tremendously outperform the "geniuses" of the mutual funds. (My sainted parents were all in blue-chips and bonds and just laughed at the bubble. Their son was not as smart.)

The Pecora Commission was set up to study wrongdoing that led to the Crash of 1929-33. Why not another one right now? Why not one to write a book about how this debacle happened, with subpoena power over witnesses?

What happened did not happen by accident, and a full accounting is owed those who were fleeced.

-- help (, September 06, 2001


Someday a full accounting must be made for this massive fraud on the American people. The little 401 (k) guy is going to have to pay for this fraud for many years to come.

-- Big Cheese (, September 07, 2001.

"I was appalled at what they did not know, and far worse, at what they thought they knew that was not so."

Yep. As my Old Uncle Ray usta say- "It ain't so much what ya don't know that gets ya in trouble, so much as what ya know for damn sure that ain't so."

-- Sam (, September 07, 2001.

I suggest the author should point the finger at his boss - the unbearable, despicable laughable cretin - James Cramer.

-- number six (!@!.com), September 09, 2001.

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