By Peter Elstrom
The Greatest Story Ever Sold
By John Cassidy
HarperCollins -- 372pp -- $25.95
When I started John Cassidy's new book, dot.con, I was startled by the amount of material pulled from other sources. After reading one good anecdote about futurist George Gilder, I noticed a nearby footnote, flipped to the back, and found that the story came from a Forbes article. A wry Netscape tale led me again to the back pages, where I found it was from a book on Netscape published several years ago. And good personal detail on AOL Time Warner (AOL ) Chairman Stephen M. Case? From none other than BusinessWeek. Clip job, I thought!
But soldier on, dear readers. Cassidy, a staff writer at The New Yorker, does have much to offer in this chronicle of the Internet's financial rise and fall. Although sections on individual companies lean heavily on other writers' work, there's plenty of Cassidy's own reporting, analysis, and insight throughout. He really hits his stride when he focuses on the economy, the Federal Reserve, and the psychology of manias.
No question, Cassidy has a rich and fascinating story to tell. As he explains, the '90s stock boom was about more than day traders and computer-science graduates trying to get rich. It also was about "a lone superpower that believed it had discovered the secret of eternal prosperity. It was about a group of pundits promoting the next `big thing.' It was about Wall Street bankers eager to cash in on an unprecedented source of revenues." Above all, he says it was about "ordinary Americans, enticed by the prospect of instant wealth, parting with their hard-earned currency for worthless pieces of paper. In short, the Internet boom and bust was about America--how it works and what it thought of itself in that short interregnum between the end of the Cold War and September 2001."
dot.con excels at providing insight into events that, in retrospect, seem inexplicable. Why, for example, did professional money managers pour funds into the stocks of Internet companies that had no profits and no prospects? Maybe some of the money managers were dim, but many, perhaps most, knew that dot-com stocks were wildly overvalued. The answer, Cassidy suggests, is that such pros have little choice but to follow the herd. They're judged on how well they perform against benchmarks, such as the Standard & Poor's 500-stock index. Stick close to the index, and your job is safe. Make a contrarian bet that turns out to be wrong, and you're toast.
One telling example is the story of Jeffrey Vinik, manager of Fidelity's Magellan Fund, the biggest mutual fund in the country. In early 1996, after a big bet on technology paid off, Vinik grew concerned about high valuations. He then moved some of Magellan's money into bonds. His performance suffered, compared with that of his peers, and, by May, he had left Fidelity to run his own money-management firm. Although Vinik said he had not been fired, Cassidy notes that other fund managers drew a lesson from Vinik's experience: "taking money out of the stock market could be a career-ending mistake."
Cassidy also does an excellent job of sketching a nuanced picture of investment banks. For example, Morgan Stanley Dean Witter & Co. (MWD ) has been vilified for analyst Mary Meeker's indiscriminate hyping of Net stocks. Cassidy points out, however, that investment banks are hardly monolithic. At Morgan Stanley, Barton Biggs, chief global investment strategist, and Byron Wien, ex-chief investment strategist, were relentlessly bearish in the late '90s. Investors could have read a "doom-laden essay from Biggs" in Morgan Stanley newsletters, right alongside Meeker's breathless "buy" recommendations.
What's bound to be controversial is the blame Cassidy lays at the doorstep of Fed chief Alan Greenspan. The author suggests that Greenspan made two big mistakes: not raising interest rates soon enough to prick the stock market bubble in 1998 or 1999, and not lowering them soon enough after the market cracked in early 2000. In August and September, 1998, the market wobbled under the twin pressures of the Long-Term Capital Management debacle and Russia's default on some of its debt. In response, Cassidy writes, Greenspan cut interest rates on Sept. 29 and then again on Oct. 15. "His actions added to the growing belief that the Fed would always be there to bail out investors if anything went wrong, and this made investors even more willing to take risks," further inflating the Internet bubble, says Cassidy.
Then in May, 2000, after the Nasdaq fell 30% from its March peak, the Fed hiked rates for the third time that year. "Greenspan and his colleagues seemed to be following the disastrous precedent of 1929, when their predecessors maintained a tight policy following the stock market's collapse. Greenspan was well aware of the Fed's errors following the Great Crash, but on this occasion he didn't think there was any danger of an economic slump." Less than a year later, recession had set in.
Pointing the finger at Greenspan seems too simplistic. There are, after all, lots of other villains to choose from, and some--notably investment banks and venture capitalists--made billions from selling stock in now-worthless Net companies to the public. But this is the real value of Cassidy's book. In the sections on the economy and the Fed, he brings his own expertise to bear and offers up fascinating, if controversial, interpretations. Agree or disagree, you haven't read it from anyone else.
Elstrom writes about technology and telecom.