"Buy, Lie and Sell High"

How investment banks sold the American economy down the river.

By Paul Roberts

Aug 6, 2002 | The U.S. markets' precipitous decline over the past two years has erased trillions of dollars from the country's economy since the heady peak of spring 2000, when the NASDAQ hovered at the 5,000 mark, the Dow was flirting with 12,000, and the advantages of a Porsche Boxster and Aeron chair seemed within reach for even the humblest of investors.

Stories of scandal and loss -- big and small, international and local -- have filled the business pages ever since. But lost in the shuffle of the headlines made by the likes of Enron, WorldCom and Global Crossing was an earlier wave of failures, the once promising online startups that crashed to earth with the bursting of the Internet bubble.

Public attention has been fixated on the sorry images of one CEO and CFO after another making a solemn pilgrimage to Congress to account for the loss of billions of dollars in shareholder equity in huge publicly traded companies. But precious little has been offered to explain the social and economic forces that set the stage for their collapse.

In his new book," Buy, Lie and Sell High: How Investors Lost Out on Enron and the Internet Bubble," D. Quinn Mills sets out to analyze what happened. A professor of business administration at the Harvard Business School and the author of a number of books on the high-tech industry, Mills argues that the bubble in Internet and technology-related stocks that developed in the U.S. and international stock markets during the late 1990s was evidence, not of the "irrational exuberance" of ordinary investors, but of a complete ethical collapse on the part of major investment banks, brokerage houses and even the Federal Reserve.

Instead of serving as gatekeepers to the financial markets and shepherds for young companies, as they had traditionally done, Mills says, investment banks such as Merrill Lynch and Salomon Brothers rushed scores of fledgling technology and Internet-based commerce companies to market knowing full well that their business models were suspect and their prospects for success dim.

The reason, he says, was simple: Investment banks collected substantial fees for taking companies public -- more than $600 million in fees for companies whose stocks are now trading below $1, according to one report. Even more, the huge opening-day "pops" in share value that accompanied so many dot-com IPOs became a commodity in themselves, which investment banks could mete out to their clients, business partners and other privileged insiders for a quick return. The net effect, Mills says, was a massive redistribution of wealth from the hands of the many ordinary -- or "retail" investors -- to the pockets of financial insiders, venture capitalists and the moneyed elite.

Mills spoke to Salon by phone from Maine:

You take the title of your book from a quote that the SEC chairman used to describe Jonathan Lebed, the New Jersey teenager who was accused of posting erroneous information on the Internet to manipulate stock prices. Is his story emblematic of the ills of the Internet mania?

Well, yes, I thought it was emblematic because in a certain sense, that's what very sophisticated financial institutions were doing. They were getting control of stock in any of a number of ways, touting it -- saying it was great -- selling it to the public and walking away with a bundle. The problem is what they were saying about the companies was not true.

A point you call attention to throughout this book was the willingness of otherwise sophisticated business people, investors and bankers to ignore or discount established business practice and rules of thumb. With eToys.com, for example, you point out that it didn't take much to see that the company would face serious competition from entrenched brick-and-mortar companies like Toys 'R' Us -- competition that would make their sales goals ($900 million in sales before eToys could turn a profit) difficult to attain. How do you account for this?

I think it was self-interest. The investment bankers made their money, not on the stock, but on the fees they made in taking the companies public. So they were not long-term investors. And I think they ceased to care whether or not the companies had a real future.

As for the venture [capitalists], they were prepared to try to get out early. They saw an opportunity to build a company and then to sell it quickly and take their profits and run.

What happened was a complete collapse -- almost an ethical collapse -- of their feeling of responsibility toward shareholders, the public who would buy shares in the companies.

Now some of them will say that they believed in the companies -- that they believed in eToys, that they thought it could be successful, that they liked its leadership. But if you look at the way that they behaved -- in the [case of eToys] and of the Internet bubble generally -- it was quite different. If they really had confidence in these companies, it wasn't based on their past experience, because in the past they hadn't done things in the same way. They hadn't looked for the same kind of leadership. They hadn't looked for the same kinds of business plans or business models. They hadn't taken the same time frame.

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