Thursday, September 25, 2008

A Difference Between the Dot-Com Bust and the Real Estate Bust

During the dot-com bust, the bag holders were, for the most part, individual retail investors -- average Americans, who bid up the price of Internet stock IPOs. Investment banks collected huge fees on those IPOs, regardless of how the companies they brought public performed. In the wake of the real estate bust and the related credit crunch, the biggest bag holders have been on Wall Street: Lehman and Bear Stearns -- two firms that survived the Great Depression intact -- gone, nearly all of their respective CEOs equity stakes wiped out; the country's largest broker/dealer, Merrill Lynch, forced into a sale to Bank of America; etc.

That's something I've thought about as I watched Congressman after Congressman rail against Wall Street in yesterday's hearings while lamenting the plight of his average American constituents.


Anonymous said...

I agree with you on the lamenting but many American's have been hurt... many more people than work on Wall Street.

The IB fall-out is good. Not sure if you agree or have read Einhorn but IB had a serious objective and risk creap--was the business getting worse or was it just a positive feedback loop? What was financial services as a % of S&P 500 in Jan 2007?

DaveinHackensack said...

Clearly, the investment banks got too leveraged and dropped the ball on their risk management. But Wall Street seems to have suffered most of the collateral damage so far as well. Not that a winnowing wasn't in order, but the Street is really taking it on the chin this time, unlike in the last bust.

Anonymous said...

Another difference between the dotcom and real estate busts is that the dotcom bust left some tangible assets in its wake. Thousands of miles of high-speed networks, huge server farms, lots of new online businesses and ideas that survive to this day.

What do we have to show for the RE bust? New financial instruments that even the firms that sold them don't really understand.

You can cry me a river for the folks on Wall Street. They've been earning billions in bonuses every year for a decade as they peddled their shady wares to anyone who would buy. You might note that there are still healthy firms around (Wells Fargo, Barclay's) ready to snatch up the remains of these fools.

anon 9/29 said...

Incidentally Wells Fargo announced this morning that they are usurping Citibank and buying up Wachovia with NO federal assistance.