Technology Bubble (1996-2000) vs. Financial Bubble (2003 - ?) (Part II)

Part II of the post...

 

Bubble Indicators

 

Internet Bubble	Financial Bubble
Outrageous IPO deals	Outrageous Private Equity Deals
People starting Dot-Coms in their garage	People starting Hedge Funds in their garage
Mary Meeker, Jim Cramer, et al.	Mary Meeker, Jim Cramer, et al.
Silicon Valley the hotbed of Young Techies	New York City the hotbed of Young Financial Pro's
Day Trading	Day Trading
Mutual Fund ads on CNBC	Mutual Fund ads on CNBC
HBS grads go to "dot-com's	HBS grads go to PE & Hedge Funds
Corporate Chicanery	Buybacks, Options backdating
Companies overleveraged	Consumers overleveraged

 

Scandals

The major scandals to come out of the Tech Bubble and that time period were Worldcom, Enron, and the "Chinese Wall" scandals involving the investment banks and their research analysts.  Since both Worldcom and Enron have been discussed to death, I will touch briefly on the "Chinese Wall".  Back in the 1990's (and probably still today), Investment Banks would pressure their research analysts to write up good research on a company in order to win banking business.  This artificially pumped up stocks to the benefits of the executives and the bank and to the chagrin of the shareholders. 

Although no major scandals have come out yet.  I believe they will come from this area:

1. Options Backdating – the only reason why it wouldn't is that everyone was involved and the SEC isn't going to take down the entire economy.
2. Private Equity – it is my suspicion (somewhat unwarranted), that there is something sinister behind the companies that they scoop up.  Historically, PE has had government/political ties and that means are subject to the influences of politics and power.  The recent purchase of Sallie Mae amid government investigations and a looming credit crunch struck me the wrong way.  By taking companies private that may have violated the law or engaged in shady dealings – they have erased the possible Enron's, and Worldcom's of this market.  It also takes away the deterrent of wrongdoing. 
3. A major lender will have a major scandal – As pressure mounts with indebted baby-boomers approaching retirement, Credit card companies and lending institutions will come under much greater scrutiny.  Although I may not believe in the prosecution, if you have an angry voter-base you are very likely to throw someone to the wolves and I think these companies have enough dirt that will stick.  Although their lobbies are strong, power is stronger. 
4. Federal Bailout of a Hedge Fund – it's going to happen again – just a matter of when. 
5. Class Action Pension lawsuit against Major Banks and Hedge Funds.  Show me a major blow up and I will show you a major court case. 

 

 

Important Major Difference

The important major difference is that in the Financial Bubble, the very industry that has created and maintains the bubble is the gatekeeper.  The industry has great power – with many former Wall-Streeters in high government positions.  The wealthy and powerful have money tied up in the bubble and therefore much more willing not to see all hell break loose.  This should not be underestimated.  Wall Street – at its foundation – was largely shielded from the effects of the Tech Collapse.  It will not be the same this time.  With the U.S. losing its grip as the center of Global Finance, the stakes are high will be defended aggressively.   I hope the globalization advocates are correct but for some reason this scenario seems all too familiar.