As we approach the fifth anniversary of the bursting of the technology bubble, it is worth reflecting on how much the markets have changed. Five years ago, internet stocks were booming, pushed up by the high ratings of securities analysts. The banks that employed these analysts were doing record business with the very same companies. Yahoo was the hot stock, and investors believed internet search engines would generate spectacular profits from advertising alone.
Today, internet company stocks are surging again, thanks to high analyst ratings and a renewed faith in profits from advertising. Banking deals with these companies are up, too. Yahoo is hot again, up almost 70 per cent during the past year. Just last month, securities analysts at both Citigroup and Merrill Lynch upgraded Yahoo - only one out of 31 analysts covering the company now rates it a "sell". Google is the latest internet darling, with glowing analyst coverage and bankers eager for business. Goldman Sachs rates Google "outperform" and just one analyst calls the stock a "sell". The newly pumped-up Google shares are worth nearly as much as those of Merrill or Goldman. Shares of eBay, the online auctioneer, are worth still more. In other words, nothing has changed.
The timing could not be better for Blood on the Street, the recent book by Charles Gasparino, former Wall Street Journal reporter who covered the misdoings of securities analysts during the late 1990s. Gasparino, now at Newsweek magazine, mixes sordid stories of the analysts' depraved lives with gory, if familiar, details of the financial scandals. The material in the book is several years old but it could just as easily be from today. Indeed, Gasparino recently wrote an article challenging the objectivity of analysts, and reporting that they continue to be paid from a pool of investment banking fees.
It is particularly ironic to see Citigroup and Merrill once again upgrading technology stocks such as Yahoo. Just five years ago, those banks employed Jack Grubman and Henry Blodget, respectively, the bad boys of technology investing in the late 1990s. Mr Grubman was the $20m-a-year Citigroup analyst who infamously touted WorldCom and Global Crossing, and upgraded AT&T after his boss, Sandy Weill, agreed to pay $1m to push the admission of Mr Grubman's twins to the 92nd Street Y nursery. Mr Blodget was the boy wonder at Merrill who predicted Amazon shares would climb to $400 and who wrote private e-mails that disparaged, in scatological terms, the companies to which he nevertheless gave high public ratings.
For anyone who missed the stringing up of these two men, Gasparino has the goods. The assault on Mr Grubman is particularly vicious. There is more information about his male organ and its nicknames than anyone needs to know, and some details of cocaine use and e-mail sex are gratuitous. Mr Grubman is forever tarnished, not by this prurient detail (that would make him popular on Wall Street), but rather by evidence that he and others received hundreds of millions of dollars in pay and perquisites in exchange for high ratings on stocks. As this book makes clear, the credit for uncovering this scandal goes to Eliot Spitzer, New York attorney-general, and his staff, who pored over the damning e-mail evidence and built a bullet-proof case against the banks. Gasparino casts Mr Spitzer as the hero, a sharp contrast to Arthur Levitt, the chairman of the Securities and Exchange Commission during the 1990s bull market, who he says was oblivious to the scandals that unfolded on his watch. As the book concludes: "It's hard to argue with Spitzer's results."
Gasparino fells many trees but it is another just-published book that sees the forest. Icarus in the Boardroom does not have any e-mail sex but it does fill some of the gaps in the more titillating versions of the scandal. In Icarus, David Skeel, professor of law at the University of Pennsylvania, puts the analysts' story in context, as part of a wave of innovation and risk-taking. His thesis, based on an analysis of scandals dating from the South Sea Bubble, is that senior executives have been like Icarus, flying too close to the sun. As financial markets and institutions became more complex and control and ownership of companies moved further apart, corporate executives, infected by hubris, exploited this complexity for personal gain. Alan Greenspan, chairman of the US Federal Reserve, put it best in July 2002: "It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed have grown so enormously."
In Skeel's account, Mr Grubman and Mr Blodget were two pawns in a game. Mr Grubman would not have upgraded AT&T if Mr Weill, the head of Citigroup and simultaneously a member of AT&T's board, had not pressed him to take a "fresh look". Mr Blodget would not have touted awful internet stocks if his bosses at Merrill had not won such lucrative fees because of high ratings. The deeper problem, Skeel says, is that the men at the top were entangled in a "Gordian knot" of conflicts.
Gasparino's book suggests that Mr Grubman understood his place among these conflicts. He admitted the higher rating had little to do with AT&T, its wireless spin-off or even the markets in general. "I needed to get my kids into the 92nd Street Y," he said. It makes one wonder what might be motivating today's analysts to upgrade technology stocks. Perhaps it is 1999 again.
The writer is a professor of law at the University of San Diego and author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets