One has to have some sympathy for Wall Street’s analysts and traders during the dot-com boom. For several years in the “New Economy,” the financial laws of gravity were seemingly suspended — stocks went up and never came down. Within this context, it seemed folly to be wise: The reputation of investing legend Warren Buffet, with his quaint buy-and-hold strategy, suffered; the memories of the few people with personal experiences of the great booms and busts of the past were devalued. A diversified portfolio was for those who didn’t “get it.” Investment analysts did their best to rationalize the irrational and live with their consciences, but by the time the crash came, the stars were too committed to a never-ending boom to recant. Mary Meeker, the only one of them to retain her job, had always urged investor caution and, according to Mr. Gasparino, kept Morgan Stanley out of hundreds of marginal initial public offerings. Jack Grubman and Henry Blodget, on the other hand, became full-blown cheerleaders for deals, and indulged in a form of Orwellian doublethink, praising shaky startups on television and in the financial press, while denigrating them in private e-mails to their colleagues. They paid for their hypocrisy when the media that had built them up tore them down.
Perhaps the most interesting feature of the dot-com debacle that Mr. Gasparino examines is that it happened in plain view and at the pace of a slow-motion train wreck. The dearth of “sell” ratings on stocks and the stories of the “spinning” of IPO shares showed that the so-called Chinese Wall separating investment banking and stock brokerage had been crumbling for years, yet the regulators did very little to bolster it. Blood on the Street is scathing about the inadequacy of the role performed by Mr. Levitt, who headed the SEC from 1993 to 2001. No doubt Mr. Levitt was hamstrung by the pro-business Congress that was elected in 2000. But his failure to act prior to that probably owes more to the challenge of complex problems and the equivocal ways in which they unfold. As a complex problem emerges, there are many straws in the wind, but their import is usually unclear. Without outstanding leadership at several levels — regulatory, legislative, executive — it is usually only in hindsight, after the crisis, that it is possible to build an unassailable case for action.
History, of course, provides the highest level of context. In Ponzi’s Scheme, Mitchell Zuckoff, a professor of journalism at Boston University, recounts the little-known tale of the king of all get-rich-quick schemers. It is an engagingly written book that both adds perspective to the recent past and, unfortunately, probably foretells the future as well. Before the Great Crash of 1929 and the formation of the Securities and Exchange Commission to regulate securities markets, the most famous “SEC” was Charles Ponzi’s Securities Exchange Company. Like Enron, Ponzi’s company had an arcane but superficially plausible business model: foreign exchange arbitrage in international reply coupons (negotiable instruments sold at the time by post offices in many countries, which allowed letter writers to send coupons to pay for the stamps on reply letters). After World War I, the official exchange rates for these coupons no longer reflected market rates, and profits could be made, at least in theory, by buying them with a cheap currency and redeeming them in a stronger one.
On paper, the scheme could be made to work, and there was nothing illegal about it. This later slowed down the investigators looking into the case, who often came from competing jurisdictions and faced other problems. As a result, the scheme grew from nothing to a full-blown financial crisis in less than eight months. The charming, affable Ponzi tried to make the arbitrage business work in practice (it never did), and he gave his early investors a 50 percent return on their investment in 45 days by paying them with money from new investors. This turned out to be easy: As testimonials from early investors became public, he was flooded with funds, pulling in more than $1 million a week as the Boston public became gripped by money madness.