Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble

by Mills, D. Quinn

• ISBN13: 9780130091130
• ISBN10: 0130091138
• Format: Hardcover
• Copyright: 2002-01-01
• Publisher: Financial Times Prentice Hall

Summary

Why did the Internet and Enron stock collapses really happen? Was it arrogance? Greed? The "madness of crowds"? Just plain bad luck? Or something else entirely? In Buy, Lie, and Sell High, Harvard Business School Professor D. Quinn Mills offers the first systematic analysis of both the Internet stock bubble and the Enron scandal. Drawing upon new research -- including an extensive review of the latest lawsuits and securities documents -- Mills uncovers both systemic causes and outrageous misbehavior. He demonstrates how each link in the "financial value chain," from venture funds to auditors and regulators, not only failed to protect small investors, but also actively contributed to their losses. Mills demonstrates why it didn't have to be that way, comparing the U.S. experience with that of Germany, which experienced its own Internet stock bubble with far milder consequences to ordinary investors. He then offers practical and detailed recommendations for investors, citizens, and policymakers seeking to keep it from happening again.

Author Biography

D. Quinn Mills is Alfred J. Weatherhead Jr. Professor of Business Administration at Harvard Business School, where he teaches about leadership, strategy, organizations, and human resources. Mills has been widely quoted in leading U.S. media, from The New York Times, The Wall Street Journal, and BusinessWeek to NBC's Today show. He is a Fellow of The National Academy of Human Resources

Table of Contents

Acknowledgments.

I. THE BUBBLE AND CAPITAL MARKETS.

1. How to Use This Book.

Why This Book Has Been Written. How This Book Was Written. An Unusual Feature of This Book: Contributions from Others. The Message of This Book: How to Avoid Another. Bubble and How to Protect Yourself If It Occurs. Talking Point.

2. Destroyed by the Bubble.

The Capital Markets as an Engine of Progress. The Social and Economic Utility of Capital Markets. The Internet, Capital Markets, and Innovation. The Early-Stage Financing of the Internet. The System Hits a Glitch. Talking Points.

II. HOW THE BUBBLE HAPPENED.

3. Causing the Bubble.

The Technology Bull Market. The Bubble. Why Did the Bubble Form? Day Trading and the Source of the Bubble. Other Bubbles in History. The Software Cycle. The Transfer of Wealth. Talking Points.

4. Inflating the Bubble: The Financial Value Chain.

The Financial Value Chain. Diagramming the Financial Value Chain. When Economic and Financial Value Diverge. Why the Huge Valuations for Internet Companies? How the Financial Value Chain Should Have Worked. Defending Enormous Valuations. Talking Points.

5. What it Meant to “Do the Right Thing” at Enron.

Enron as an Internet Company. Inflating the Enron Bubble. Wall Street's Involvement. The Key Role of the Accountants. Equity Analysts Promote the Company. Politicians Lend Their Aid. Evaporating Employee Pensions. Unethical, Unfair, but Illegal? Enron's Significance. Talking Points.

III. INEXPERIENCED LEADERS.

6. Dumb Kids?

Blaming the Entrepreneur: He's Dumb. Amazon.com's Miracle. How Amazon Flouted the Rules. The Learning Failure. Talking Points.

7. How Some VCs and Bankers Led.

Entrepreneurs in the Wrong Direction. Having to Go to the Venture Firms. Pressure to Spend. A Strategy's Limitations. Like Sheep to the Slaughter. Get-It-Right Instead of Get-Big-Fast. Talking Points.

IV. HOW VENTURE FIRMS CHANGED THEIR CRITERIA.

8. Building to Flip.

Venture Capital. Rushing to an IPO. Exiting an Investment. How Their Own Rules Were Changed by the Venture Capital Firms. The Baby Goes Out with the Bathwater. Talking Points.

9. Choosing the Wrong People.

Whom to Back. Garden.com: A Mistake from the Get-go. Boo.com. Did the Venture Firms Make Money from the Bubble? Talking Points.

V. TAKING START-UPS TO THE PUBLIC.

10. How Investment Banks.

Inflated the Bubble. The Banks Bend the Rules. The Investment Banks and Institutional Investors. Who Brought Those Duds to Market? Mass Hysteria or Fraud. The Blame Game. Mass Hysteria. What Did the Venture Firms Know? Did Wall Street Cross the Line? If You Can't Sue City Hall, Can You Sue Wall Street? Beware of “Buyer Beware” . Talking Points.

11. The Retail Investor: Victim or Fool?

The Buyers' Side of the Capital Market. Why Mutual Funds Got on the Bandwagon. Speculating with Pension Money. Momentum Investors in Disguise. Blaming the Investor: She's a Pig. How Important Is the Freedom to Speculate? Talking Points.

12. Influencing Factors: Where Does Responsibility Lie?

What the Accountants Should Have Done and Didn't. The Hype Machine. The Fed Was Also at Fault. Talking Points.

VI. THE ROAD KILL OF CAPITALISM.

13. Sell, Sell, Sell!

theglobe.com. Not a Smart Thing to Do. Young People Succeeding Early. The Return of Big Company Values. Talking Points.

14. Dire Consequences.

Creating a New Business Cycle. Economic Losses Caused by the Bubbles. Starving Entrepreneurs of Capital. Setting Back Technological Innovation. What Happened in e-learning. Meanwhile, in Germany. Another Wave of Internet Companies Is Coming. A List of the Economic Consequences of the Bubble. Insuring Public Confidence. Talking Points.

VII. A TROUBLED SYSTEM.

15. Can America Lead?

The United States as the World's Financial Leader. Should American Leadership Be Followed? Dare We Privatize Social Security? Why Current Regulation Isn't Working Well Enough. Talking Points.

16. Reforms to Protect Small Investors.

The German Experience. Every Investor a Qualified Investor. Extending Fiduciary Responsibility. Improving Disclosure and Governance at Mutual Funds. A Return to a More Restrictive Prudent Person Rule. Preventing Another Enron. New Regulations to Protect Investors in IPOs. Nine Reforms to Restore Confidence. and Rebuild the Economy. Talking Points.

VIII. LESS DAMAGE NEXT TIME.

17. What Does the Future Hold?

Do We Want Another Bubble? Will There Be Another Bubble? Smaller Bubbles and Less Damage.

Appendix A: Nemax (The German New Market) and Nasdaq.
Appendix B: Financial Value Chain Influencers.

Contributors.

Endnotes.
Index.