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Valleywag
Are we in a bubble? Far too late to be asking that question, says Chris Nolan, a former Valley newspaper gossip who now runs a startup, Spot-On. She weighs in on the current market crisis and its effects on the tech business. Her thesis: New regulations will on investment banks will bring an end to the tech-stock bubbles on which Valley VCs have feasted. (I asked if this meant she was back in the tech-gossip game; Nolan's column served as one of this website's inspirations. "I'm writing about business and politics," she demurred.) Nolan compares sketchy mortgages approved by banks to the wafer-thin startups taken public by stockbrokers a decade ago. A brief version of her 887-word argument, followed by my take on where Nolan goes wrong:
Investment portfolios of universities, pension funds and charities expanded in value as Americans put their savings into stocks. As a result, stock prices rose. Richer, these institutions put money into venture capital funds. The funds spent like drunken sailors. As long as the stock market stayed up, they could reap the rewards of their investments. Venture capitalists, like mortgage companies, relied on investment bankers to lay off some risk by selling their wares to someone else — in this case, IPO stock to the public.A brilliant comparison. But Nolan puts too much stock in the powers of regulators. "Money goes where it is wanted, and stays where it is well treated," former Citibank CEO Walter Wriston once told Wired. Already, U.S. regulations have driven some public stock offerings to new markets like London's AIM. No regulatory scheme is airtight; indeed, the U.S.'s regime, relying too heavily on rules rather than principles, makes it all too easy to find loopholes. New regulations, while hard to argue against, will simply generate new ways of avoiding them. And psychology tells us people will always fall prey to bubbles. Will VCs will be among the profiteers? Perhaps not. And few among the Valley's entrepreneurs will shed a tear for them. They'll be too busy finding something new to inflate, with someone else's money.If all this reminds you of the U.S. mortgage crisis, a time where anyone could get a loan because it was assumed that the price of real estate would go up, up, up, you are not alone. During the stock bubble, the SEC made no bones about its inability to keep up with the number of filings it had to process, review and approve. Something similar happened at the mortgage banks. As long as everyone signed a piece of paper saying they knew risk was involved, the loans got written. Can you imagine a Netscape public offering — the company's main product was given away — sponsored by a financial institution supervised by the Federal Deposit Insurance Corp.? Me neither.
(Photo by Bub.blicio.us)
Comments
I think you've nailed it Owen, except for the new temptation to put money into cheap loan bail-outs. Bear Sterns at $2 a share? Name me one VC that would pass on that. Though that deal is reserved for the very few, you are going to find people selling auction rate notes on the cheap for at least a year. If you actually were sitting on a pile of capital, would you rather buy up the auction note of a midwest utility for pennies on the dollar or would you want to give some money to a kid that says social networking is the next big thing? Or another example, you could white knight into one of the buyouts that are flailing right now. Would you pass on ClearChannel at pennies on the dollar? Capital is in such great demand right now that a reasonable "venture" would be to own a power utility for a few months. See if Zuckerberg can compete with that.
There are no bubbles. There are only differing investment strategies and those who exploit them to the fullest.
Harry "its all the same by all the same" Wang
"...as Americans put their savings into stocks."
Americans don't have much money, and what they have is generally tied up in their homes.
And that's where the housing bubble differs from the dot com bubble. The housing bubble had lots of average people using large amounts of leverage (0% down: what's that, 1:0 leverage?) for speculation. That's more analogous to what happened before the great depression, or what's happening in China, now.
And guess who provided this leverage: the soon-to-be head of regulation, the Federal Reserve.
@WagCurious: I can't seem to find anyone who got BSC at $2. While I have to admit that it makes for exciting copy, you really undermined the credibility of the rest of your comment opening with it. Do you write for CNBC?
@matto: Jamie Dimon got Bear Sterns for $2. He had a signed deal and everything. Then he decided to give 'em an extra $8 (in a modified deal) because the initial deal actually had him assume all Bear Sterns debt even if the deal fell apart, and at $2 it was looking like that might actually happen.
So I'm saying compare the deal that Jamie got with anything walking the halls down on Sand Hill Road. Where would you rather put your money? And no, time lapse photography of S.F. is not a viable option as much as you seem to be into it.
@WagCurious: Wrong. The only place Jamie got BSC at $2 was in fairy tale land, and everyone knows it. Do you think he decided to offer 500% more out of magnanimous generosity? The deal still had to pass shareholder approval and there was no way they were going to bite.
@matto: "Everyone knows it", what is this high-school? He had paper in hand that said $2/share OR if the shareholders do not approve, he still gets the building at a firesale price. Either way he wins. The speculation is that he went higher because he also agreed to assume Bear Sterns' debt in the original deal (even if the deal fell through). The revamped deal does not stick him with the debt if it falls through (and also has a better chance of getting past shareholders). But shareholders would have no vote if the company goes insolvent (they can line up behind the preferred creditors and maybe get a desk and chair set). So if they turn any deal down they end up with nothing. Or does everyone know that as well?
@WagCurious: Even my cat knows the fed wasn't going to let bear stearns go insolvent. Is that better than 'everyone'?
@sample032: Americans as a whole have a negative net worth, actually. They passed the barrier of insolvency several years ago, another contributor to what we're seeing here.
If investment money does flee the bundled mortgage sector, it won't just evaporate. It will be invested somewhere else, and tech is looking relatively stable comparatively speaking. Of course, if the shift is significant enough to get Jim Cramer babbling about it, all hell will break loose and there will be another bubble. Why? Because for the longest time everyone loves them.
@FiveStarEggRoll: Harry Wang, you are now my Kiyosaki! Also my horse whisperer and my crime-solving psychic medium.
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