December 9, 2005
Excerpts: The Battle For The Soul of Capitalism - Part X
If the winners raked in what we can roughly estimate as at least $2.275 trillion, who lost all that money? The losers, of course, were those who bought the stocks and who paid the intermediation costs. Most of the buying came from the great American public—sometimes directly by buying individual stocks; sometimes indirectly, through mutual funds; sometimes in their personal accounts; and frequently through the increasingly popular 401(k) thrift plans, themselves often treacherously loaded with the stock ofthe companies for which the investors themselves worked. “Greater fools?” Perhaps. Surely greed, naiveté, and the absence of common sense plagued too many stock buyers, and aggressive sellers capitalized on the popular delusions and madness of the investing crowds.
Millions of investors rushed into the stock market to buy the burgeoning number of speculative stocks—technology shares in Internet, telecommunications, and other companies—that were part of the ballyhooed “new economy.” For example, during the peak two years of the bubble, $425 billion of investor capital flowed into “new economy” mutual funds, favoring those types of speculative growth stocks; $100 billion actually flowed out of those stodgy “old economy” value funds that would provide a peaceful refuge from the storm that was to come.
Ironically, the list of losers also included those same corporations. In order to avoid the dilution in their earnings that would otherwise have resulted from their issuance of options, the very corporations that issued those billions of options at dirt-cheap prices also bought them back—but at the inflated prices of the day. The real losers, of course, were not those corporations themselves, but their own shareholders, who lost twice: first because of the dilution in their interests caused by the options issuance, and second because the purchases of their stocks depleted corporate cash. The largest 100 companies in the S&P 500Index actually bought back even more of their stocks than they issued in the form of stock option grants, while the 100 largest NASDAQ companies appear to have (wisely) bought back far smaller amounts.
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