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Bubble Economy Series
With Michael Leahy
Washington Post Staff Writer
Monday, Nov. 11, 2002; 1 p.m ET
The Bubble Economy, once known as the New Economy, had everyone cheering
and the activity of the financial markets became a national obsession.
Starting around the mid-90's, investors were jumping to get in on the
Internet action, unemployment virtually disappeared, companies projected
20, 30, 40 percent annual growth rates and stock prices were flying
high.
But in 2000, the bubble burst, the good times halted and shortly
thereafter, the economy sank into a recession. Meanwhile, the talk on
Wall Street shifted to corporate scandals and speculation about when the
Dow would rise above 10,000 again.
The Post's six-part series takes a retrospective look at the key players
in the Bubble Economy and gives an analytical view of the bubble
phenomenon. Read the Post Business Special Report: BUBBLE: The Roots of the '90s Boom and Bust.
Join Post staff writer Michael Leahy to discuss his piece on executive Clark McLeod and his eponymous company McLeodUSA, a telecom giant that fell into bankruptcy. Read A CEO's Lesson: What Goes Up ... (Post, Nov. 10). This is the first of the Post's Bubble Economy series.
Clark McLeod carried the hopes and savings of his Iowa hometown with him as he created a telecommunications giant. Only later, after the company was in bankruptcy and McLeod had retired to his horse farm with millions of dollars pocketed from stock options, did people begin to wonder about the person in whom they had placed their faith.
Below is the transcript.
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Michael Leahy: Glad to be here. Welcome to everyone who has joined the discussion and submitted questions. Let's get started.
Alexandria, Va.:
Would McLeod and other executives' options have gotten the same once-over and scrutiny if things hadn't crumbled? Fabulous story, by the way.
Michael Leahy: Thanks for reading the piece, A CEO's Lesson: What Goes Up ... (Post, Nov. 10). Your question suggests that McLeod's stock options WOULD NOT have received the same scrutiny had the company not encountered difficulties and if its stock had not tanked. I think your point is an excellent one. Indeed, there seemed to be absolutely no public criticism of McLeod's decision to exercise stock options in early 2000. The criticism came later, after the stock began plummeting like a stone. This does perhaps speak to some moral relativism at work in the minds of investors, who are comfortable with the perks and toys that many CEOs possess when a company is riding high and the stock price soaring. It is only later, when so many investors get hurt, that the same toys and perks that once seemed like a king's entitlement, are viewed to be onerous by many people who have lost money. Of course, it is one thing to say that the issue of stock options might never have been raised in good times; it's quite another to argue that it should never have been raised in good times or bad.
New Orleans, La.:
Great story. Loved the way you depicted things in human terms. Doug Bean sounded like such a nice open man. Re McLeod and the other telecoms: Did people just get wild on all the investment money available to them? Where were the analysts to warn us?
Michael Leahy: Thanks for the nice words. Clark McLeod talks in his self-published book, "This Way Up," about how easy it was to raise money. His words reflected the free-flow of investment money through most of the 1990s. Here are Clark McLeod's words: "Would finding the dollars required be a problem? No way! .... whether it was $1 million, $1 billion, $10 billion, we could get all the money we wanted."
In time, as I say in the story, each dollar of equity he raised from shareholders was more than offset $3 to $4 of debt. By then he was bobbing in a kind of red sea. When you talk to observers and prominent analysts, you realize that most of the experts believe that McLeod's and other telecom companies' debts never would come back to bite them; that investment money would keep coming so that they could continue to fund their projects. When the stock market slowed, the investment money stopped coming. For a capital intensive company like Clark McLeod's, that was the beginning of the road towards bankruptcy and a stock price that sunk from roughly $35 at its post-split high to 18 cents a share in early 2002.
Bowie, Md.:
Hi Mr. Leahy:
Enjoyed your article yesterday.
At the risk of incurring wrath for not being sympathetic to older folks losing their retirement money--didn't the market do EXACTLY what it was supposed to? When it was revealed that the emperor, indeed, was wearing no clothes, the stock price tanked. Stockholders who had been buying for all kinds of reasons but the right one--that they understood the business and rationally determined that it was a wise investment--got burned.
I work for a software company, and all through 1999 I kept asking, "How are ANY of these dot-com-type companies ever going to make money?" No one--including those who had invested every penny they had in the technology sector--could answer that question.
What do you think drove the buyer frenzy the ended up being the Bubble Economy? Greed? Stupidity? Group think?
Michael Leahy: Thanks for the intriguing question, which evoked memories of an old economics professor of mine who once said that the market, among other things, was designed to correct problems (such things as overvaluations and mirages), and it did this quite ruthlessly. Certainly, some startling "correction" occurred here. What investors back in Cedar Rapids, Iowa generally observed was that, quite apart from the abstract marketplace, this was a story about their money getting lost in hype. What particularly burned many people in Cedar Rapids was that prominent McLeodUSA officials assured investors in late 2001 that the rumors of bankruptcy was groundless; that the company was funded throughout the next year. Many felt misled, arguing that at the very least the company should have understood the peril ahead; that instead of seeking to reassure investors, it ought to have said nothing.
Arlington, Va.:
ALL of that money that's now seemingly gone had to go somewhere, right? So who got rich?
Michael Leahy: I'll tell you who made a sweet pile of money. Many other CEOs who bought Initial Public Offerings (IPOs) in McLeod and other technology stocks watch them climb rapidly in the short term and then quickly sold them and made a great deal of money. They got out before the stocks tanked.
Arlington, Virginia:
The idea of a bubble has taken a negative connotation, but economic bubbles seem a fact of history and only due to human psychology. No one will see the next one coming until it's gone, just like this last one. Should we expect to learn something from it, and who has the right to teach about it?
Michael Leahy: You're right. The bubbles seem to be a cyclical fact of history. What might change this time is that, among other things, stock analysts who pump up the stock of a company like McLeod will come under more scrutiny, particularly when their brokerage houses do investment banking business with the very client whose company the stock analyst is paid to assess. It does, obviously, raise meaningful questions about toxic conflicts of interest.
Bethesda, Md.:
I'm always boggled by the notion that the collapse of the dot com bubble was a big surprise. In fact, lot of people just went ahead and 'drank the Kool-Aid'-- willfully ignoring history, rational risk assessment, reality, and common sense. People thought that one just needed to 'sincerely want to be rich'; well, it ain't necessarily so.
Michael Leahy: "Drank the Kool Aid" -- the phrase of our times. Yes, even many investors in places like Cedar Rapids will acknowledge that their zeal to make money got the best of them. They sometimes use the word great. So yes, they blame themselves in part.
Princeton, NJ:
A wonderful article. A breath of fresh air. Clark McLeod seems like a distant figure now that the heydays are over and that being tightlipped is the best way to protect himself. Your description of people who believed in him is human and empathetic.
Do you think that the broadbrush given to individual investors who have lost the most... that they were too greedy to start with.. is unfair? Bean and others invested their money in the hope that it was safe and that they could use their money in the future. The people who were greedy were the day-traders, the brokerage houses, the CEO's and other brokerage and industry insiders who kept milking money in the form of options etc. What do you think? Why is there a lack of a sense of outrage in the way individual investors can be duped of their hard earned life savings... people who can afford it the least? And there are no calls for protections etc.
Michael Leahy: Great questions. There is something so American about believing that if you do everything responsibly and by the book, that all will work out in the end. But the stock market is still a casino of sorts, which means risks but sometimes great riches. Doug Bean felt let down by some analysts like Jack Grubman who ceasely pumped up the stock and by some McLeod officials in the late stages period. He wished at the very least that they had not delivered such glowing reassurances to the public. So, of course, there is a real outrage in places like Cedar Rapids that investors were not so much lied to as neglected (perhaps "duped" is not putting it too strongly). It is the perception of negligence however that has people fuming the most -- which will likely be the moral catalyst for reform.
Fairfax Va.:
Does Doug Bean still have shares in the company?
Michael Leahy: Yes, Doug still has shares, hoping that the stock price will climb. The stock ended trading on Friday at 70 cents a share. And Doug recently bought a few more shares on the cheap, at 54 cents a share. Many investors back in Cedar Rapids have held onto their stock (which lost 98% of its value in about a year), because the alternative of getting rid of the stock for next to nothing makes no sense.
the analysts.....:
Someone asked where the analysts were when they should have been warning us... well, the financial analysts were busy pumping up IPOs of companies with no hope of ever making a profit, and the industry analysts were busy putting together unrealistic market numbers that provided the basis for the ridiculous valuations as companies got capital and spent money to sell to markets that would never exist... if I sound bitter, it's because I've lived through the trauma of being at a company that was built around nonsense spouted by analysts, and watched hundreds of my coworkers lose their jobs as a result...
Michael Leahy: Thank you very much for your comment. I simply want to post it. I heard many others echo your perspective.
Washington D.C.:
Have enjoyed reading the first two installments of your series. Not knowing the content of the entire series, I am wondering if you address in your text the fundemental need for sound ethics to be incorporated in the market place? Also, as a matter of practice, specific to the telecommunications industry, there was a common practice used by equipment manufacturers to provide "vendor financing" during the heady days of the 90s. This practice allowed for sales to be booked, yet the transfer of funds (used traditionally to close a sale), to be differed, forgiven, or forgotten. The upshot of this practice is that neither the telecommunications company's reports were reliable nor the manufacturer's reporting instruments, adding to the "bubble" economy. Do you address this practice? There is a huge story here waiting to be uncovered,that I have yet to read about in any publication. washingtonpost.com:
Read About the Series to find out more about the Bubble: The Roots of the 90's Boom and Bust.
Michael Leahy: As journalists, we're obviously not in the business of offering ethical solutions. But the series fairly screams, I believe, about the need for important financial and governmental players to probe the many ethical questions that you're viewpoint suggests. Many thanks for your questions.
Fairfax, Va. about "bubble":
This may be just semantics, but are all "bubbles" illusions, and characterized by the elements you mention--boom, bust, scandal, etc.?
Say there's a long major war--investors and companies involved in supplying material might create a bubble, but is there BY NECESSITY, scandal?
Thanks.
Michael Leahy: I'll take a stab: Yes, I would suppose that all bubbles are necessarily "illusions," given that the bubbles invariably burst. So your example, that of a long major war - would not have the components of a bubble. I don't see how scandal necessarily follows from your example.
Seattle, Wash.:
I loved your point of view and your writing in that series you did about Michael Jordan, and was engrossed by this story about the telecom CEO McLeod. Congratulations. Another fascinating story. Is there any similarity, on any level, to what you saw in the business of NBA/Jordan and the kind of telecoms led by people like Clark McLeod? Thanks again for such terrific writing.
Michael Leahy: The shortest of short answers -- thanks a lot for reading both sets of stories. The only similarity I can see between the NBA and some telecoms is a certain heedlessness.
Washington, D.C.:
How do you think CEO's should be paid? I heard that they typically make 8 times what the President of the United States makes, which totally ridiculous. Is it that there's a short supply of people qualified to be a top executive or are they just bullying companies to excessively pay for their services?
Michael Leahy: Certainly, the issue of stock options for CEOs will be front and center for the next couple of years.
Arlington, Va.:
We've heard so many regulation proposed since the bubble burst and corporate scandals came to light. But what has actually be done? What conflicts-of-interest still exist?
Michael Leahy: Well, when you listen to financial observers and the average investor in a place like Cedar Rapids, there remains enormous dissatisfaction with what HAS NOT been done.
Every where I went in Iowa, people fumed about stock analysts and what they regarded as gross conflicts of interest.
Great Falls, Va.:
Who can we place our faith in? Who can actually provide independant advice about stocks?
Michael Leahy: Some financial observers speculate that, if the relationship between stock analysts and companies does not markedly change, we might have a new kind of player - someone who provides blunt and seemingly cold perspectives about stock. Certainly, confidence in the wisdom and the objectivity of analysts has sunk to a historic low.
San Diego, Calif.:
Few, even amongst the most educated and influential, have any real understanding of how to read SEC filings let alone how to value a business. Have you seen indications that people are becoming more educated -- and realistic -- about valuing business and the shares that represent it?
(looks to be a good series!) washingtonpost.com:
Business Special Report: BUBBLE: The Roots of the '90s Boom and Bust
Michael Leahy: People back in Cedar Rapids seem to be doing more research on their own than ever before -- terribly reluctant to trust the recommendations of outsiders, particularly the analysts. So yes, I suppose people are engaging in self-education.
Towson, Md.:
Do you think the market has cleansed itself of all the overvalued stocks from the Bubble Economy or is it still in the process?
Michael Leahy: The view of many observers is that the corrections are probably not over.
Princeton, NJ:
In your research, did you come across any average investor who cashed out before losing his or her shirt?
Michael Leahy: In Cedar Rapids, there were some who got out in time -- but most took a hit, and many are still reeling. This is not a problem that should be viewed in the abstract. I saw real hard working people in Cedar Rapids, like Doug Bean and Dick Ramsey, whose lives for now are considerably different because they lost a great deal of money. They entrusted years of savings to what they regarded as the acumen of McLeod officials. So, in assessing the tube that is Wall Street, and the sterile insularity of that world, one can never forget that, at the other end of it, way back in a place like Cedar Rapids, are people who have put their faith in the judgements of a very small circle of experts.
I hope if my piece illuminates anything, is that there exists a profound social cost to business negligence.
Michael Leahy: Thanks to everyone for your great questions and observations. I'll look forward to talking to you down the road.
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