The Crash of 2002 Written Report

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  • Topic: Dot-com bubble, Dot-com company, Stock market
  • Pages : 7 (2075 words )
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  • Published : December 3, 2012
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DOT-COM CRISIS REPORT

The “dot-com crisis” saw stock markets crash across the globe at the beginning of the 21st Century, after a speculative bubble in the share prices of new technology firms eventually burst. The bubble is attributed to the large rise in the number of global internet users, from around 16 million in 1994 to 304 million in 2000¹. This rise was accompanied by hundreds of internet based companies called “dot-coms” after the “.com” suffix in web addresses, seeking to tap into this rapidly growing international market known as the “new economy”, including firms that are now household names such as Amazon and Google. Many of these firms relied on venture capital, money provided by to start-up firms which are seen to have long run growth potential, and Initial Public Offerings (IPOs), the first sale of stock by a private company to the public, to finance their business models. These were to establish themselves as monopolies in their respective sectors even through measures such as sustaining net losses. Early successes made investors more eager to place money in the sector, and out of 457 IPOs registered in the United States in 1999, more than 100 saw their stock prices double on the first day of trading². The bubble peaked numerically on March 14th 2000, when the NASDAQ composite index reached an all-time high of 5048.62, more than double its value the previous year, and around this time the FTSE 100 and the Dow Jones Industrial Average also saw historic highs. The bursting of the bubble saw almost $5 trillion wiped off the market value of companies over the next few years, with stock market lows occurring in October 2002 for the DJIA, NASDAQ and S&P 500 in the US and in March 2003 for the FTSE 100 in the UK.

There are many factors which contributed to the dot com crisis, such as the fact that the investment banks understood the profit potential in promoting the technology boom to over-eager clients looking for the investment of a lifetime. However, the Wall Street and investors failed to see the fact that these investment banks did not follow the guidelines which had to be followed for a company to be made public. According to these guidelines, a company should be in business for a minimum of five years and should have generated profit for three consecutive years. Thus, many companies which lacked a viable business model were made public mostly for the profit of the Investment banks and also because of the philosophy “get big fast” (Hovde, 2008).

Enron began as a mundane natural gas pipeline company in the 1980's, but morphed into a financial services firm by the late 1990's. It traded things like oil, but created new markets to trade oddities like weather and bandwidth. Because Enron operated in a largely unregulated arena and because of the way energy trading firms are allowed to account for their operations, the company recorded revenue that made the economic status of its business appear larger than it really was. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by a creatively planned accounting fraud, known as the "Enron scandal” which caused shareholders to lose more than $60 billion (Morgenson, 2002).

The September 11 attacks on the World Trade Center hindered various critical communication hubs necessary for payment on the financial markets. The attack halted trading in stocks and bonds on major Stock exchanges (e.g. London Stock Exchange, New York Stock Exchange and Dow Jones Index) illustrated by the blank portion of the graph below. Trading on the United States bond market also ceased as the leading government bond trader, Cantor Fitzgerald was based in the World Trade Centre (Gonzales, 2009; Makinen, 2002).

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The "Greenspan Put" refers to the monetary policy approach exercised from 1987 to 2000, which led US investors to wrongly believe that the Fed would take decisive action to prevent the market from falling if it was...
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