In the 1990s, an era of deceit helped promote the speculative bubble in high-technology and telecom stocks that carried forward from 1995 to 2000. Good money was invested after bad in one absurdist dream after another, justified by Wall Street analysts who were paid handsomely to exaggerate or deceive investors outright about company prospects. Accounting fraud reached new heights across corporate America, with the help and approval of the most prestigious accounting firms. Under-the-table compensation to high-technology executives and institutional investors promoted still higher prices. The Nasdaq Composite Index reached a high of about 5,000 in March 2000 only to fall to just above 1,000 thirty months later. Enron and WorldCom went bust, the soaring early success of both due to accounting fraud and misleading Wall Street analysis. Several trillion dollars of value was lost overall. As late as the fall of 2010, the Nasdaq was still 50 percent below its 2000 high. Overall, capital investment rose in the 1990s as a proportion of GDP, but many hundreds of billions of dollars of it turned out to be wasted.
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The collapse of housing eight years later followed the same pattern, but the bubble in terms of actual dollars was far bigger and the collapse of greater consequence. Six to seven trillion dollars of new mortgages had been written that decade; mortgage debt was now much greater in total than federal debt. Wall Street firms learned how to raise capital for new mortgages around the world by creating attractive securities that in fact disguised the real risk of the mortgages. The major banking firms not only "securitized" these mortgages but had consumer loan subsidiaries that wrote subprime and other risky mortgages aggressively. Citigroup was every bit as aggressive at originating subprime mortgages as was Countrywide; Bear Stearns, Lehman, Merrill, and JPMorgan Chase had subsidiaries that were subprime leaders as well.
For all these endeavors, Wall Street professionals got fabulously rich. They channeled hundreds of billions of dollars into wasteful investments that could have been spent on energy, transportation, and communications infrastructure, health care and medical research, education, technical and business R&D, and new, truly innovative consumer products and business equipment. The question was not whether Wall Street bankers contributed enough to the economy to warrant their compensations, but how much they cost the economy in the damage done.
Excerpted from Age of Greed by Jeff Madrick. Copyright © 2011 by Jeff Madrick. Excerpted by permission of Knopf, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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