Days of Reckoning

Now that the magnitude of the great tech stock massacre of 2000-2001 has become clear - trillions in lost wealth, hundreds of thousands of lost jobs, countless dreams destroyed or deferred - the inevitable blame game has begun in earnest. And who better to hold responsible than investment banks?

Over the past several months, a veritable legion of legal and regulatory forces have lined up in a concerted attack on the once-staid world of technology investment banking. There are the trial lawyers: In the past six months, some 400 lawsuits and complaints have been filed alleging fraud, negligence, market manipulation and other conspiracies. In the wake of Merrill Lynch's recent $400,000 settlement of a case by an investor who claims he was misled by celebrity Internet analyst Henry Blodget, hundreds more complaints are expected.

There are the members of Congress: Smelling a no-lose political issue, they are parading stock analysts, bankers and even financial journalists before their committees, demanding explanations of what went wrong. There are the regulators: The Securities and Exchange Commission, as well as the self-regulation arm of the National Association of Securities Dealers, are investigating the Net IPO madness. And, most ominously for the targets, there is the U.S. Attorney's office in Manhattan, where an ambitious lawyer named Rudy Giuliani once built a political career on the prosecution of former junk bond king Michael Milken.

There is something a bit disingenuous about this legal assault, which is, after all, mainly about people who lost money speculating in the stock market. Some are suing because they couldn't get shares in initial public offerings at the offering price; others are suing because they got the shares and lost money on them. Federal regulators and politicians are suddenly shocked - shocked! - to discover that conflicts of interest are rampant on Wall Street.

Still, with $3.3 trillion up in smoke since the Nasdaq hit its peak in March 2000, it's hardly surprising that the people and institutions that helped engineer the epic Internet bubble are being called to account. And for the technology finance industry - which was transformed by the Nasdaq's boom from a relatively obscure West Coast offshoot of Wall Street into a major source of growth and profits for top-tier firms such as Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Credit Suisse First Boston and Merrill Lynch - it's going to be a painful reckoning indeed.

The legal battles are only part of the problem for the tech banks. After a remarkable run in which some 600 tech companies went public - generating an estimated $5 billion in fees for the bankers who handled the transactions - the IPO market has all but vanished. Mergers and acquisitions, the other big source of revenue for investment banks, have plummeted. The market doldrums and the shift to decimalized trading have eaten away at stock trading commissions. In short, business is terrible, and there are no signs of an upturn anytime soon.