Dot-Com Bubble Peaks, Exposes IPO Fraud and Analyst Conflicts

The NASDAQ Composite stock market index peaks at 5,048.62 on Friday, March 10, 2000, marking the height of the dot-com bubble before collapsing 78% to 1,114 by October 2002, erasing all gains made during the bubble. Between 1995 and the March 2000 peak, NASDAQ investments rise 600% in what becomes one of history’s most spectacular speculative manias. Investment banks fuel the bubble by profiting significantly from IPOs while encouraging investment in unprofitable technology companies. Netscape’s August 9, 1995, IPO exemplifies the irrational exuberance: despite operating at a loss with no discernible revenue streams, the stock lists at $28 but hits $58.25 on opening day. Investors willingly overlook traditional metrics like price-earnings ratios, creating an environment where companies with no path to profitability achieve billion-dollar valuations. Universal banks face eventual enforcement actions for conflicts of interest among research analysts, who issue biased and misleading reports to investors while their firms profit from IPO underwriting fees. The crisis exposes manipulative and abusive practices connected with IPOs, including analysts promoting stocks their firms are taking public regardless of actual business prospects. The SEC’s failure to adequately regulate analyst conflicts and enforce disclosure requirements allows the bubble to inflate unchecked. After the crash, the SEC tightens IPO and disclosure rules, but only after hundreds of billions in investor wealth evaporates. The episode demonstrates how deregulation, regulatory capture, and conflicts of interest in financial services enable massive wealth transfers from retail investors to financial institutions, foreshadowing the even larger frauds of Enron and WorldCom.