The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via [Initial Public Offerings (IPOs)], hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

- Matt Taibbi

How was this bubble created?  Remember the four elements from yesterday’s post:

• An Intangible Market.  The internet, which really is just a bunch of interconnected electronic circuits whose use might somehow produce money for the user, was the ultimate intangible market.
• A Broken Rule.  Prior to the internet bubble, there was a long-standing rule concerning which companies were appropriate for IPOs.  The company had to have been in existence for five years and produced a profit for three consecutive years.  Near the end of the internet bubble, tech IPOs were being initiated for companies that had never made a profit and would not make a profit into the foreseeable future.
• An Insider.  The investment bank offered executives sweetheart deals for IPO shares resulting in money being diverted from the company’s bank account to the CEO’s and CFO’s bank accounts.  In return the investment bank was promised additional business.
• A Hedge.  As the facilitator of an IPO, an investment bank earned a commission on the amount of money it raised.  The big risk for the investment bank was that it wouldn’t be able to dupe people into investing enough in a shaky IPO.