Those responsible for protecting the interests of investors have all betrayed those investors.
The guilty parties include institutional investors, security analysts, portfolio managers and even pension executives, in addition to top corporate managers, boards of directors, auditors and accountants.
That is one of the central theses of "The Battle for the Soul of Capitalism," the new book by John C. "Jack" Bogle, the founder and former chairman of The Vanguard Group, Malvern, Pa.
Whether you agree with Jack Bogle or not, the book — an analysis of the causes of the bubble, and the corporate scandals that accompanied it, that led American capitalism wildly astray in the late 1990s — will make you think and provide a different perspective on the Internet bubble and its aftermath.
It is also a cry for reforms to get the system back on track and to prevent such scandals from occurring again, and Mr. Bogle proposes appropriate reforms.
Even if you think you know what went wrong, what caused so many investors to lose so much money between 1999 and 2002, you will be reminded of much — and learn much — from Mr. Bogle's analysis.
His key thesis is that owners' capitalism, the productive form of capitalism that made the United States the world's greatest economic power, has mutated into managers' capitalism, a far less productive form.
Owners' capitalism delivers the lion's share of the rewards of investment to those who put up the money at risk, the shareowners.
Managers' capitalism provides vastly disproportionate rewards to those entrusted with managing the enterprises. That is, the managers were running the corporations primarily to benefit themselves, not the shareholders.
Mr. Bogle estimates the wealth transfer from ordinary shareholders to insiders and entrepreneurs who sold their stocks during the Internet bubble could have totaled $1 trillion or more.
The other, even bigger recipients of this wealth transfer were investment bankers and brokers, who sold highflying stocks to the public, and mutual fund managers, who sold speculative "new economy" funds to investors.
The total losses during the period could be $2.275 trillion, and the losers were those who bought stocks and mutual funds — mostly the American public. The winners managed to keep most of their winnings when the bubble burst, he noted.
"Managers' capital is a betrayal of owners' capitalism, a system that worked, albeit imperfectly, with remarkable effectiveness for the better part of the past two centuries," Mr. Bogle wrote. It evolved because the markets had diffused ownership of companies so individual owners had no control, and those who were supposed to serve the owners failed them.
Among the latter are not only corporate management but also corporate directors, who should have been the first line of defense, along with accountants, security analysts and portfolio managers, legislators and even pension fund executives. "Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long," he wrote.
The investment system failed to protect investors by challenging corporate management because financial institutions shifted their focus from long-term investment to short-term speculation, from the intrinsic value of the corporation to the "momentary precision of the price of its stock." Further, the institutions were reluctant to challenge the managers of corporations who hired them — a blatant conflict of interest.
