Fed revelation: Boom stock seemed really high

More than five years later, secret government documents reveal the shocking truth: Some stocks were priced kind of high during the tech boom.

In notes from a late-1999 meeting of the Federal Open Market Committee, economist Mike Prell said he was alarmed by the astounding IPO of VA Linux Systems.

VA Linux, which then specialized in workstations made from standardized components and open-source software, went public in December 1999. The stock opened at $30 and closed at $238.25, a 698 percent increase on the first day of trading. Then-CEO Larry Augustin became a billionaire, in terms of the then-current value of VA stock, the moment trading began.

"not="" bad="" for="" a="" company="" that="" some="" analysts="" say="" has="" no="" hold="" on="" any="" significant="" technology,"="" prell="" said="" in="" the="" meeting="" about="" cautionary="" statements="" va's="" sec="" filings.="" "the="" warning="" language="" i've="" just="" read="" is="" at="" least="" an="" improvement="" disclosure="" compared="" to="" classic="" prospectus="" of="" south="" sea="" bubble="" era,="" which="" someone="" offered="" shares="" 'a="" carrying="" undertaking="" great="" advantage,="" but="" nobody="" know="" what="" it="" is.'="" but,="" i="" wonder="" whether="" spirit="" times="" isn't="" becoming="" similar="" earlier="" period."="" <="" p="">

According to a transcript of the meeting, Prell noted VA Linux was not profitable and said its "IPO recorded a first-day price gain of about 700 percent and has a market cap of roughly $9 billion. Not bad for a company that some analysts say has no hold on any significant technology."

VA Linux's time at the top was as brief as 1960s actress Joey Heatherton's. The stock market began to fall about four months later. Investors also began to realize that since VA's workstations were mostly made of off-the-shelf parts and software, the company made products that could also be produced by cheap manufacturers in China, or even Cub Scout troops with a few motherboards and some electronics expertise.

By 2001, the company was laying off workers and exiting the hardware business. It became VA Software, still a key player in the open-source movement. In the quarter that ended in January, the company pulled in $9.9 million in revenue and reported a net loss of $700,000.

Augustin, meanwhile, went on to become CEO of Medsphere Systems, which provides software to the health care industry.

Fed members in the dark
The transcripts provide a glimpse into the rarefied world of the Federal Reserve Board--and show that even Chairman Alan Greenspan seemed to believe that the Nadsaq composite index would continue to skyrocket. Complete transcripts of the meetings are released after five years.

"I think the question on the table is whether we are looking at an aberration or at the emergence of a new era," Greenspan said in a March 1999 meeting. "Anecdotally, people we speak to in businesses such as computers, software, telecommunications and, obviously, the Internet all say that the backlog of potential profit-making investments is still rising. That is what the security analysts are saying."

Eight months later, not long before the dot-com bubble would burst, Greenspan told his fellow Fed members that "we really do not know how this system works. It's clearly new. The old models just are not working."

Instead of relying on the Fed's statistical models, Greenspan said, government economists were forced to talk to business trade associations and large companies to find "ancedotal" evidence of how the economy was performing.

Greenspan had been doing just that. "People in the front lines of business operations, such as Jack Welch of GE and Lou Gerstner of IBM, say this is a true revolution" rather than a stock market bubble, Greenspan said at a June 1999 meeting. "They have seen nothing like this in their experience."

Other Fed members seemed equally enthusiastic about the continued dot-com boom. Robert McTeer, who was president of the Dallas Federal Reserve Bank at the time, said that "the fundamental factor that has been helping us is the high-tech boom, which is not petering out and is not likely to peter out any time soon."

The Internet bubble burst in early March 2000, sending the Nasdaq index spiraling down from its lofty heights of 5,000. On Friday morning, the index was holding steady at 2,014.