Ira Schwarz/Reuters Greenspan noted investors and the financial services industry were in some cases over-optimistic

In his first detailed comments on the surge in the high-tech sector of the stock market, the Fed chief told the Senate Budget Committee it was certainly possible that some of the Internet companies with highflying stock values would succeed as others would fail.

"The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different vehicles," Greenspan said in response to a question on the Internet sector of the stock market.

"Some of these small companies which have stock prices going through the roof will succeed and they very well may justify even higher prices," he added. "The vast majority are almost sure to fail. That's the way the markets work in this regard."

An American Stock Exchange index of Internet stocks, which had dipped briefly after Greenspan's comments, moved to session highs. The index was up 23 points, or more than three percent to 771.

"He is looking at the reality of the situation. Even though valuations are looking a little stretched, industries that are new generally carry some excessive multiples," said Barry Hyman, a market strategist at Ehrenkrantz, King and Nussbaum in New York.

The frenzy in the Internet sector of the stock market is so great that some company stocks have moved sharply higher even though have not yet shown a profit. For example, Amazon.com Inc shares rose 15 percent Wednesday even as analysts projected it won't turn a profit until 2001.

In his testimony, Greenspan noted investors and the financial services industry were in some cases over-optimistic about the sector's prospects.

"You will get some lottery premium in the stocks," he said. "Is there some hype in this? Of course, there's some hype."

However, he added the frenzy over high-tech stocks actually showed something positive about how Wall Street players operate: "Mainly, that they do endeavor to ferret out better opportunities and put capital into various different types of endeavors prior to earnings actually materializing."

Greenspan said the risk-taking in the stock market was good for the financial system.

"In fact — with all of this hype and craziness — that is something that at the end of the day is more plus than minus," he said.