Confessions of a Wall Street Analyst (3 page)

In the pages that follow, I’ll share my front-row seat at one of the most dramatic—and ultimately tragic—periods in financial history. I will share details of life on Wall Street that few can risk disclosing for fear of implicating themselves. I’ll explain what it was like to be at the epicenter of the most dynamic industry in a highflying stock market, sparring with fellow Wall Streeters Jack Grubman, Henry Blodget, and überbanker Frank Quattrone; telecom CEOs like AT&T’s Michael Armstrong, WorldCom’s Ebbers, and Qwest’s Joe Nacchio; and Street bosses such as Merrill Lynch’s David Komansky, Morgan Stanley’s John Mack, and CSFB’s Brady Dougan.

I’ll show a Wall Street that was a jungle of greed and ego, a place brimming with conflicts, and a place that was absurdly out of touch with the Main Street it claimed to serve. It was an environment in which pay levels spiraled out of control, where 30-year-olds earned seven figures, and where no one noticed an extra $1.5 million inadvertently inserted into my own employment contract. It was an environment in which an insider tip could yield billions of illicit stock market gains without anyone else knowing. It was an environment in which an obscure ruling by the Securities and Exchange Commission (the government agency responsible for the integrity of the financial markets) sparked what I believe was the biggest wave of Wall Street conflicts of interest ever. And it was an environment in which ethical standards had fallen so low that not only was it difficult to do the right thing but often it was difficult to even discern the line between right and wrong.

What you’ll learn in these pages is sometimes ugly, but it is all true. While writing this book, I have had to relive many of the decisions, judgment calls, and ethical choices I made. Sometimes those memories have
made me smile with pride; other times, I’ve cringed with embarrassment. Some of the stories are outrageous, others hilarious, and many are simply absurd. Such was life inside the telecom bubble.

L
OOKING AT BERNIE
’
S BACK,
I wondered what was about to happen to him. I wondered, too, about Jack Grubman. Jack was my fiercest rival and the analyst who parlayed his advocacy of WorldCom and his close association with Bernie Ebbers into a position of power that made him the most influential analyst on Wall Street for much of the 1990s. Jack and I were brutal competitors, so obviously I can’t be completely objective, but I do believe that he personified much of what went wrong at the intersection of Wall Street and Main Street. Now he, too, was gone, having resigned under a cloud of scandal and having been banned from Wall Street, but without ever being charged with any crime or brought to trial.

With the verdict now imminent, reporters scurried across the room to their preferred positions, some near the jury, some sitting behind Bernie and his defense team, and some poised to run outside to the TV cameras and trumpet the news to the world. The sketch artists opened their easels and sat poised to capture the moment in its most lurid details.

I glanced over at Kristie Ebbers, who sat with her arms around her daughter Carly. Bernie was now standing up straight, facing the jury box, praying to his God, I supposed. His face was totally impassive. You’d never have known he was waiting to find out whether he’d be walking out of this courtroom a free man or spending the next few decades in prison.

At 12:30 PM, Judge Barbara Jones, an even-keeled former federal prosecutor, came out of her chambers. The jury filed in slowly. I scrutinized their faces, looking for clues. Not one of them looked at Bernie.

“Have you reached a verdict?” Judge Jones asked the foreperson, a serious, middle-aged woman named Theodora Evans.

“Yes, we have, Your Honor.”

“May I see it, please?” The clerk brought the envelope to the judge, who opened it, pulled out two pages, and read them to herself for a seemingly interminable sixty seconds. Judge Jones gave it back to the clerk.

“Ms. Evans, you are the foreperson of the jury,” Judge Jones said. “Would you please answer the following questions for the court: How does the jury find Mr. Ebbers on count number one, conspiracy?”

“Guilty,” Ms. Evans said, her voice low and strong.

The courtroom went absolutely, totally silent. I looked at Bernie and then at Kristie. Both were staring into space, their faces masks, motionless and emotionless.

“How does the jury find Mr. Ebbers on count number two, securities fraud?”

“Guilty, Your Honor,” Ms. Evans said.

“Count number three?”

“Guilty, Your Honor.”

Tears began to spill out of Kristie’s eyes. She didn’t have any tissues. Small rivulets streamed down her face as she stared at the back of Bernie’s head. Carly put her arms around her mom’s waist. Bernie continued to stand up straight, his face blank. I couldn’t believe his legs were still holding him up. His lawyer, the folksy, ultraconfident Reid Weingarten, sat next to him in shock.

Bernie was found guilty on all nine charges.

As the judge and jury filed out of the courtroom, some people looked vindicated, others stunned. Bernie picked up his coat and embraced Kristie and Carly. As the three of them passed me in the aisle, I tried to empathize, but I kept recalling that his company’s fraud had helped to bring down my industry and ruin the livelihoods and retirement dreams of hundreds of thousands of people. Though he seemed to be unaware of what was going on around him, he turned and shook my hand.

As the Ebbers family exited the courthouse and slowly trudged the half block up to Centre Street to catch a cab, crowds of cameramen and reporters hounded them. Bernie Ebbers, a man who once had private jets, drivers, and handlers, was exposed to the jeers of passersby who had heard the news.

“You should fry,” one yelled.

“Do you know how many lives you destroyed?” bellowed another.

“You got what you deserved,” a third muttered to himself.

The king of the shining new world of telecommunications had a new identity: the king of white-collar crime.

But while the world finally saw justice served in the story of WorldCom, the jury is still out, in my view, on the telecommunications industry, which burned so brightly and sucked in so many people before it turned into the deepest of black holes. Moreover, the jury is also still out on the responsibility of the Wall Streeters who aided and abetted the rise of these companies and then simply got out of the way when they collapsed, at most paying only
a few modest fines. And it’s still out on the insider game that I was a key part of, a game that the average investor—and even many of the professionals—can never win.

I’m sure you will arrive at your own verdict after reading the pages that follow.

1989–1991

Ed picked me up at my house in a taxi. My home, at the time, was nothing super fancy, but Paula and I had put a lot of sweat into it and were quite proud of it.

Ed took one look at the house and almost started laughing. “You ought to come to Wall Street and hit the big time,” he said.

J
ULY
14, 1989

“This Is the Street Where They Fool People.”

T
HAT
’
S WHAT I WAS THINKING
as I stepped off the early morning express train from Scarsdale and stood on Madison Avenue, blinking nervously in the bright sunlight. As I gazed up at the rows of tall buildings and tried to avoid colliding with the natives, I felt the tiniest sense of relief.

At least my job was on Wall Street. Madison Avenue, by contrast, was the center of the advertising world, the place where smart and manipulative companies burned loads of cash and creative energy to convince us that we needed to wash our hands with Dial, brush our teeth with Colgate, and wipe our derrières with Charmin. At least I was going to be an analyst whose job it was to evaluate companies on their merits, not someone whose raison d’être was to seduce America’s soap-opera watchers with meaningless slogans and exaggerated promises.

My new job in equity research, I believed, had nothing to do with manipulation and everything to do with balanced, rational thinking. I had made
the leap to Wall Street in part because of the money, but also because being an analyst seemed like the perfect job for a serious guy like me who liked to reason his way through life. Sure, emotion and hype sneaked into my line of work occasionally, but in the end, the stock market was rational, analytical, cool. Fooling people wasn’t part of
this
equation.

Or so I thought. In retrospect my naïveté sounds charming or—let’s not be charitable—silly.
Of course
Wall Street was as much about fooling people as Madison Avenue was, at least if you were one of the corporate executives trying to convince investors—and analysts—that your company’s shares would shoot to the moon. But my job, I hastened to tell myself, was all about shooting straight. I had been in a sales role before, and I’d never liked it. Now I’d have a chance to focus entirely on the facts.

I grabbed on to that belief as if it were a life preserver and clutched it as I walked up Madison, then west on Forty-eighth Street and north on Sixth Avenue until I reached the headquarters of Morgan Stanley at Fiftieth and Sixth. I was 36 years old, it was my first day on Wall Street, and I was scared out of my mind.

Not that I had fallen off the turnip truck or anything. I had moved here from Washington, D.C., where I had been director of business analysis at MCI, the brash upstart that was shaking up the telecommunications business. I had interacted with Wall Street and its analysts and bankers for the past two years, trying to make them see my company as positively as I did. What I loved the most was the intellectual sparring as we debated the future of MCI and the telecom industry. It had been a great gig.

But this was the big time. I had been recruited by one of the premier investment banks, a place better suited to Brooks Brothers–clad Greenwich bluebloods than a middle-class public school guy from Buffalo, New York. I was going to be one of a select group of some 35 analysts at Morgan Stanley whose job it was to recommend stocks—and, I had been told, move the financial markets. The prestige and power of my new job filled me with pride. But the responsibility terrified and humbled me. All of a sudden I was in the major leagues, and I’d never even played Class A ball. What was I doing in the middle of this?

Already, I’d ventured pretty far from my beginnings as the son of a scrap-metal dealer with a high school education. I’d been a political science major and math minor at the State University of New York at Albany, where I’d met my wife-to-be, Paula Zimmer, during a Wiffle ball game on the first day of our second year. She studied art history and then went back to school to be
come a pediatric-intensive-care nurse. And I’d gone on to become a starry-eyed graduate student of Middle East politics at the University of Chicago and Princeton University, certain I wanted to devote my life to bringing peace to that powder keg of a region.

I ended up at the LBJ School of Public Affairs at the University of Texas, earning a master’s degree in 1979. I was hoping for an assignment that involved foreign policy but instead accepted a $24,000 offer from Coopers & Lybrand, one of the world’s largest accounting and consulting firms, as an economic consultant in its Washington, D.C., office. For a few years, I was really happy at Coopers. The job appealed to my inner wonk, and I worked my way up the food chain. But once I was promoted to manager, my job became more and more about selling new consulting services to clients. The whole selling thing turned me off. I didn’t want my life to be defined by the spin and hype of selling. Working
inside
a growing company began to sound a lot more interesting.

From Consulting to Communications: MCI

It just so happened that the Coopers’s D.C. office building backed up against the new offices of MCI, an upstart telecommunications company that had been in business since 1968. MCI had emerged as a young, exciting David to AT&T, the ultimate corporate Goliath, with a more responsive, entrepreneurial culture. Its founder, Bill McGowan, had found a way to compete against AT&T in the long distance market even before the November 1982 court order that would break up the monopoly Bell system into AT&T and seven companies that became known as the Baby Bells. MCI had grown wildly in the early 1980s, quadrupling its sales to $400 million between 1979 and 1983.

I knew a few former colleagues from Coopers who had gone over to MCI, and decided it sounded like a great opportunity. MCI made me an offer to work in its finance department, though it would mean a 10 percent pay cut from my current salary of $38,000 to $34,000 and the end of my rise up the Coopers & Lybrand partnership ladder. I talked it over with Paula, and although it was going to be tough for a while, she agreed that the potential to work at a fast-growing, dynamic company was worth giving up some salary in the short-term.

Most of all, I wanted out of anything to do with sales and marketing. I
was a cerebral type who liked reasoning through complex issues rather than trying to turn everything into a slogan or sales pitch. It would become a familiar refrain in my career, and an ironic one too. Every time I tried to escape the sales aspect of a job, I made a move that brought me closer to that world.

But I didn’t know any of that then. I was 30, with a wife, a two-year-old daughter, and another baby on the way—no longer an idealist seeking world peace, but no cynical sellout either. So I started at MCI in 1983 as a capital-budget analyst, which essentially meant that I reviewed all the requests for money from around the company and recommended approval or rejection. It was a classic middle management job, but it was exciting work in a company like MCI. Within four years, I had become the senior manager of budgeting and planning, doing nuts-and-bolts financial stuff that was right up my alley. And then, in 1987, I got a call from Bill Conway, MCI’s wunderkind 36-year-old chief financial officer. He wondered whether I’d be interested in a job in the investor relations department as the liaison between MCI and the Wall Street analysts who now covered us.

Every time a new industry came along, Wall Street staffed up with analysts, traders, and bankers to cover it. And while telecommunications wasn’t new, the number of publicly traded telecom stocks was about to triple. In 1984, what was just one company—AT&T, or “Ma Bell”—became eight when the Bell system was broken up in an antitrust settlement with the U.S. Department of Justice. It was a decision that would usher in a new world of competition, major technological advancements, and billions and billions of dollars in new investment.

There were now eleven major telecom companies—AT&T, the seven Baby Bells, GTE, Sprint, and MCI. Former AT&T shareholders were given shares in each of the Baby Bells and, of course, in the new AT&T, which now provided long distance service and manufactured telecom equipment. These companies, now publicly traded, were suddenly vulnerable to the vicissitudes of the stock market, and Wall Street desperately needed people who could help investors figure it all out. So in the early 1980s the Street went on a hiring binge, recruiting practically everyone it could find with experience in both financial analysis and the telecom sector.

These analysts were a small but elite group of people who researched companies’ publicly traded stocks and made recommendations to investors on whether or not to buy them. They studied companies in their area of expertise by doing everything from analyzing the financial trends in an industry
to interviewing the top executives to gauging the impact of upcoming regulatory changes.

There were two kinds of analysts, each with different responsibilities. The first group, some 500 strong in total by the late 1980s, worked for investment banks like Morgan Stanley or Goldman Sachs. They published their research in reports that were then “sold” to outside investors from large pension funds, mutual funds, and other large institutions, which is why they were known as “sell-side” analysts. In practice, these reports were not really sold; they were given to the institutional investors in exchange for the fund managers buying or selling stocks through the firms with the most helpful research. At some banks, brokers in the “retail” arm of the business would also provide this research to individual investors. The sell-sider had to walk an odd sort of tightrope, providing research that was supposed to be completely independent of any banking business his employer might do with the companies the analysts covered.

The second group of analysts, a much larger but not as well-compensated group, worked directly for the large institutional investors that bought the sell-siders’ research. Their job was to recommend which stocks their employers should own in their portfolios. They were known as “buy-side” analysts because their firm would “buy” the “sell-siders’” research. Although these analysts made their own investment decisions, buy-siders certainly read sell-side research, and sell-siders catered to them as their clients. Buy-siders didn’t publish their own research, however, and had no responsibility to investors outside their own firms. The only master they served was the large pension-, mutual-, or hedge-fund manager that employed them.

My new investor-relations job at MCI, if I took it, would be to pitch MCI to both of these newly minted groups of research analysts. That meant explaining MCI’s strategy, providing financial information, interpreting regulatory decisions, and doing whatever was necessary to help these influential people make their investment decisions. Hopefully, of course, their opinions would be favorable toward MCI and their firms would buy MCI’s stock, which would make my bosses happy and anyone who owned MCI shares richer.

My first reaction was that it was basically a public relations job, and PR was definitely not my forte. But MCI’s CFO, Bill Conway, whom I liked a lot, kept after me, and I finally decided that it would be good for me to try it. After all, the job did have some advantages, one of which was its location on
the company’s executive floor. I figured I’d have a lot more interaction with the top brass and in the process learn a lot about how a rapidly growing company is managed.

In early 1987, it was also a tougher job than it had been. In December 1986, MCI had taken a huge write-off and the stock had crashed from over $20 to under $5 per share after a disastrous acquisition of a satellite company. Investors had lost enormous amounts of money; they felt betrayed and angry. The previous two-person investor relations team had been shunted aside, virtually run out of town by rabid institutional investors seeking vengeance. Though they clearly were not responsible for the company’s misfortunes, many professional investors felt that the previous team had spun a misleadingly bullish story just as that acquisition was going south. So, at this point, the investor relations job was more about damage control and reestablishing the company’s credibility than anything else.

I was assigned to work with Jim Hayter, a tall, lanky regulatory troubleshooter who started in 1972 as MCI’s 85th employee. Jim was a true extrovert; he loved to interact with people and had an innate ability to find out what makes someone tick. He used self-deprecating humor, a beguiling yet devious smile, and a deep-throated, sometimes-forced laugh to disarm people. He had a way with the ladies too.

We made a great tag team: I taught Jim the ins and outs of financial analysis and forecasting, and he taught me about regulation and market psychology. Coming from within the bowels of the company’s financial organization, I had good knowledge of what internal factors drove the company’s future, and I also had solid sources inside MCI’s financial, marketing, and engineering organizations. They gave me credibility with Jim and, more important, with Wall Streeters as well.

We divided up the analysts we’d each handle, more by personality type than anything else. As the stoic member of this dynamic duo, I dealt with the more analytic and empirical analysts, like Ed Greenberg at Morgan Stanley and Robert Morris at Goldman Sachs. Jim got the ones who were more intuitive and, shall we say,
emotional.
I marshaled facts to explain the merits of MCI’s strategies and earnings prospects, while Jim used psychology to entice investors into buying MCI shares.

My First Run-in with Jack Grubman

Jack Grubman was one of those emotional sorts. Jack was a PaineWebber analyst who had left AT&T for the Street in 1984. He was loud, opinionated, and seemed to exaggerate everything in order to make it sound more dramatic. He had a somewhat high-pitched, nasal voice, two large front teeth, and a receding hairline with jet black hair. Most Wall Street analysts were, well, analytic; their reports were as dry as a day-old turkey sandwich. But Jack punctuated his dispatches with the written equivalent of a scream.