The book describes the era of the superstar analysts, when research reports on the newly deregulated telecoms market and the ascending power of the internet, could make or break anything from a flimsy start-up to an established company. Dan Reingold was a top telecoms analyst at a number of bulge bracket firms during the dotcom boom of the late 1990s, ending his days at what was then called Credit Suisse First Boston (now Credit Suisse). While Reingold had a reputation for meticulous research, his great opponent was the super-bullish Jack Grubman at Salomon Smith Barney (SSB). Reingold is put in the shade as Grubman puts out powerful reports packed with the latest data and insider gossip, while Reingold toils away on his models and publicly available information.
Adding fire to the competition is that both are vying for the top spot in the Institutional Investor survey, where the right call on a stock can make all the difference.
Grubman gives the market exactly what it wants. He seems to provide better information more quickly than anybody else, and he boosts the stock he covers, thus giving the buy-side every confidence that they are buying into rising stocks. SSB bankers love him, because the stock he covers reward Salomon by pushing refinancing and merger deals their way. But Reingold, with his more cautious approach is antagonising the stocks he covers and his own bankers in equal measure. The CSFB bankers get punished by their corporate clients when Reingold writes negative research on them. Crucially, Grubman gets paid according to the amount of business he brings in, an arrangement which Reingold refuses at CSFB. Those contracts end up destroying GrubmanÆs reputation and saving ReingoldÆs.
Reingold is increasingly convinced GrubmanÆs relationship with the top management of the superstars of the era, such as Global Crossing, Worldcom and Qwest, is unhealthily close. In fact, according to regulations of the Chartered Financial Analyst at the time, itÆs not necessarily Grubman who is fault when receiving leaks, as long as Grubman makes the information available to everyone simultaneously. The wrongdoing is on the part of the company which leaks the information solely to Grubman. The conflict of interest between the research and the banking side is recognised at the time. But Grubman, in an interview, brazenly calls the conflict æsynergyÆ instead, and says that being objective is tantamount to being uninformed. Much to ReingoldÆs astonishment, no regulator picks up on his comments.
The book describes the hellish bubble collapse, whereby Grubman is unmasked as providing bent research and the superstar companies of the day are shown to have been fiddling the books. Reingold comes across as somewhat nanve here. His faith in rigorously crunching the numbers is shown to be pointless when so many companies are cheating, aided and abetted by the likes of auditing firm Arthur Andersen.
ReingoldÆs most powerful passages come towards the end of the book, where he muses about where he and the industry went wrong. He points out that Eliot Spitzer quickly decides to settle rather than pushing for a guilty verdict. Wall Street is made to cough up $1.8 billion in fines, which is insignificant compared to the $80 billion in profits the Street made over the course of the boom. None of the investment bank heads are brought to book. He castigates the Securities & Exchange Commission under Arthur Levitt for passing the 1997 No Action Letter, that allowed analysts to write about mergers when a deal is pending and when their own bank is involved, thus exposing the analyst to pressure from his bankers.
As for Grubman, Reingold points out that he ends up a winner, settling the SEC charges against him without admitting guilt. The $15 million he pays in fines is less than half the severance package he received from SSB on his resignation, and even smaller compared to his accumulated bonuses. Even his legal bills get paid by Citigroup.
The key to the story is the independent analyst. Grubman sold his soul for the acclamation and money that making popular calls would bring. Reingold frequently had to battle with his constituents, but finished his career honourably. But in the end, Grubman was the chump, since he ended up giving the stamp of approval to companies who were leaking false information to him.
ReingoldÆs final words are somewhat chilling: ôI no longer believe in the transparency of the American financial system. When I came to the Street, I saw it as a place where American capitalism reigned supreme, where everyone had a chance to do wellà(but) I came to realise that itÆs a game rigged against most of its participants û everyone but the few with a seat at Wall StreetÆs special tables.ö Food for thought in these troubled times.
¬ Haymarket Media Limited. All rights reserved.
