Confessions of a Wall Street Analyst Part 10

No one was home when I opened the letter, but I somehow felt guilty. I half expected someone to jump out from a closet and start wagging his finger at me. If there ever was a way to codify a conflict of interest, this letter sure was it. I wondered if I should even bother dancing with these guys. Was Merrill's subtle disappointment with me going to look like paradise in retrospect if these guys at CSFB were so focused on paying me like a banker? On the other hand, the financial upside might be dramatic. Was this the temptation that would send me to the other side?

I wanted to see Paula's unbiased reaction to these enormous numbers. Careful to keep a straight face, I gave her the offer letter. After reading the relevant paragraphs, it took her about five seconds to make up her mind. "This looks like a huge conflict of interest. No way you can take it," she said, as clear-minded and matter-of-fact as always.

Brady, Al, and I met again on November 5, this time at the Mark hotel, where I had met with John Mack back when he was trying to lure me back to Morgan Stanley. I couldn't help but look furtively around for him or anyone else who might recognize me. I told them my lawyer (always blame the lawyer) had advised me to request that four items be added to the contract.

The first was that I wanted my team and me to report to Al. I did not want to report to Frank Quattrone. I was sure that having a banker as a boss would create more pressure than ever to be bullish on the stocks I covered. Brady said "fine." Al smiled. He was clearly relieved that telecom stocks would remain under his watch. Upon Frank's arrival a year earlier, the a.n.a.lysts covering technology stocks had moved under his direct control. Whatever faint line still existed between those a.n.a.lysts and the bankers seemed to have disappeared into the sand. I had no intention of that happening to me.

The second item related to my team. I wanted to bring over six of them at roughly the same percentage pay increase as I was getting. Al said no problem. He was impressed that I had been able to a.s.semble and keep such a highly qualified team. He said he could give each a two-year contract, but I wanted four years to match mine. Brady said they had never gone past three years and wouldn't do it now. They had finally said no to something. I protested, but in the end, we compromised. All six received three-year guarantees.

The third item was more of a stretch. I requested a guaranteed minimum budget for my staff in terms of both headcount and aggregate compensation. This was extremely important because it would enable me to protect my team even if hard times. .h.i.t CSFB. Brady had no problem with the concept.

The final item I held for last because it was the most important and I didn't want to bring it up until everyone thought the deal was done. It was that incentivized bonus scheme. "I'm good to go on virtually everything," I started. "Except my wife and I had a long talk. She's just not comfortable with the banking incentives and I agree. So I'd like to go back to the fixed deal, but, given how the incentives have gone up, can we increase the annual fixed amounts by 25 percent to equalize the two offers?"

I expected some kind of reaction, at least surprise that I would reject something that could make me so much dough. I was rejecting a contract that would have paid me as much as 40 percent more than the fixed contract would over the four years. But the CSFB guys were true pragmatists. They didn't care what I did as long as I decided to come with them. Fine, they said. What ever works for you is fine. And the 25 percent? That's fine too. I'd learned a few negotiating tricks along the way, I guess.

At the end, I had what amounted to a doubling of my pay package from Merrill and roughly the same for the members of my team. It was truly crazy. My contract had no upside opportunity for banking, for making number one on I.I., I.I., or even for picking stocks well. Likewise there was no downside risk even if the bankers-or their corporate clients-were not happy with my investment opinions. Even if my or even for picking stocks well. Likewise there was no downside risk even if the bankers-or their corporate clients-were not happy with my investment opinions. Even if my I.I. I.I. ranking fell or if I fell off the list entirely, I would still be guaranteed the same amount. ranking fell or if I fell off the list entirely, I would still be guaranteed the same amount.

Yet there was no way I was going to start slacking off. I wanted to go out on top and beat the Grubster, as my team members liked to call him. It was going to take a lot of work, since he ruled the roost in virtually every const.i.tuency, from executives to buy-siders, from journalists to bankers. I figured the world would have to wise up at some point.

I was 90 percent sure I was going to move, but the decision wasn't final. I still had to find out how Merrill would react. So on the night of November 16, after my lawyer had signed off on the final contract changes, I left Andy Melnick a voice mail saying I needed to speak with him as soon as possible the next morning, which was a Wednesday. By the tone of the call, I knew he would know what I was calling about.

Merrill: I'm Outta Here At this point in the bull market, research directors like Andy were fielding these gun-to-the-head stickups about every week or so. Did they want to keep this a.n.a.lyst? Was it worth doubling his or her comp to do so? The amount of money being spent on salary, bonus, stock options, and the like was simply staggering. The only thing more staggering was the amount of money coming in from the bankers' deals.

In 1999, for example, Merrill would earn $2.6 billion in profits, up a mind-boggling 69 percent from the year before. Its revenues from investment banking alone were $3.6 billion, while Goldman Sachs's banking revenues were $4.4 billion and Morgan Stanley's $4.5 billion. Credit Suisse First Boston, fueled by Frank Quattrone's technology IPOs, brought in $1.9 billion in fees. It was truly raining money.

That evening, after leaving Andy that voice mail, I couldn't help thinking how nice it would be to get away from Merrill's ma.s.sive retail system and to get back to a firm that serves professional investors only. For the past six and a half years, I had avoided direct contact whenever possible with Merrill's brokers and their clients, mostly out of necessity. Dealing with retail, or the brokers who interact with individual investors, takes far too much time, distracts you from doing research, and siphons off time that otherwise might be used to serve inst.i.tutional clients and win I.I. I.I. votes. votes.

I had come to realize that dealing with retail was a loser's game. If brokers bought a stock and it went up nicely, we never heard from them. If it went down, on the other hand, we got nasty voice mails and e-mails screaming about our bad picks. But the main problem with retail, which wasn't specific to Merrill but was true of every brokerage firm with a large focus on individual investors, was that it dumbed down everything we did. Merrill's retail system, for example, had the ability to convert a report of 20 to 40 pages into a paragraph or two of Madison Avenuestyle slogans, combined with some words about my "top" ranking as an a.n.a.lyst. The brokers would then push this simplified information through to their clients.

The other problem was that some brokers paid no attention to the risk level we a.s.signed our stocks or to the need to diversify risk. They didn't look at our picks in connection with Merrill's investment strategists, whose job it was to recommend to investors whether they should be overweighted or underweighted in the sector, or whether investors should hold a certain percentage of their portfolio in stocks versus bonds versus cash. Caveats, alternative scenarios, and other details that my inst.i.tutional clients read and took the time to understand never made it to the regular folks.

The brokers were enormously varied in their experience and smarts, and the most sophisticated ones ended up, unsurprisingly, with the individual clients with the highest net worth. Taxi drivers and teachers with a relatively small amount of savings were more likely to get the youngest, least experienced new residents of broker-land. And those brokers were the ones who seemed to blindly follow a.n.a.lyst picks most often.

So the idea of returning to a bank that served only inst.i.tutional investors was really very appealing, especially when combined with the pressures I was feeling. I had had nearly seven good years at Merrill, but I was a realist: I was clearly wearing out my welcome with the bankers there, and a move to CSFB would give me a fresh start that I hoped would carry me through the three and a half more years I wanted to stay in the business. I was sad that my time at Merrill Lynch had to end this way, but I was mostly relieved that CSFB's door had opened at exactly the right time.

The next morning, Andy's secretary asked me to come down to his office. Rosemary Berkery, who ran the research department with Andy, was there too. "Look," I said, "I have been very happy here, and I appreciate everything you two have done for me. But I have this offer from CSFB and I feel obligated to give you a heads-up." Andy asked what it was, and I ticked off the numbers for each of the four years.

Both of them looked startled, giving each other quick glances, but neither of them asked me what was wrong or what they could do to make things better here, as usually happens. Instead, they said they'd have to get back to me. That part was typical, since they needed approval from David Komansky, the CEO, to match an offer of this sort. As I exited Andy's office, I couldn't help wondering whether Andy and Rosemary were high-fiving each other as the door closed behind me.

The next morning, they called me in at around 9:30 and got right down to business. Rosemary led the discussion. "We think you're doing a great job," she said, "and we've made a commitment to you and we thought you had made a commitment to us." Translation: We're not matching. "I appreciate that," I said. "You guys have been very good to me. I know these numbers are crazy. Let me think it over and I'll get back to you later today." Translation: I'm outta here.

I have to admit I was surprised and a bit disappointed, more for my ego than for anything. Another side of me-the side that was a shareholder in this company-actually felt a little relieved. I guess there are limits to this game of chicken, I thought. It was over. So I went back to my office, called Al Jackson, and told him we had a deal. This meant that he could immediately start calling my team, as I wasn't allowed under my Merrill contract to solicit them myself. Ehud Gelblum, a 30-year-old PhD in engineering who'd been working with me for just a year and half, was the most aggressive one of the bunch, and he knocked on my door. He knew something was up, having heard the buzz that traveled at lightning speed the second someone went into Andy's office. "Don't worry," I said. "It's good. Just hang in there."

I walked out the doors of the World Financial Center for the last time and went home, waiting for my team members to get the call to come to a meeting with Al at 7:00 PM PM, where they were offered pre-negotiated contracts. They were excited, but also worried and confused by the quick turn of events, so I was up until about 3:00 that morning, talking through the details with each of them. I explained that they wouldn't report to anyone on the banking side, that I would protect them, and that everything would be fine. Probably the toughest sell was Connie Marotta, my executive a.s.sistant, who had spent virtually her entire career at Merrill. But by the next morning, all of them had signed contracts and shown up for work at their new home, CSFB.

We spent that Friday and the entire weekend setting up our systems, working with CSFB's computer people, and meeting with its conference planners to try to transfer our conference, which was already scheduled for March, to CSFB. Three of us even spent Sat.u.r.day afternoon visiting hotels and other conference venues, reviewing their facilities and available dates.

My departure must have set off a bit of a panic inside Merrill. I heard that within 24 hours of my leaving, several people, including my friend Linda Runyon Mutschler, the number one wireless a.n.a.lyst, had their pay packages instantly doubled. And despite my entire team's reputation for playing it straight, Merrill made a huge effort over that weekend to convince both Mark Kastan and Ehud to return. Ehud actually turned down an offer from Merrill that was twice what CSFB was offering. He told me he was worried Merrill's bankers would push him to recommend everything in sight. "I don't want to be a wh.o.r.e. It's just not worth it," he said.

Mark felt the same way. He had had some serious run-ins with the bankers as well, some of which he didn't even know about.

"Any Idea What the h.e.l.l They Were Talking About?"

Earlier that year, Merrill banker Tom Middleton had asked me to come to his office for a meeting. I walked in to see Rob Kramer, a young, rising-star banker in Middleton's group who was a.s.signed to a variety of telecom startups.

I immediately flashed back to a conflict I'd had with Rob about a year earlier. Ehud and I had gone with him to visit Digital Island, a San Francisco company planning an IPO that claimed to have a brilliant, proprietary technology for efficiently routing Internet traffic around the globe. At least that's about all I understood after a four-hour pizza and Chinese take-out dinner with Digital's top executives in their conference room.

It was late, the pizza was digesting, and I was exhausted, so maybe that's why I had no clue what they were talking about. We'd had a rough day, starting in New York, then flying to San Francisco for a meeting with Global Center, a Web-hosting company in Palo Alto, then with Covad, a DSL startup in San Francisco, followed by a meeting at PacTel (now SBC)'s DSL operations center in Walnut Creek before reaching Digital Island at about 7:00 PM PM. Or perhaps it was because I just wasn't equipped to understand the Internet. I kept scratching my head trying to "get it"-and also to stay awake.

As we walked out of the building, I said to Ehud, "Any idea what the h.e.l.l they were talking about?"

"Nope."

"Ehud," I said, "you're a f.u.c.king PhD in electrical engineering. If you can't explain this thing to me over the next half hour, then there is no way we can put our names behind their IPO."

Merrill banker Rob Kramer was walking a step behind and started to panic.

"You guys, this company is awesome," he said. "Investors will eat it up. Get with it. This company is going to revolutionize the Internet and you can take credit for bringing it to [the attention of] investors."

"Rob, I sat in there for four hours with a PhD in electrical engineering sitting next to me. I still have no idea if this thing is a sham or for real. I'm certainly not the guy who can credibly explain it to our sales force and brokers, or to investors. s.h.i.t, I can't even understand half the words they used in there. And, for some reason, I'm not even sure they did either."

The next morning, as our plane touched down at JFK, we all jumped on our cells to check messages. Rob had news: it turned out that Merrill could not underwrite this IPO even if it wanted to. This was because Merrill's private equity fund, a fund for managing directors and other executives that I had invested in as well, had recently invested in Digital Island. Since we had only recently invested, were we to be the underwriter, it would look like we had invested in order to get the IPO business and/or to hype the stock when it went public.

Everyone agreed, for a change, that this was a real conflict of interest. I was relieved. Eventually Digital Island did get its IPO done, in June of 1999, underwritten by Bear Stearns, at $10 a share. It was, to my surprise, a huge hit. It quickly rose to as high as $148 in December 1999. But then, like so many other dot-com startups, it crashed. (By 2001, it had found its savior, Cable & Wireless, which bought Digital Island for just $3.40 per share.) Returning from my flashback, I heard Merrill banker Rob Kramer immediately begin to slam my colleague Mark Kastan's lack of influence in the markets and lack of respect among the top executives of the startup local carriers that he covered. "He just doesn't get it," Rob fumed, again saying how the Internet was changing the world and Mark was the last to realize it.

I understood that what he was really saying was that he didn't like Mark's measured research in comparison with Jack Grubman's o.r.g.a.s.mic enthusiasm for the startup local carriers. Tom and Rob told me that they'd like my help in either convincing Mark to be more bullish or finding someone to replace him. I told them that Mark was doing a great job. Just like me, Mark couldn't be expected to "win" when Jack, it seemed, was using over-the-Wall information to gain influence. I said that I would not allow any change in Mark's coverage.

The $1.5 Million Mistake But now I was leaving, and suddenly Merrill realized that having no a.n.a.lyst was a lot worse than having one that didn't listen to the banking side. Mark received streams of phone calls all weekend from Rob, Tom, Andy Melnick, and even John L. "Launny" Steffens, Merrill's vice-chairman, a board member, and the second-highest-ranked executive at the firm. They all exhorted him to stay at Merrill. And Andy kept one-upping CSFB's offers. Mark never wanted to stay but did a marvelous job of negotiating that weekend, parlaying the compet.i.tion into an even better offer from CSFB.

The irony was amazing: Merrill was desperate to rid itself of me and CSFB was equally desperate to hire me. And both were in heat for Mark and Ehud. In the meantime, the PR people at both firms worked to convince the outside world that Merrill fought hard to keep all of us. Merrill didn't want anyone to think it was pushing out the second-ranked telecom a.n.a.lyst, since that could make welcome fodder for an ugly article about banking pressures on a.n.a.lysts. CSFB, on the other hand, wanted to notch up another victory for this up-and-coming bank. Investment Dealers' Digest, Investment Dealers' Digest, a trade rag read by Wall Streeters, even reported on December 20, 1999, that, in the words of a "source familiar with the move," "'Merrill fought hard to keep Reingold....They tried to but couldn't keep him.'" a trade rag read by Wall Streeters, even reported on December 20, 1999, that, in the words of a "source familiar with the move," "'Merrill fought hard to keep Reingold....They tried to but couldn't keep him.'"4 Yeah, right. Yeah, right.

Several days after starting at CSFB, I was looking over my contract when I saw a number that stopped me cold. It looked as if CSFB had made a mathematical mistake. We had agreed to a deal that would compensate me for the unvested Merrill Lynch stock and options I had left behind. Amazingly, there was a $1.5 million error-in my favor!

The contract was ready for signing. All I had to do was put pen to paper and I'd have a nifty $1.5 million bonus that I hadn't even expected, in addition to having doubled my pay. It was truly surreal. The most surreal thing of all was the fact that the bank would never even miss it. A mere $1.5 million? For CSFB, it was a blip, nothing more, nothing less. But I couldn't keep it. I told Paula the story, and she agreed that I had to give it back.

So that evening, I left CSFB's Brady Dougan a voice mail. "I want to let you know there is an error in the final contract. The make-whole award is $1.5 million too high by my calculation," I said. I figured Brady would forward my message to the right people and then send me a quick response, saying something like "Thanks, Dan. You are an honorable man and you are already making CSFB proud." But there was no response. A few days later, a new contract arrived, exactly $1.5 million lighter.

I never heard a word about it, not from Al or Brady or anyone. On Wall Street, honesty doesn't raise an eyebrow, even when it involves over a million dollars. I guess it should surprise no one that dishonesty goes unnoticed as well. There really is no right and wrong on Wall Street, I thought to myself. Just money.

The Dupe: Jack's AT&T Upgrade And because money never takes a vacation, there was no time to grab a sandwich with my new colleagues or figure out where the men's room was. The next Friday, the day after Thanksgiving, The Wall Street Journal The Wall Street Journal printed an article saying that AT&T was considering selling a 1015 percent stake in its wireless unit to the public. printed an article saying that AT&T was considering selling a 1015 percent stake in its wireless unit to the public.5 It would be a $10 billion IPO. If true, it would be a juicy plum of a deal, the largest IPO in U.S. history, generating over $300 million in underwriting fees. The scuttleb.u.t.t was that AT&T would choose three banks to co-lead the deal, and each of the three could make something on the order of $65 million. It was a monster, all right. It would be a $10 billion IPO. If true, it would be a juicy plum of a deal, the largest IPO in U.S. history, generating over $300 million in underwriting fees. The scuttleb.u.t.t was that AT&T would choose three banks to co-lead the deal, and each of the three could make something on the order of $65 million. It was a monster, all right.

I hadn't been over the Wall, so I read about it in the paper like everyone else. My first reaction was that, like the wireless and cable tracking stock I had championed a year earlier, it might lead to a higher AT&T stock price. I figured AT&T was hoping to profit from investors' seemingly insatiable appet.i.te for new companies with high growth potential. Sure AT&T was still considered a stodgy stock at best, but its cellular business was very hot, and all signs pointed to a very successful IPO. I thought it was a good move, and it certainly would be good for my Buy rating on the company. In fact, the stock jumped 8 percent on the Journal Journal story alone. story alone.

I thought CSFB had a very good shot at winning the third underwriting slot in the deal. Mike Armstrong, AT&T's CEO, had done much of his banking with Goldman since he'd been at DirecTV, and Merrill was probably a shoo-in thanks to Linda Runyon Mutschler's number-one wireless ranking in the I.I. I.I. magazine poll. But a banker at CSFB used to work with Dan Somers, AT&T's CFO, and apparently had a great relationship with him. And Cindy Motz, CSFB's wireless a.n.a.lyst, had risen very quickly to number three in the magazine poll. But a banker at CSFB used to work with Dan Somers, AT&T's CFO, and apparently had a great relationship with him. And Cindy Motz, CSFB's wireless a.n.a.lyst, had risen very quickly to number three in the I.I. I.I. poll and might challenge Linda in another year or two. I figured AT&T would be impressed with that. I, of course, had been bullish on AT&T and, fortunately, its shares were up almost 11 percent after adjusting for stock splits since my upgrade about a year ago. poll and might challenge Linda in another year or two. I figured AT&T would be impressed with that. I, of course, had been bullish on AT&T and, fortunately, its shares were up almost 11 percent after adjusting for stock splits since my upgrade about a year ago.

The other possible contender was Salomon Smith Barney, but in this case Jack Grubman actually hurt its chances. His Neutral rating and acerbic remarks about AT&T and Mike Armstrong had totally alienated AT&T management. It didn't matter financially to me, of course, whether we won it or not, but I certainly hoped we would.

And then, on November 29, some news crossed the wire that made me sick. Jack had suddenly upgraded AT&T to a Strong Buy-this after dissing the stock for four straight years. There was no particularly great news that justified an upgrade, no major change in strategy, no nothing-except, of course, for a chance to get in on the biggest IPO of all time. I don't know why I even bothered feeling shock or surprise by this time-it was getting old-but I was aghast. Everyone knew how aggressively negative he'd been on the stock. He'd been extremely critical of the company's cable telephony strategy, seeing it as too expensive and too late, and likely to be a huge waste of money. But now, in his new report, he suddenly claimed that the strategy was going to work like a charm.

I wasn't the only one to react cynically to the news. Many clients forwarded Jack's report to me with snarky comments such as "Check this out. You're not gonna believe it" or "I smell a deal coming." The move seemed so patently obvious that surely it would never work. He had stooped to a new low, it seemed, in order to horn in on this gargantuan banking deal. Surely, the folks at AT&T would understand that too. They weren't stupid.

My reasoning was reinforced a week later when The Journal The Journal published a story in its "Heard on the Street" column by Randall Smith and Leslie Cauley t.i.tled, "Will Upgrade of AT&T Stock Help Salomon Smith Barney?" published a story in its "Heard on the Street" column by Randall Smith and Leslie Cauley t.i.tled, "Will Upgrade of AT&T Stock Help Salomon Smith Barney?"

"As AT&T gears up for another blockbuster IPO," it read, "...the betting on Wall Street is that one of the firms with a role in the underwriting will be...you guessed it-Salomon." The article continued: "People familiar with the matter say Sanford I. Weill, co-CEO of Salomon's parent, Citigroup, and an AT&T board member, nudged Mr. Grubman to give AT&T a fresh hearing. One person who knows AT&T says its chairman, C. Michael Armstrong, has regularly asked Mr. Weill to urge Mr. Grubman to revisit the merits of AT&T's cable strategy. 'Anyone who knows me knows that I call them as I see them,' Mr. Grubman said. 'No one tells me what to do.'"6 If If The Wall Street Journal The Wall Street Journal was casting aspersions, I thought to myself, no company with any self-respect-certainly not conservative, image-conscious AT&T-could fall for such an obvious ploy. was casting aspersions, I thought to myself, no company with any self-respect-certainly not conservative, image-conscious AT&T-could fall for such an obvious ploy.

In the meantime, I had a lot of work to do getting ready to launch coverage at CSFB. I didn't intend any dramatic ratings changes, but I still had to write new reports and explain my reasoning on every stock I covered. My team and I were excited to be at a firm serving inst.i.tutional clients only. In contrast to life at Merrill, we no longer needed to simplify our writing or presentations for consumption by thousands of retail investors. And we no longer had to worry that every word we wrote or spoke might be misunderstood. In a lot of ways, I felt as if I had been released from retail jail.

That's because CSFB had no retail brokers, other than some salespeople who served very high net worth individuals who were generally quite sophisticated businesspeople and corporate executives. CSFB's inst.i.tutional sales force, about 150 strong throughout the world at the time, comprised MBAs and others with substantial experience in the markets. The only challenge was that I had to convert my recommendations to CSFB's unique rating scheme. While Merrill's scheme of intermediate versus long-term ratings and various risk and dividend ratings was confusing in its endless categories and criteria, CSFB's had terminology that didn't match up well with that used by the rest of the Street.

Though it was a multilevel system like Merrill's and each level (1, 2, 3, etc.) represented the same percentage upside or downside, CSFB's top rating, Strong Buy, was what Merrill called a Buy. Its second rating was Buy, which is what Merrill called Acc.u.mulate and Salomon Smith Barney called Outperform. Despite the confusing semantic differences, these rating systems were virtually identical. A "1" suggested the a.n.a.lyst felt very strongly that this stock was going to do very well, outperform the market by a substantial amount, and had upside over the next year of 20 percent or more. Similarly, regardless of whether it was called Acc.u.mulate, Outperform, or Buy, a "2" meant the a.n.a.lyst thought the stock would outperform the market by a small amount and had upside in the 1020 percent range. But those who weren't clients often confused our Buy, or "2," rating with other firms' Buy, which for them was their top rating.

CSFB also had only four choices for ratings, where the others had five. In the case of a "4"-or "5"-rated stock, CSFB used Sell, but the rest of the Street had a quirky nomenclature, clearly intended to soften the blow to investment banking clients and, in some cases, to buy-siders who got angry when a big stock holding of theirs was slammed by an a.n.a.lyst. So, if an a.n.a.lyst thought there was 1020 percent downside in a given stock over the next 12 months, the appropriate rating was Reduce at Merrill, Underperform at SSB, and Sell at CSFB. And if the a.n.a.lyst thought there was more than 20 percent downside over that same time period, the stock would be rated "5" and labeled Avoid at Merrill, Sell at SSB, and, again, Sell at CSFB.

"I've Never Had a Conversation Like This."

Toward the end of December, we made our formal pitch to AT&T in front of its treasurer and its new CFO, Chuck Noski. Chuck, another Hughes Electronics transplant, had just signed on that month. He was truly a wild card: he hadn't been in the telecom industry. He didn't know many of the telecom bankers nor did he know any of the twenty or so Wall Street a.n.a.lysts who followed AT&T. He certainly didn't know much about Jack's "special" approach to the a.n.a.lyst's role, though I supposed he knew Jack could move stocks far more powerfully than the rest of us.

It was a bit of a problem for CSFB, since its bankers had had the closest relationship with Chuck Noski's predecessor, Dan Somers, whom AT&T's CEO, Mike Armstrong, had just sent out to Denver to run its cable business. We met with Chuck and his team two days before Christmas to display our wares, much as a traveling salesman would sell pots and pans. Only what we were essentially selling was the ability to sell.

Most of the pitch meetings I've ever been in have been the same, and this one was no different. The bankers proffered their services, and CSFB wireless a.n.a.lyst Cindy Motz and I talked about our research. AT&T executives asked us questions, such as how could they best reach retail investors if they went with CSFB, which didn't have retail brokers or customers, what was the right price for the shares, and what aspects of the company should be emphasized during the road show. I thought the CSFB team handled the meeting well, and we waited expectantly for the news.

Sometime around the end of January, I got word from Chuck Ward, the head of CSFB's investment bank, that made me realize-yet again-how naive I still was. He called me up to his office, where he told me he had talked with Chuck Noski and that it looked as if AT&T had decided to go with three bankers. He said that one of them was going to be Salomon, which meant that not one of them was going to be us, since Goldman and Merrill were shoo-ins. We were screwed-and Jack had been rewarded for what seemed the most sinister move I'd seen in my 11 years as a research a.n.a.lyst. In addition to my own personal anger and frustration, I was embarra.s.sed for AT&T, since everyone, and I mean everyone, saw right through this one.

Furious, I told Chuck that I was going to call Chuck Noski and tell him how outrageous I thought this was. He smirked and said, "Good luck. I guess we've got nothing to lose." I don't know whether I thought I could actually make a difference, but there was nothing that could stop me at that point. All I could think was that Jack's model was now the only working model for an a.n.a.lyst. There had to be something I could do about it.

I had met Chuck Noski for the first time during the pitch meetings. Short in stature and quiet in demeanor, he seemed very smart and very a.n.a.lytical. I figured he could use an education in Grubman's World, a world a lot like Wayne's World: Wayne's World: you had to live in it in order to believe it. I hoped I could show him how bad it would look for AT&T to pick Salomon. And if I could change his mind, I would also be showing Chuck Ward that I could make a difference for CSFB. you had to live in it in order to believe it. I hoped I could show him how bad it would look for AT&T to pick Salomon. And if I could change his mind, I would also be showing Chuck Ward that I could make a difference for CSFB.

So I put in a call to Chuck Noski. He called back a day later, just as I was boarding a plane from Portland, Oregon, to Whistler, the Canadian resort where I was going to spend a few days skiing with clients after four grueling days of meetings up and down the West Coast. I had 10 minutes before the plane took off, so I didn't waste any time once Chuck confirmed to me what I feared was true-that AT&T was getting ready to announce it had hired Goldman, Merrill, and Salomon as lead underwriters.

"Chuck, I want to apologize at the outset of this conversation," I started. "My plane is taking off in less than 10 minutes and I need to quickly convey some things to you about my compet.i.tor at Salomon. I may not come across as politely or professionally as I normally would like to."

"Go ahead, Dan, I'm a good listener," Chuck replied.

"Grubman's research is a sham," I blurted, every bit of self-control I had evaporating. "He sells his Buy ratings for investment banking business. In effect, he's a wh.o.r.e and everyone knows it. If you guys hire Salomon, you will be perceived as naive dupes, and shareholders will lose respect for AT&T management."

I tried to tell Chuck that by rewarding this behavior, he was simply encouraging more and more research a.n.a.lysts to emulate Jack's approach, and that that wouldn't benefit anyone. I was more emotional, and more personal, than I'd ever been with a company executive. He heard me out, but he was clearly taken aback, particularly by the fact that I would dare to call my compet.i.tor a wh.o.r.e and him a dupe.

"I've never had a conversation like this, Dan," he said.

"This is really a different industry," I said. "Grubman's behavior is really outrageous."

Finally, Chuck told me that he'd discuss our conversation with Michael Armstrong.

"I have taken notes and I've heard you," he said politely but firmly.

Well, I guess he had heard me, but he certainly didn't listen to me. CSFB would end up being a co-manager with about six other firms, the b.o.o.by prize after losing out on the world's biggest IPO ever. CSFB's take was $15 million instead of the $63 million that Salomon, Goldman, and Merrill each took home. Jack had delivered a $48 million bonus to his firm with a few strokes of the keyboard.

As I walked across the tarmac toward the waiting twin prop, I was truly disgusted-with Wall Street, with the a.n.a.lyst community for imitating people like Jack, with the press for celebrating him, and with corporate America in general for its willingness to deal with the devil.

The fact that Sandy Weill, the co-CEO of Citigroup, which owned SSB, sat on AT&T's board, while Armstrong sat on Citigroup's board, troubled me a lot too. Critics of these "interlocking directorships" considered them to be a corporate governance no-no because of the temptation for mutual backscratching, and suddenly I could see why. There was one other explanation for the move, although it was the most pathetic one: perhaps Mike Armstrong simply thought Jack's November upgrade was a great piece of honest research extolling the virtues of his cable telephony strategy. If so, Armstrong was the only one on earth who believed that Jack's upgrade was authentic.

That evening, I returned a call to Rebecca Blumenstein of The Wall Street Journal, The Wall Street Journal, who was preparing a story about the intense battle between SSB and CSFB for the third and last lead underwriting spot. She wanted to know what was going on and whether I knew if a final decision had been made. I played somewhat dumb-not so dumb as to make her think I wasn't a player but enough so that I could deny that I knew the final decision. In any case, she wrote a fairly accurate article that said CSFB had fought hard but lost, and that given my recent arrival at CSFB and the firm's historical excellent investment banking relationship with AT&T, this was somewhat embarra.s.sing for me. who was preparing a story about the intense battle between SSB and CSFB for the third and last lead underwriting spot. She wanted to know what was going on and whether I knew if a final decision had been made. I played somewhat dumb-not so dumb as to make her think I wasn't a player but enough so that I could deny that I knew the final decision. In any case, she wrote a fairly accurate article that said CSFB had fought hard but lost, and that given my recent arrival at CSFB and the firm's historical excellent investment banking relationship with AT&T, this was somewhat embarra.s.sing for me.7 It was was embarra.s.sing for me, but it was even more embarra.s.sing for my profession and for Mike Armstrong and Chuck Noski. I was also, I suppose, a bit embarra.s.sed about my outburst. Chuck Ward later told me that he had called Dan Somers, AT&T's former CFO, to follow up, and that Dan had told him I had "made enemies of friends." Nice way to start off on the right foot with a new job, I thought ruefully. Chuck Ward never asked for my help again. I guess I had devised one very effective way to get bankers off an a.n.a.lyst's back. embarra.s.sing for me, but it was even more embarra.s.sing for my profession and for Mike Armstrong and Chuck Noski. I was also, I suppose, a bit embarra.s.sed about my outburst. Chuck Ward later told me that he had called Dan Somers, AT&T's former CFO, to follow up, and that Dan had told him I had "made enemies of friends." Nice way to start off on the right foot with a new job, I thought ruefully. Chuck Ward never asked for my help again. I guess I had devised one very effective way to get bankers off an a.n.a.lyst's back.

A few years later, in November 2002, Chuck Noski announced his resignation from AT&T. We had maintained a decent professional relationship despite its awkward beginnings, so I called to congratulate him. After a bit of pleasant chitchat, his tone turned serious. He told me that he regretted not listening to me about the IPO. I'm sure he did; the whole thing unleashed a storm of controversy that would later envelop Jack, Sandy Weill, and Mike Armstrong, among others. But at the time, all we knew was that Jack's way was the winning way.

8. Humpty-Dumpty

2000.

Without realizing it at the time, I presided over what was probably the last hurrah for the fearless leaders of telecom. My conference coincided perfectly with the absolute zenith of the bull market. There was a giddy hysteria to it that at the time was thrilling and contagious; looking back, it seems pathetic. Everyone there was making money hand over fist, from the executives whose stock options were soaring to the bankers who were awash in deal fees to the inst.i.tutional investors who, armed with that extra edge, were getting to IPOs and M&A announcements just a little bit sooner than the rest of the world.

Playing with the Devil THE NEW MILLENNIUM DAWNED with the kind of frenzied excess that had come to seem normal. In retrospect, it was really the dancing-on-graves-with-fingers-crossed kind of mania that happens when everyone knows in their heart that it just can't last. The first big telecom event of the year was Salomon Smith Barney's annual Palm Springs telecom and media conference in January, hosted by Jack Grubman. I wasn't invited, of course, but I paid a lot of attention to the wires, since some news was likely to break during the event. with the kind of frenzied excess that had come to seem normal. In retrospect, it was really the dancing-on-graves-with-fingers-crossed kind of mania that happens when everyone knows in their heart that it just can't last. The first big telecom event of the year was Salomon Smith Barney's annual Palm Springs telecom and media conference in January, hosted by Jack Grubman. I wasn't invited, of course, but I paid a lot of attention to the wires, since some news was likely to break during the event.

Like my conference, it was a star-studded gathering, a who's who of telecom attended by many of the industry's top executives. Our two events, held just two months apart, were the two best-attended conferences for telecom investors, and we each tried to put on the most dynamic show possible. Jack's event, because it took place at a golf resort, was more casual in style, while ours, in New York, was a bit more formal and urbane. As always, we were competing-this time, to attract the most influential speakers and attendees, who would, hopefully, bring to light some important new information.

In Palm Springs, Bernie Ebbers and Scott Sullivan of WorldCom were the most popular speakers, and rightfully so, since the company's stock continued to soar, having nearly quintupled in the previous four years and become the NASDAQ's most successful stock of the decade. The gym teacher cowboy from Canada and the numbers whiz from upstate New York were the dream team of telecom who had transformed the industry like no others. Way back in 1995, the company had hired Michael Jordan as a spokesperson. And now, it seemed, WorldCom had become the Michael Jordan of its own sector, outhustling, outthinking, and outwheeling and dealing its plodding compet.i.tors. (In 2005, Michael Jordan would sue the company, claiming that the company owed him $8 million.1) But what Bernie and Scott were saying on this day, though diffused in a fluffy cloud of optimism, got some tongues wagging. Clients called to tell me that one of their slides showed a revenue growth range of 13.515.5 percent for the year 2000. It was a terrific range to have, but it wasn't quite the 14.515.5 percent range that had been cited in their conference call a few months earlier, in October.

A full percentage point may not seem like a lot, but it can have a major effect on investor perceptions and, if the downward trend continues, on a company's stock price. Conference attendees buzzed. Were Bernie and Scott saying that the real number was only 13.5 percent now and the Wall Street consensus of 14.515.5 percent was too high? Were they just hedging in case the economy slowed? Or did they know something we didn't? Some of the biggest WorldCom bulls actually wondered whether the presentation simply had a typo. People asked Scott what it all meant, but he simply said that that was the range, and not to read any more into the top end of the range than the low end. That day, WorldCom shares fell 11 percent, from $49.94 to $44.44. It sure looked as if the attendees at Salomon's conference were reading more into the low end.

The stock settled down after a few days, but toward the end of January it began to slide again, falling about 25 cents a day or so. I watched with concern, as I still had a Strong Buy, or "1," rating on it, the top rating in CSFB's system, and finally called some of my clients to see if they knew anything. One of them told me that he'd spoken to Jack, who had said he'd talked to Scott and that 1315 percent, not 13.515.5 percent, was actually more accurate, with the lower end more likely than the higher end.

We all knew better than to believe everything Jack said by now, but when it came to WorldCom, it was foolish to ignore him: he was better connected with this company than anyone, and he'd certainly come up with critical information before. If this information was true, however, it was a terrifying number for anyone who owned WorldCom, since if the revenue numbers came out that low, the stock would surely plummet.

This was particularly true for a growth company like WorldCom with a suddenly slowing growth rate. Wall Street is a game of expectations: when expectations are not met, the market usually reacts swiftly and brutally. I was worried, but I didn't want to change anything until I had more than hearsay backing me up.

At the end of January 2000, I hosted a luncheon for Ivan Seidenberg, CEO of Bell Atlantic, and invited some money managers from the country's biggest financial inst.i.tutions. This was one of those perks for the most favored-or most powerful-clients; an intimate group of 20 people lunching with a top executive. I held about eight of these each year, and almost always scheduled them in the elegant Library Room on the second floor of the St. Regis Hotel. The St. Regis, located in midtown Manhattan, was one of New York's sw.a.n.kiest hotels, a place where the ornate Louis XIVdecorated rooms went for around $575 a night.

As my handpicked group of powerful investors chatted before sitting down, I heard more about Jack's claim that he'd talked to Scott Sullivan. The irony was that Jack was now so powerful that these rumors took on a life of their own. He had succeeded in making everyone believe that his relationship with WorldCom was so tight that even if what he said wasn't true, few would doubt him. Anything he said was now as important, if not more important, than what Bernie or Scott said about WorldCom. I had no idea what was correct; all I knew was that the stock was dropping.

After lunch I asked Ehud Gelblum and Ido Cohen, an extremely bright young a.n.a.lyst I had hired shortly after my move to CSFB, to call Blair Bingham, one of WorldCom's investor relations guys, and press him for some more information. I showed Ivan out and returned to the St. Regis's Library Room to hear Blair, on speakerphone, reiterating that the range remained 13.515.5 percent.

I jumped in. "Hi, Blair, this is Dan," I said. "Here's our dilemma. We're recommending your stock with a Strong Buy rating. We're getting a lot of questions lately, because apparently Jack is saying that the revenue forecast should be closer to the lower end of that range, based on a recent conversation he had with Scott."

Blair dismissed my question right away. "I don't know anything about such a conversation, Dan," he said, "and I don't know what Jack is saying, but it doesn't matter anyway. Bernie told everyone in Palm Springs that the range was 13.515.5 percent and one shouldn't read anything more into the lower end than the higher end."

"I hear you," I interrupted, "but you've got a problem. I don't know who said what to whom, but I do know you guys have given Jack a very disproportionate voice on your stock. If he says revenues will grow 13 percent and you deny it, the vast majority of investors are going to either believe the 13 percent or live in fear of it. No one is going to believe you."

I asked him to get Scott Sullivan, the CFO, on the phone. "Otherwise," I threatened, "I'm going to have to cut our revenue forecast this afternoon." I was playing hardball, but I needed some answers here.

"Well, uh, I'll try," Blair said doubtfully, "but I don't know if I can find him..."