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E-mails Show Wall St. Has Gaps In Walls

Nov 15, 2002 | The Globe And Mail

If you're wealthy and live in New York City, there's a good chance you've spent time at the 92nd Street Y.

This isn't your average Y. This venerable institution in Manhattan's Upper East Side ranks up there with Radio City Music Hall, the Metropolitan Museum of Art and the Empire State Building.

This is where the city's elite gathers to talk, be seen, hear string quartets and occasionally sweat.

And for the princely sum of $14,400 (U.S.) a year, it's also where New York parents can give their precious little ones a head start on the road to Harvard or Princeton, and eventually back to Wall Street.

The Y's nursery school promises to develop kids' self esteem and to help them reach their full potential through a structured, hands-on play program that "encourages respect for others." Sounds pretty ordinary, but the school is so exclusive that some people will go to extraordinary lengths to get in.

The Y's exclusive nursery school is now the focus of a revelatory series of e-mails between Citigroup Inc. chairman Sanford Weill and former star telecom analyst Jack Grubman. Mr. Grubman, an expert stock picker and a dedicated dad, wanted to get his twin daughters into the school. Mr. Weill, his employer, had the clout around town to make it happen.

So Mr. Weill agreed to intervene on Mr. Grubman's behalf. He also pledged $1-million worth of Citigroup cash to the nursery school (to buy more toys for the Grubman twins, one presumes).

Here's where it gets murky. Mr. Grubman later claimed in an e-mail, which has now conveniently found its way into the hands of New York Attorney-General Eliot Spitzer, that he promised to upgrade his rating on AT&T Corp. shares as a quid pro quo. AT&T, you might remember, was a key banking and underwriting client of Citigroup and its brokerage subsidiary, Salomon Smith Barney.

Mr. Grubman insists he invented the part about his end of the bargain, pumping up AT&T stock. Mr. Weill says he got the twins into the Y out of the goodness of his heart.

"I tried to help Mr. Grubman because he was an important employee," Mr. Weill says, effectively confirming at least half the story. He also acknowledged asking Mr. Grubman to "take a fresh look" at AT&T, validating much of the other half.

But it hardly matters what portion of this sordid tale is true.

The story says a lot about how Wall Street works. The Chinese Walls between research and investment banking are pretty much like those partitions between the cubicles in most offices. It doesn't matter whether they go up to your waste, your chest or your head. They're not really walls at all.

And therein lies the problem of severing ties between two key functions at the major brokerages. It's tough to get unbiased research from a company, whose existence depends heavily on driving stock prices ever higher.

At the height of the dot-com bubble, buy ratings outnumbered sells 100 to 1. At its extreme, research became a trading house positive ratings for underwriting business. Mr. Grubman needed Mr. Weill, and vice versa.

The solution, according to Mr. Spitzer, is to levy a tax totalling $1-billion over five years on the major brokers, with the proceeds put into a fund to pay for independent research. The brokers would distribute the research to clients alongside their own in-house research. In return, the brokers would be shielded from lawsuits by investors claiming they had lost money by acting on tainted research (Citigroup and Salomon are facing 62 such suits). Citigroup's response has been to hive off its research into a separate division.

The U.S. Securities and Exchange Commission isn't sure what would work. And now Wall Street is vigorously fighting the settlement, taking advantage of the vacuum created by SEC chairman Harvey Pitt's resignation.

There's growing skepticism that either the Spitzer or Citigroup solutions would produce the desired effect: put unbiased research into the hands of investors. Marshall Blume, a finance professor at the University of Pennsylvania's Wharton School of Business, believes the proposed settlement would cost a lot, give brokers additional legal protections, and yet do little to solve the problem.

Mr. Grubman, and others like him, have never been of much value to investors. The best hope may be that the 92nd Street Y nursery produces a new generation of Grubmans, with some of that pricey moral fibre it promises to instill.

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