As a reporter who was once thrown out of a Salomon Brothers investment conference by Jack Grubman, the US telecommunications analystâ€™s own ejection and lifetime ban from the securities industry holds some irony.
My crime on that day in 1996 had been to ask too many questions of the telecom industry chiefs who were assembled there in New York to give Salomon clients the glowing view of an industry destined for everlasting expansion. These clients had paid handsomely for the chance to hear exclusive details that might put them ahead of the crowd, so I can understand their frustration when reporters such as myself buttonholed the executives they wanted to speak to. I was, however, just doing my job which as a Reutersâ€™ reporter was to get timely information to all our clients.
Mr Grubman, however, was this week penalised for failing the investment clients he was there to serve. The ban, which will surely hurt this wealthy man more than the $18m fine, emerged as part of the $1.4bn settlement that US investment banks will pay to settle New York security regulatorsâ€™ charges that the industry comprehensively misled investors during the 1990s. Mr Grubman had already resigned from Citicorpâ€™s Salomon Smith Barney unit in August with a $32m pay-off.
Clients thought they were paying for independent research, harnessing the knowledge of Mr Grubmanâ€™s years at AT&T and his analytical skills to make them money by picking stock in the industry he knew so well.
However, his real value to Salomons and the reason he was better paid than other Wall Street analysts, was his role as a dealmaker, a role that arose through his friendship and association with Bernie Ebbers, then chief executive of telecommunications group WorldCom. Mr Ebbers was an acquisition junkie, and Salomon earned hundreds of millions of dollars in fees for arranging the unending diet of takeovers that took WorldCom from being an industry minnow in the early 1990s to a market value of $170bn at its peak in 1999. Mr Grubmanâ€™s enthusiastic stamp of approval on WorldCom shares was an important part of the symbiosis.
That a potential conflict of interest existed should have been obvious right from the early days. However, with WorldCom getting expert advice on the deals it wanted, and shareholders making money hand over fist throughout the 1990s, it was in no oneâ€™s interest to start digging into this little theoretical problem. While the share price rose, these interests didnâ€™t even seem to conflict.
During this time Mr Grubman, in common with many other industry analysts, had WorldCom shares as an unwavering buy. In fact, it was only on April 22 2002, two years after the stock had begun its slide from a $65 peak to around $1, that Mr Grubman downgraded the stock from “buy” to “neutral”. Again, he was not alone in being tardy to change his view. Mr Grubmanâ€™s record as an analyst is no worse than many others who lost clients millions by recommending buying telecoms media and technology stocks that continued to fall as the stock bubble burst early in 2000.
Jack Grubman is now taking the fall for thousands of others in the securities industry who were just as wrong, but less prominent, less arrogant and certainly less careless than he was. As well as the general allegation that Mr Grubman used the promise of sparkling investment gradings to lure corporate business to Salomons, a few more personally grubby matters were unearthed in his e-mails by the New York attorney generalâ€™s investigators.
For example, Mr Grubman was so desperate to get his two-year-old twins into an elite $14,000-per-year nursery where they could rub shoulders with the children of Kevin Kline and Michael J. Fox, that he got Sandy Weill, Citigroup chief executive, to donate $1m of shareholder funds to the nursery. Having got the donation, he allegedly offered to upgrade AT&T stock as a thank you, which would help Salomonâ€™s investment banking unit tout for business from the telecom giant.
It is one shock that this kind of horse-trading is acceptable within some organisations, yet another that AT&Tâ€™s investment rating and $1m of shareholder cash were apparently treated as chips in such an odd game as nursery school poker.
What are investors to make of this? Certainly it will add to the caution in 2003. If three years of losses were not enough, there are the frauds at WorldCom and Enron that Wall Streetâ€™s finest analysts blithely failed to spot.
For the next few years we can actually relax a little. A leaner and much chastened securities industry will almost certainly behave itself. It isnâ€™t really the new intense regulatory scrutiny, (though that helps) the real driver is the lack of fat enough incentives to stray over the line.
The trouble is we all have short memories. When Michael Milken, the junk bond king who was convicted of securities fraud in the 1980s, re-emerged as a go-between in the mid 1990s to introduce phone firm MCI (which was later bought by WorldCom) and Rupert Murdochâ€™s News Corp, we should all have been warned that the moral defences were down. Milken had himself been banned for life from the securities industry.
History repeats itself. The time to really start looking hard at company accounts, and questioning the motivations of the securities industry and those in it will come a few years down the line when memories have faded and regulatory oversight gets attacked, as it inevitably does, as a drag on competitiveness. It will of course be during a bull market.
That may be about the same time that Jack Grubman is sufficiently rehabilitated to be invited back on to the New York dinner party circuit.
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