Dan Reingold with Jennifer Reingold (Eds): Confession of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market.
Dan Reingold not only lays outs his career as a telecommunications analyst on Wall Street in this professional autobiography, but sets forth quite explicitly many of the problems with the financial services industry and the information and communications technology (ICT) sector it supported. Unfortunately, most of these problems have not been resolved by legislation arising from the scandals, accounting frauds, and deceptive practices at Enron, Qwest, WorldCom, Global Crossings, and other companies that resulted in bankruptcies, losses of trillions (yes a "t") in stockholders' value, tens of thousands of redundancies and employees losing their retirement plans and savings.
Reingold takes a swipe at interlocking directorships, particularly in the case of AT&T and Citigroup, the indefeasible rights of use (IRUs) and their accounting treatment. Reingold provides details on Bernie Ebbers and the rise of WorldCom and Jack Grubman's role on the financial side, as well as Grubman's intimate relationship with Ebbers. The rise and fall of Global Crossing, Qwest, and other companies, with the aid of analysts and bankers, are detailed in the book. In addition, the author indicts the accounting industry, particularly the quality and reliability of auditors, for whom he earlier had admiration. He points out the changes in their practices that aided and abetted the nefarious practices of the ICT sector.
Reingold indicates how the investment bankers both scorn analysts and attempt to coerce, intimidate and sway them to rate their clients favorably. At the same time, many analysts were under pressure to provide advance notice to bankers of down grades in ratings. With respect to IPO's Reingold notes:
"The problem was that the IPO shares were being spun, certain investors got inside information and the rest of the investing public was playing in a rigged game and didn't even know it." (p. 274).
For those who lost some of the trillions of dollars in the market, the book is sure to confirm their suspicions and annoy them. More importantly, according to Reingold, the systemic problems have not been addressed. This points to additional problems, disappointments and a lack of confidence in the veracity of the stock market in the future.
According to Reingold the "Chinese Wall" separating the analyst and the investment banking segment of the firm is breached--more often than one would like to think. Moreover, he stresses the importance of information, which moves the market, by millions, if not billions. Early access to this "insider" information can make fortunes for the insiders (and rarely leads to a jail term, even if offenders are caught). Reingold cites the example of Fidelity, in the days before Reg FD (Fair Disclosure), which requires all information about a company to be released to everyone simultaneously. The analysts would fly to Boston and brief Fidelity first, and then move on to others. Thus, Fidelity would get the early news on the buys and when to sell.
"Trying to mimic Fidelity's stock purchase was a good strategy, one that many individuals and companies employed, but it had a major downside: if you were still in when 'FIDO' started selling, you were toast." (p. 110).
Another example of the power of insider information was with Global Crossing, in which only a handful of people were privy to a briefing (p. 237) which indicated problems with Global Crossing's business plan--its stock price fell by 17 percent within two hours of the meeting.
More importantly, he indicates how both Wall Street and the ICT sectors were complicit in the collapse of the ICT sector. Reingold also notes how the research arms of banks were continually pressured to support banking side deals (pp. 36, 71, 103, 104, 112), as blatant as tying analyst's compensation to the banking side revenues (p. 186) or more subtle forms of incentives or threats. He discusses how the Security and Exchange Commission's (SEC) "No-Action Letter" and knowingly looking the other way facilitated the conflicts of interest between research and banking (pp. 41, 103, 163-165), which have not been addressed.
In this easy to read and informative book, Reingold (with Jennifer Reingold, his niece) traces his career from MCI to Morgan Stanley, to Merrill Lynch, and finally, to Credit Suisse First Boston (CSFB) during the stock market's "go-go" years of the late nineties and early in this century. Along the way, he introduces many high-rollers on Wall Street and the ICT sectors--their arrogance, hubris, and conceit, but most of all their greed. In particular, his evil "twin," Jack Grubman of Smith Barney, is one of the major villains of the piece. According to Reingold, Grubman is constantly revealing privileged information after going "over-the-wall," that is, talking to the investment banking side of the business and their clients. Grubman, according to Reingold, would spread this knowledge through out the industry in order to gain status and be known as an insider (pp. 77, 71, 133, 174, 224, 285). Unfortunately, this could cost the unaware investing public, and even some of the professional investors, hundreds of millions of dollars; in one case Reingold documents, a three billion dollar swing in a day (p. 78). But yet, even when the law comes down on Grubman, he only has to pay a 15 million dollar fine, less than half of his severance package and only a small piece of his reported 80 million dollars of compensation during the period (pp. 288-289). Crime pays!
But Reingold goes further than this well publicized story to criticize the fact that Spitzer or other crime fighters did not investigate how high up the ladder the corruption went; although one gets a clue in the actions of Sandy Weill, Chairman and CEO Citigroup at the time, and Grubman to cite a specific example.
Michael Armstrong, head of AT&T, expressed to Weill, who was on AT&T's Board, his annoyance with Grubman's negative views on AT&T. Weill asked Grubman to "take another look" at ATT shortly before ATT spun-off its wireless business and would need an investment bank to handle the world's largest IPO. In the end Grubman raised the rating on ATT, and got his two children into the desirable 92nd. Street Y pre-school with Weill's assistance. The pre-school received a one-million dollar donation from Citigroup (a tax write-off for the firm). And, Citigroup became one of the lead bankers on the AT&T offering and made 63 million dollars for the firm (pp. 197-199). Later, Grubman returned to verbally dissing AT&T while maintaining its high "buy" rating and within a few months had lowered it by two notches. By the way, Armstrong was used to solidify Weill's power at Citigroup by helping oust his rival co-chairman. This is one, but perhaps the most well known, example cited by Reingold of conflicts of interest in the industry.
Reingold's focus on the incentive structure offered by the banks and the industry is critical to the understanding of the remedies, which he does not feel the current reform captured. Every securities policymaker should read the last chapter--"Afterword"--of Confessions ... to understand how the current legislation and regulations are not adequate to control and correct the practices of the finance sector. Indeed, he feels that Elliot Spitzer did not go far enough. He failed to reach the highest level of the executive suite. The famous 1.4 billion dollar settlement with the financial industry, for example, only "punished" the firms and not the individuals involved. Indeed, it is a small sum to pay when the industry made over 80 billion dollars in profit during the period (p. 288).
"I just hoped he [Spitzer] wouldn't stop at firms, but would take his crusade right to the door of individuals who broke the rules. After all ... if firms are fined, the stockholders suffer. By contrast, if individual executives are punished, shareholders will benefit because executives are more likely to behave better in the future and spend more time running their companies instead of lining their own pockets." (p. 288).
The research environment steadily deteriorated over this period, and it does not appear to have improved despite all the rule changes and legislation. "This job was less about analysis and more than ever about who you knew." (p. 205). This is why the last chapter of the book is so important; it provides guidance on how to rectify these issues from someone who knows the problems and conflicts intimately.
As with several books on the collapse of the ICT sector and practices of its financial enablers, this book reads like a novel, except no publisher would accept it as believable. But this is not fiction and the problems, issues and conflicts remain, much to the detriment of the society and the investing public. Would that all analysts had the ethics of a Dan Reingold; regrettably, it appears they do not.
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|Publication:||Communications & Strategies|
|Date:||Apr 1, 2006|
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