Why You Lost All That Money


The Sensational Inside Story

of How Wall Street Analysts

Duped a Generation of Investors

By Charles Gasparino

Free Press -- 355pp -- $26

( below)

Editor's Review

Three Stars
Star Rating

The Good A juicy and damning account of how Wall Street analysts became shills for investment bankers.

The Bad Sources are at times unclear, the narrative sometimes wanders.

The Bottom Line A key account of an era of pervasive greed and hubris.

Imagine scenes like these: At Citigroup (C ), star research analyst Jack Grubman snorts cocaine with an unnamed telecom executive. At Morgan Stanley (MWD ), despite an official separation between research and investment banking, Internet analyst Mary Meeker approves and nixes potential deals. And Henry Blodget, Merrill Lynch & Co.'s (MER ) star Internet analyst, complains one week of spending 85% of his time helping investment bankers, and says at least half should be going toward his real job -- research.

Such episodes fill the pages of Newsweek Senior Writer Charles Gasparino's Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors. Grubman declined to answer BusinessWeek's questions about drug use or any of the book's other allegations. Blodget and Meeker also declined to comment.

Gasparino's picture of how top research analysts and their investment bank bosses preyed on unsuspecting individual investors -- only later to become fodder themselves for regulators and class-action lawyers -- is both the most detailed and the most damning so far. This is hardly the first account of how analysts became willing shills for investment bankers during the stock market boom of the late '90s. And there are shortcomings: It's occasionally hard to tell where the author's assertions come from, and his sometimes squalid chronicle tends to wander. But because of Gasparino's deep knowledge of the players, a result of his reporting at The Wall Street Journal, Blood on the Street is a key account of an era of pervasive greed and hubris.

The book's first half focuses on Grubman, Meeker, and Blodget. But Grubman, barred from the securities industry in 2003, steals the show. What differentiates him from the other two, even though Blodget was also barred, is that his research was "hype [that] surpassed anything Wall Street had ever seen," Gasparino writes. The author sprinkles details of Grubman's acts throughout the book -- how the analyst carried on a sexually explicit e-mail relationship with a money manager; how he walked around the hotel lobby at an AT&T (T ) conference in his underwear; and how he made "obscene noises" when AT&T's then-CEO, C. Michael Armstrong, spoke during analyst meetings.

Gasparino is equally critical of Grubman's boss, Citigroup Chairman Sanford I. "Sandy" Weill. Relying primarily on e-mails produced by New York Attorney General Eliot Spitzer's investigations, Gasparino describes how Grubman went from being a thorn in Weill's side to being an employee so highly valued that Weill donated $1 million of Citigroup's money to help get Grubman's children into Manhattan's exclusive 92nd Street Y preschool. Why? Gasparino alleges that Weill needed Grubman to raise his rating of AT&T's stock. In exchange, Weill got Armstrong, then on the Citigroup board, to vote for the ouster of the financial behemoth's co-CEO, John Reed. Once Reed was out of the way, in 2000, Weill took control. But Gasparino fails to provide real evidence of these schemes. Through a spokesperson, Weill declined to comment.

Like a relentless boxer, Gasparino takes jabs at regulators who let analysts and their bosses get away with duping investors. Former Securities & Exchange Commission Chairman Arthur Levitt Jr. is depicted as talking a lot about analyst misdeeds but never taking action. And though the account is generally favorable to Spitzer, Gasparino describes him as a publicity hound. An example: The author says Spitzer fined Merrill $100 million for issuing misleading Net research -- in large part because The Wall Street Journal Managing Editor Paul Steiger jokingly remarked that it would take a fine that size to justify a front-page story. Steiger confirms the conversation. A spokesman says Spitzer disagrees with the characterization of the meeting and insists there was no connection between the fine and the alleged conversation.

Along the way, Gasparino shows sympathy for former New York Stock Exchange Chairman Richard A. Grasso's dramatic rise and fall. And former SEC Chairman Harvey L. Pitt appears to be the agency's most effective regulator, canned in part because he failed to see the political value of publicity, instead of trying to settle matters quietly.

Alas, despite its hard-nosed reporting and many on-the-mark criticisms, Blood on the Street lacks a sustained narrative thread. It also fails to offer a final judgment on Wall Street analysis. After all the reforms, is today's research reliable? "Only time will tell," Gasparino concludes.

Still there probably won't be a better book about these events. Notes Gasparino: "This is a story where there are few heroes, and even fewer people willing to provide an honest account of what went wrong." Blood on the Street will take most readers as close to the action as they are likely to get -- and few will come away comfortable with what they learn.

By Emily Thornton

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