Buyer Beware: There is Blood on the Street

By Vincent P. Cuccia   Charles Gasparino, former writer for the Wall Street Journal, now a senior writer for Newsweek magazine, and a Bronx native, has written one of the most detailed and fascinating accounts of what went on behind the scenes when the dot coms became not coms. Blood on the Street: The sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors is a bullhorn warning, “caveat emptor!” The book summarizes the stock market craze of the 1990’s and examines the research analysts responsible for the booming and crashing of the market: Mary Meeker, Queen of the Internet: Henry Blodget, King Henry: and Jack Grubman. These three were primarily responsible for the bullish buying of dot com stocks because of their relentless and hyperbolic recommendations to investors who were unaware of the connection between the companies and the analysts. According to Gasparino, there was supposed to be wall as thick as the Wall of China between research analysts and brokers. The idea was that brokers only pushed stocks they got commissions on. Thus, for an unbiased opinion on stocks, the public could turn to the research analyst for “objective research.” But as the Internet burst on the scene, that wall became thinner and thinner. Until brokerage firms like Salomon Smith Barney, Merrill Lynch and Morgan Stanley were pushing their research analysts to recommend the stocks of those companies they were taking public. Regarding analysts’ research, Gasparino indicates that it was just advertising to get investors to buy a product. He starts with the sexual harassment case filed against Merrill Lynch by Cook. She alleges Merrill Lynch fired her for discrimination, but Gasparino sees more. He hints that they fired her because she disagreed with the brokers who were recommending gas prices would rise in the early 1990’s. Her research stood in opposition to their message to investors. As a result, they let her go. Gasparino was the first journalist to crack open this scandal so it is fitting that he write the book. But Blood on the Street is more than just a recap of his award winning articles. Gasparino gives intriguing biographies of all the major players and reviews their careers. He also includes personal e-mails that really give insight and further prove his point. In fact Gasparino delayed publication of his book until the release of these damaging e-mails. Of particular interest or embarrassment is the pseudo Internet affair Jack Grubman had. Further is Blodget’s notes to friends. He would privately label stocks “junk” or “powder keg” that he highly recommended publicly. According to Gasparino’s research, Blodget also expressed “’enormous skepticism’ about the company’s fortunes, and even fretted when the shares were being place on the firms ‘recommended list’ so they could be sold to small investors.” Unfortunately this concern came too late and too quietly. What is most difficult to read are the stories of the investors, because they were the only ones who really suffered. This was the ‘90’s when even low-level clerks were preparing portfolios and saving for their retirement. Pension plans were abolished and the employee took responsibility for his/her own future by opening up IRA’s and 401 (K)’s. These first time investors studied the reports from these objective analysts only to lose millions in savings and financially cripple themselves. Gasparino does a beautiful job in portraying these victims. The most frightening aspect of Gasparino’s research is that the federal watchdogs at the Security Exchange Commission (SEC) did little to protect small investors across the nation. Gasparino shows how regulators, like former SEC chairman Arthur Levitt, allowed the deceptive practices to fester and grow during the ‘90’s bubble, leaving the door open for a then little known attorney general from New York State, Elliot Spitzer, to step in and make his mark by holding Wall Street accountable. But Spitzer is not the man in white by any stretch of the imagination. Gasparino looks at his shifting allegiance to the powerful chairman and CEO of the New York Stock Exchange and long time supporter of the Italian American Museum Richard Grasso. Gasparino relates that Spitzer and Grasso found “common ground” in their efforts to clean up Wall Street. Grasso would take Spitzer to the elite Italian American social club, Tiro A Segno, for dinner. But things changed, “Spitzer, for his part, has vowed to keep up his fight against Wall Street abuse, and by the spring of 2004, he had even found a new target, his good friend Dick Grasso.” Grasso was recently forced out his job as Chairman and CEO by Spitzer. Blood on the Street does fall short in one area. It never fully explains how this wall between brokers and analysts came crashing down: how it came to be that the analysts were all but forced to promote a stock and sell out in favor of companies who were clients of their respective firms. Nonetheless, investors and non-investors must read this book. It is an incredible study in how the capitalist machine believed its own hype and the catastrophes that resulted.