Investors who heeded Ms. Meeker’s recommendation would have lost 98 percent of their money. They would have turned a $10,000 mountain of cash into a $144 molehill. Apparently undaunted and unashamed, Ms. Meeker proceeded to issue buy ratings on Yahoo!, Amazon.com, Drugstore.com, and Homestore.com. The financial media reported the recommendation with a straight face. Millions of naive investors nearly trampled each other trying to be the first to follow her advice.
Yahoo crashed 97 percent; Amazon.com, 95 percent; Drugstore. com, 99 percent; and Homestore.com, 95.5 percent. Why did Ms. Meeker recommend those dogs in the first place? And why did Ms. Meeker stubbornly stand by her buy ratings even as they crashed 20 percent, 50 percent, 70 percent, and, finally, as much as 98.5 percent?
Answer: Virtually every one of Ms. Meeker’s strong buys was paying Ms. Meeker’s employer—Morgan Stanley Dean Witter—to promote its shares. Morgan Stanley’s underwriting department was paid millions of dollars. And Morgan Stanley rewarded Ms. Meeker—with a mind-blowing $15 million paycheck—for helping to do it.
While millions of investors twisted in the wind, Morgan Stanley Dean Witter and Mary Meeker, as well as the companies they were promoting, laughed all the way to the bank. An isolated case? Not even close.
In 1999, Salomon Smith Barney’s top executives received electrifying news: AT&T was planning to take its giant wireless division public, in what would be the largest IPO in history. Naturally, every brokerage firm on Wall Street wanted to do the underwriting for this once-in-a-lifetime IPO. And for good reason: The fees would amount to millions of dollars.
But Salomon had a small problem. One of its chief stock analysts, Jack Grubman, had been saying negative things about AT&T for years. A major problem? Not on Wall Street of the late 1990s. By the time Salomon’s hotshots made their pitch to pick up AT&T’s underwriting business, Grubman had miraculously changed his rating to a buy.
Everywhere, big firms were making money hand over fist on the deal. Salomon was named lead underwriter and made millions. AT&T got a positive rating and the supersuccessful IPO it craved . . . and made more millions. Grubman, who had saved the day, got to keep his $20 million annual salary. But about 4.8 million investors got the raw end of the deal. They assumed that Grubman’s buy rating was an honest evaluation of the stock. They didn’t know what it really was—cheap sales hype.
They trusted Salomon and Grubman. They bought AT&T Wireless. And they were then left to watch in horror as the stock promptly crashed from $29.50 to $14.75—a 49.7 percent loss. More examples:
- Mark Kastan of Credit Suisse First Boston liked Winstar almost as much as Grubman liked AT&T, issuing and reiterating buy ratings until the bitter end. No surprise there: Kastan’s firm owned $511 million in Winstar stock.
- In 2000, an analyst at Goldman Sachs oozed 11 gloriously positive ratings on stocks that subsequently lost investors 71 percent or more of their money. He got paid $20 million for his efforts. One of his best performing recommendations of the year was down 71 percent; his worst was down 99.8 percent.
- Meanwhile, Merrill Lynch’s Henry Blodget gained fame by predicting Amazon.com would hit $400 per share. It was soon selling for under $11. Blodget also predicted that Quokka Sports would hit $1,250 a share. It went bankrupt. Blodget issued and reissued strong buy ratings for Pets.com (out of business), eToys (lost 95 percent of its value), Info- Space (crashed 92 percent), and BarnesandNoble.com (lost 84 percent of its value). Yet even while investors lost billions, Merrill Lynch cleaned up—$100 million on Internet IPOs alone.
In each of these cases, all but the investors got rich. Brokerages made millions. The analysts made millions. The companies they promoted raked in millions. But the poor investors lost their shirts. Tamara Belmont became increasingly conscious of this great Wall Street scam. She knew it was no coincidence. She knew these were not mere “honest mistakes,” as many of her colleagues were claiming. They were orchestrated campaigns to fleece the public. They were overt attempts by Wall Street insiders to get rich at the investor’s expense.
“Want to do yourself a favor?” she asked her old college roommate during a weekend visit. She handed her a page printed from her home computer. “Tape this to your bathroom mirror so you’ll never forget.” In 36-point bold type, the text on the page read :
THERE IS NO CHARITY ON WALL STREET. THE BIG FIRMS ARE NOT IN BUSINESS TO MAKE YOU RICH. THEY’RE IN BUSINESS TO MAKE THEMSELVES RICH.
At the time, this was radical thinking and never discussed in public. Later, however, Wall Street’s ugliest secrets would burst into the open.
Read More : Wall Street Had Evolved into a Giant Eating Machine, and Your Wealth Was Their Lunch
