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Did kiddy-school envy cause star analyst to alter his AT&T rating? | |||
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By DAVID MOON, Moon Capital
Management Wall Street's dirty little secret just took a juvenile turn. Actually, the turn is more childish than juvenile. For years, Wall Street has known what most of Main Street is only now learning: stock recommendations from brokerage firms are often (exclusively?) influenced by those firms' ability to secure lucrative investment banking relationships. Stock research is not about trying make money for clients. It is about trying to make money for the broker. In effect, Wall Street firms use their published research recommendations as a way to gain favor with the firms on which they purport to issue unbiased research. At least that is what I thought until this week. If that were only the whole story. We now have learned that Wall Street recommendations are influenced by a number of things, including trying to get your children into 'the right' nursery school. Apparently, that may have been former Salomon Smith Barney star analyst Jack Grubman's motivation for some of his investment recommendations. Jack Grubman is the poster boy for Wall Street analysts. Two years ago, a positive recommendation from him could send a stock soaring. Executives and directors of the companies he covered eagerly sought out his advice ' even while he supposedly produced unbiased research on those companies. First Grubman claimed he upgraded his rating on AT&T stock in late 1999 because the fundamentals of the company warranted it. Most of Wall Street, however assumed the changed was an effort to become the investment banker for AT&T's spin-off of AT&T Wireless. Then Grubman admitted he changed his AT&T recommendation to help his boss in some personal power struggle with former Citigroup co-CEO, John Reed. (Salomon Smith Barney is a subsidiary of Citigroup.) Grubman then he recanted his second explanation, admitting he 'invented a story in an effort to inflate [his] professional importance.' Emails have now surfaced in which Mr. Grubman says he changed his recommendation on AT&T stock to try to get his twins admitted into 'an exclusive nursery school in New York.' I'm not even sure what 'an exclusive nursery school' is. My twins (only slightly younger than Mr. Grubman's, but apparently more academically deprived) attend an 'Early Enrichment Program.' I thought that sounded pretty exclusive. But I didn't have to change my opinion on any stocks to get my kids into the St. Mark's Early Enrichment Program. We just had to put them on a waiting list before they were conceived. It is a little tougher to get into the 92nd Street Y nursery school. The Material Girl, Madonna, couldn't get her child admitted. But she didn't have Jack Grubman helping her. The Wall Street Journal reports that recently discovered Grubman emails claim that the change in his AT&T recommendation was the impetus for a $1 million donation to the nursery school by Citigroup. That donation helped Mr. Grubman's budding young capitalists get into the 92nd Street 'diaper Dartmouth.' (AT&T Chairman Michael Armstrong sits on the Citigroup board.) Grubman denies the connection. I'm dizzy trying to keep up with Grubman's latest explanation. He says one thing. The Wall Street Journal reports another. Former Grubman colleagues offer different explanations. I am sure of only one thing: Jack Grubman's investment recommendation on AT&T had nothing to do with the value of AT&T. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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