Confessions Of A Wall Street Analyst [Hardcover]

Over the course of the past 10 years, I have watched with dismay the devolution of the telecommunications industry. My point of reference has been the anecdotal feedback I have received from numerous friends and acquaintances that were employed in a wide variety of telecom companies - AT&T, Lucent, MCI, Global Crossing, to name just a few. It has been a tale of woe, with elements of malfeasance, misfeasance, greed, incompetence and venality.

A friend who works in the world of investments suggested that I read Dan Reingold's memoir, recently published by Collins, the Harper Collins imprint that produces most of their business titles. The full title of this fascinating and chilling book is, "Confessions of a Wall Street Analyst - A True Story of Inside Information and Corruption in the Stock Market." From his vantage point as one of the most respected Wall Street analysts covering the telecom industry, Reingold tells the ultimate "caveat emptor" story that should give pause to all of us who make stock market investment decisions.

Reingold tells a very credible tale, mixing in enough elements of mea culpa to make his story believable and accessible. In hindsight, he wonders why he and other analysts did not uncover before it was too late the accounting duplicity and fraud that ultimately led to indictments of several key telecom executives, and that served as the straw that broke the camel's back of the telecom industry.

In the first 300 pages, Reingold does an excellent job of walking the reader through the development of his role as an award-winning analyst, first within the fledgling MCI, and then on Wall Street with Morgan Stanley and finally with Credit Suisse First Boston. Reingold's long-time rival and nemesis, analyst Jack Grubman of Salomon Smith Barney, serves as the perfect foil for exposing the abuses and excesses of an industry that continued to blur the line between the analyst side of the house and the investment banking side. The SEC emerges as an "unindicted co-conspirator" for its years of inaction and complacency in turning a blind eye to escalating levels of abuse.

The crucial take-aways for me in reading this book are Reingold's strong words of warning to individual investors to open their eyes and realize that in many ways we are not competing on a level playing field.

"Last and most important, investors need to be aware that they're playing a loser's game. No matter what laws or rules are changed, the investment banking and brokerage businesses are fraught with inherent and inevitable conflicts, conflicts that can hurt even the biggest investors. Rather than trusting in the inherent fairness of the markets, individuals buying stocks should assume that they will never receive the same information as the professionals. It's an insider's world, and it always will be." (Page 301)

"Individuals should not be buying individual stocks. I know this is a radical statement, especially coming from a guy who researched individual stocks for a living. But there are simply too many insiders with too many unfair advantages. Biased research or not, insider trading or not, the markets are, and will remain, rampant with uneven information flow. Some privileged and talented professionals will always receive or ferret out information earlier than everyone else. To be an investor in this environment is like being a drug-free athlete whose competitors are all juiced up on steroids." (Page 313)

"Individual investors should assume that the information and advice they receive regarding individual stocks are stale and, to a large degree, already incorporated into stock prices. Even the majority of professional investors find the deck is stacked against them, since it is only a minority of well-connected, high-commission paying, deal-absorbing institutions that receive the favored information flow." (Page 314)

Clearly, this book is one man's opinion, but that man had a unique "seat at the table" for many years. I told a friend of mine, who is an investment professional, that I would be reviewing this book, and I offered him an opportunity to make his own comments. Look for these comments to be published the week of November 6, after I return from a much-anticipated vacation.

This is a very valuable book for those who want to know what Wall Street analysts do, or at least what they did in this period. As a former Wall Street analyst, I can attest that it has the ring of truth. The author comes across as being overly obsessed with Jack Grubman, however. Getting revenge seems to have been one of his strongest motivations in writing this book, and he certainly has succeeded.

Dan Reingold is vulnerable to criticism himself. He pats himself on the back for putting "Hold" recommendations on stocks that fell sharply, and that he claims he thought were probably going to fall sharply. Why not say "Sell?" His defense seems to be that he was spending his time finding stocks that were Buys, and if a stock was not a "Buy" there was no point in writing a report on the stock.

At the end of the book he makes some recommendations about how to reform the role of Wall Street analysts. He makes well-founded points about the flaws in Spitzer's "reforms". But his own recommendations are poorly thought out. He does not seem fully to appreciate the economics behind research departments.

I always find the inside stories of events as told by the participants very interesting. If they are candid, and that is a big if, they can provide information and perspectives on events and people that can't be had from those of us on the sidelines. The problem with these accounts is that any participant only knows what he or she did and those pretty much in their immediate vicinity. To get things in a larger context is often beyond their expertise and so their opinion on the big picture is often as distorted and incomplete as anyone else's guess. Then there is the self-interest bias that prevents most people from presenting and completely open picture of themselves and to load up to heavily on why the other guy is the real bum.

Well, this is a terrific book and I enjoyed reading it very much. Honestly, I picked it up with some trepidation for the reasons I list above. Dan Reingold tells his own story as one of the very top telecom analysts on Wall Street. He provides a very interesting and honest context for his entry and rapid rise and is quite clear about the lavish pay scales and pressures his job enjoyed and endured. He is quite open about his own experiences in moving up the ladder and from firm to firm (always at higher pay and better terms). I very much enjoyed the way he describes how these negotiations are handled.

The most interesting part of the book, for me, was his discussion of the inherent conflicts between the analysts and the banking side of the firm. For the most part, Reingold managed these conflicts well and honorably. This approach to his job not only earns our respect, but kept him from being caught up in the scandals that took down so many in his industry, especially the notorious Jack Grubman. It is Grubman who is Reingold's nemesis and the reader will find himself as frustrated as the author when Grubman seemingly clearly violates not only the rules of an analyst's job, but the law and yet nothing happens. It seems that as long as the Bull Market is on, no one wants to risk upsetting the situation, but when things collapse, someone must be blamed and the most egregious violators are called to task. However, Reingold is clear how so much of the focus of the hearings was misplaced and the actual bad behavior, the insider trading, was not pursued.

The author shares with us what every Road Warrior knows, that the glamour of the life on the road is much more apparent than real. The difference is the Reingold earned millions of dollars, and enjoyed (for the most part) the very finest accommodations available. However, when one travels a lot, it is often hard to remember exactly where one is when one first wakes up. I learned to tell what country I was in by the ring of the phone, however, one time I was in my own bed and heard the phone ring after being away for weeks, and couldn't quite place the ring even though it seemed like I should remember it. However, I never traveled half way around the world for a half-day meeting. That is a level of travel I hope to never know.

If there is a central theme to the book, it is WorldCom, Bernie Ebbers, Scott Sullivan and Jack Grubman. Gary Winnick and Joe Nacchio are secondary characters to add color and depth to the story. Frank Quattrone is just a bit player in this telling of the story (not that his role in the boom - bust was small). The author takes us from the story of the napkin and the founding of LDDS through the amazing rise of the company. When the bubble finally breaks we also get to see terrible crash of the company and the eventual sentencing of its principle officers. Grubman ends up vilified and becomes one of the faces and names the public associates with the corporate fraud of nineties boom.

Reingold does ask himself why he didn't dig deeper into WorldCom's finances. He says that it never occurred to him or anyone else that they would ever commit a fraud so brazen. Given the millions these analysts receive and the millions more the firms spend on their staff, I would hope that from now on they have a forensic accountant or two digging more deeply into the structure and financials of the companies they tout. I know that it is not in their financial interest to do so, but given what we went through recently, it might be in their long term interest to throw a few penalty flags so the public can have a bit of faith in their integrity (did I hear someone cough and choke?).

In the epilogue, the author gives us a "where are they now" update and in the afterword he takes us through his analysis of the reforms that came out of Spitzer's prosecutions (mostly useless) and his own recommendations of what should (but won't) be done. In the end, he rightly notes, that liars will be liars and crooks will be crooks. There is no replacement for integrity and no regulation that can control the dishonest.

He leaves the reader with a point he hopes everyone takes away from this book. It is that the information flows are so biased in favor of the insiders and highly placed professionals that the individual has no real reason to buy anything but indexes or broadly based mutual funds. For individuals to be buying individual stocks, they simply must accept that they are stepping into an unfair game that is set up against them.

A very good read for anyone interested in Wall Street, business finance, and investing.

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