Confessions of a Wall Street Analyst Part 2

That's why there were and are strict rules governing the interaction between the two. At Morgan Stanley, a written policy given to me upon my arrival at the firm officially and emphatically declared the independence of the research division from pressures by the investment bankers.

"Morgan Stanley's research is totally separate from the investment banking of [sic] and merger and acquisition activities of the Firm," it read. "Rigid rules ensure the separation of a.s.sociation and information. A basic tenet of our philosophy is that research must have integrity and therefore requires absolute and impartial freedom of judgment."2 In practice, however, it was slowly becoming a different story. Although I had not experienced any overt pressures, some sordid stuff was beginning to swirl around the firm.

One of these was the Clay Rohrbach memo. Clayton J. Rohrbach, III, was the head of stock capital markets, in other words, a big-shot banker. The way I remember the story of Clay's memo, a young guy named Sandy Cohen was Morgan Stanley's utility a.n.a.lyst at the time. Like me, Sandy had been mentored by Ed Greenberg and had developed a habit of speaking his mind, even if it angered the companies he covered. He had developed a special methodology for rating his companies, a very technical one that spit a lot of components into a formula and came out with an opinion.

One of the criteria he plugged into his model was the quality of management. Some of the people who ran companies were true dolts, while others were real strategic thinkers. Anyway, Sandy ranked one of his utilities low in the management department, and Clay, as the keeper of the flame, or that "special relations.h.i.+p" with the company, apparently got an earful about it. From Clay's perspective, research must have seemed like something of a waste of time. It didn't make any money-and was, in part, paid for by the fees generated by bankers like him. So wasn't it logical that an a.n.a.lyst, whose salary and bonus inevitably came from the money earned on deals, shouldn't do anything that could jeopardize that deal flow? Ticked off by Sandy's conclusions, Clay wrote a memo in September 1990 that shocked all of us on the 20th floor, which was where Morgan Stanley's research a.n.a.lysts worked.

"As we are all too aware," it said, "there have been too many instances where our Research a.n.a.lysts have been the source of negative comments about clients of the Firm.... Our objective is to have a zero failure rate on this subject and to adopt a policy, fully understood by the entire Firm, including the Research Department, that we do not make negative or controversial comments about our clients as a matter of sound business practice." we do not make negative or controversial comments about our clients as a matter of sound business practice."3 This, of course, was absurd. Did Clay think we should rave about every stock in the entire stock market, even if it was a dog? Although Clay's memo was later portrayed as a one-off outburst, he clearly felt strongly about the issue. Earlier that year, Clay had written a draft memo proposing that research-a.n.a.lyst pay be determined partly by how much they had helped bankers win deals, with a.n.a.lysts getting an A, B, or C grade depending on how "instrumental" they were in the firm's winning of a transaction.4 What Clay was trying to do, in effect, was make the a.n.a.lysts earn their keep. He, and some others, were trying to change the a.n.a.lyst's job from giving good advice to investors to helping bankers do deals. For me, it was the first example of the crossing of that supposedly sacred line between banking and research.

What Clay was experiencing was the end of the genteel old world of banking, in which belonging to the same country club and living in the same town was as much of a draw for a corporate executive choosing a banker as the actual services the bank was offering. As banking became more compet.i.tive, these relations.h.i.+ps weren't enough anymore. Banks needed to offer something extra, some special sauce. As time went on, that special sauce would often involve bullish research.

I guess I was lucky, both because I had an old-school banker in Bob Murray, who didn't interfere with my opinions, and because the telecom sector did virtually no deals at that point, so there was no reason to meddle and no way to a.s.sess my level of "cooperation." At the same time that my colleagues were murmuring that they were starting to get heat for their opinions, I had a Sell rating on one stock, Ameritech, and Holds on most of the Baby Bells, and never heard a peep about it from anyone.

In any event, someone eventually leaked Clay's memo to The Wall Street Journal, The Wall Street Journal, which ran a front-page story on the shenanigans in July of 1992. It was a huge embarra.s.sment for Morgan Stanley-the most highbrow firm now essentially being caught red-handed trying to influence research. As far as I know, Clay was never disciplined. He went on to have a long career as a senior banker at several major houses. The whole episode is a reminder that the scandals of the late 1990s, as shocking as they were, had plenty of precedent and plenty of warning. which ran a front-page story on the shenanigans in July of 1992. It was a huge embarra.s.sment for Morgan Stanley-the most highbrow firm now essentially being caught red-handed trying to influence research. As far as I know, Clay was never disciplined. He went on to have a long career as a senior banker at several major houses. The whole episode is a reminder that the scandals of the late 1990s, as shocking as they were, had plenty of precedent and plenty of warning.

I heard these things but reacted to them a little bit like an ostrich. No one was bothering me, so it didn't seem like something to get worked up about. In my world, Morgan Stanley seemed pure. I didn't see anyone daring to put the squeeze on Ed, my mentor. He managed to have strong opinions-positive and negative-without being pressured by anyone, not bankers, not management. As his protege, I felt insulated and protected.

By now, Ed had initiated coverage of the cellular, or mobile, phone industry with negative views. He predicted much lower prices resulting from increased compet.i.tion, as the federal government was awarding many new licenses. He a.s.signed Sell ratings to five of the seven cellular companies he covered and Hold to the remaining two. Several of the companies were even Morgan Stanley investment-banking clients. Yet no one seemed to raise an eyebrow. Ed's Sell ratings made sense in the context both of his detailed a.n.a.lysis and of the overall stock market. Indeed, the major stock market indices had been trading sluggishly for quite a while and there was nothing to suggest that was going to change anytime soon.

Ed's report was outstanding, perhaps the best I had ever seen. It was deep in its a.n.a.lysis, thorough in its consideration of the numerous variables that would drive the future of the cellular industry, and prescient in its prediction that the federal government would allow many more compet.i.tors.

Yet contrary to Ed's predictions, several of the cellular stocks took off, driven by a ma.s.sive consolidation wave throughout the industry. Several large companies, including AT&T and the Baby Bells, went on acquisition binges, paying hefty prices for the stocks Ed disparaged in order to fill in geographic holes in their cellular coverage. And technological improvements and lower prices meant customers began to use cell phones more than anyone could have imagined.

More significant than all of these factors, however, was the suddenly turbocharged bull market. In the 12 months after Ed's bearish report, the Dow Industrials rose 17 percent and the NASDAQ index, where most of the cell phone stocks traded, rose over 20 percent. Once that bull began to rage, bearish calls like Ed's were ruthlessly stampeded: within four years of his call, for example, the Dow had risen almost 50 percent and the NASDAQ by 67 percent. Ed was lucky. He was a top-rated a.n.a.lyst, had a stellar reputation, and was about to move to banking anyway. Many other bears, however, found themselves overrun by the roaring bull market of the 1990s, and were never heard from again.

There were two very simple lessons to be learned from Ed's experience with the cellular stocks. The first was to never get on the wrong side of a major bull or, for that matter, a major bear market. Either one can flatten you, no matter how astute your insights and sophisticated your a.n.a.lysis.

The second lesson was that Sell ratings offer little payoff to a Wall Street a.n.a.lyst. This is because, for the most part, inst.i.tutional investors are paid to pick stocks that go up. They need to outperform the overall stock market by enough to compensate for the risks, fees, and trading costs they incur. As a result, stocks that perform in line with the market are of no interest to these money managers.

If a stock falls or performs in line with the market, the Wall Street a.n.a.lyst who rated that stock Hold or Neutral looks almost as good to his clients as the one who rated it Sell. As a result, a.n.a.lysts didn't have much incentive to go out on a limb with a much riskier Sell rating, even before the banking pressures emerged.

At that time, I didn't fully understand any of this. And I soon learned that Ed had been protecting me from other matters as well. One morning in October of 1991, I was toiling away on a very long report on a local phone company called Centel. I had spent about two months working feverishly on it, and was just about finished, when I looked up at my computer screen to see a news flash: "Centel Board to Put Company up for Sale." Even more surprising to me was the fact that the board had hired none other than Morgan Stanley to be the banker in charge of this auction. How could I not have known?

Ed walked in that morning and said, "I have to apologize to you, Dan. But I couldn't tell you." It turned out that Ed had known all about the pending announcement for weeks and had been asked to give his opinion to the bankers on whether Centel should sell itself to a larger company or go it alone. Ed's expertise and knowledge of the industry was eagerly sought by Morgan Stanley bankers and telecom executives. Because he had been brought "over the Wall" to the banking side, he said, using a cryptic-and compelling-term I had never heard before, he couldn't tell anyone, not even me, without possibly running afoul of insider-trading rules. If he told his wife, his colleague, or his plumber, he'd be improperly sharing proprietary inside information with other people.

The wall that Ed was referring to going "over" was something commonly known on the Street as the Chinese Wall. Meant to be as big and impenetrable as the Great Wall of China, the Wall was a metaphor for keeping information about pending deals or transactions in the hands of the bankers who helped put those deals together. If that information leaked out to the rest of an investment bank-anyone from traders to research a.n.a.lysts to even the cafeteria workers-someone could use that information to buy or sell the stocks involved, making an unfair and illegal profit. This was what Ivan Boesky and bankers from Drexel Burnham Lambert and Kidder Peabody had been convicted of just a few years before. I knew all about the Chinese Wall, of course, but I had had no idea until that moment that there were exceptions to this rule for a.n.a.lysts. Apparently bankers didn't have all the answers when it came to deals. In some cases, a.n.a.lysts could provide some added perspective that might never have occurred to the bankers and company executives.

My first reaction was frustration. I had just spent two months learning everything there was to know about Centel, and my own bank couldn't even tell me it was being sold. This deal also meant that I'd now be "restricted" from publis.h.i.+ng my report while Morgan Stanley's bankers handled the auction, which could take several months. And if the bankers did manage to sell the company, the report would become irrelevant anyhow, so I'd essentially wasted two months of my life.

But Ed had done the right thing by keeping quiet, I soon realized. This was the way the game was played, and if I lost a few weeks but managed to avoid the temptation of insider information, well, that was just fine by me. At the same time, the more I thought about this over-the-Wall stuff, the more intrigued I became. I was fascinated-and wondered if my views would ever be respected enough to be asked to come over the Wall one day.

2. AROUND THE WORLD IN SEVEN DAYS (OR LESS) AROUND THE WORLD IN SEVEN DAYS (OR LESS).

19921993

Most people would have seen a 30 percent increase in pay as a pretty fantastic raise. I would have, too, if I hadn't had that sizzling offer burning a hole in my pants pocket. I had no intention of staying at this point, but this game had rules and I had to play it out.

Climbing Over the Wall.

THIS MYSTERIOUS CONCEPT of going over the Wall quickly receded into the back of my mind. But one day in November 1992, it suddenly reappeared. Ed strode into my office, closed the door, and said "Get up. We're going upstairs to a meeting of the Corporate Finance Executive Committee in the Morgan Stanley boardroom. There's a deal that Jeff [Williams, Morgan Stanley's head of telecom banking] and Paul [Taubman, its head of telecom and media mergers and acquisitions] want us to react to." of going over the Wall quickly receded into the back of my mind. But one day in November 1992, it suddenly reappeared. Ed strode into my office, closed the door, and said "Get up. We're going upstairs to a meeting of the Corporate Finance Executive Committee in the Morgan Stanley boardroom. There's a deal that Jeff [Williams, Morgan Stanley's head of telecom banking] and Paul [Taubman, its head of telecom and media mergers and acquisitions] want us to react to."

I exhaled with irritation. Yeah, this over-the-Wall stuff had sounded intriguing at the time, but now that intrigue had been buried under a pile of paperwork. I had almost a dozen phone calls left to return that afternoon and he wanted me to go to some banker meeting?

"Huh? How long will this take?" I griped. "Where the h.e.l.l is the boardroom and what the h.e.l.l am I going to do in there?"

"I'll do most of the talking," said Ed. "Just come with me."

Still muttering, I hopped on the elevator and walked into the boardroom, where I felt an instant jolt of electricity. Someone handed me a three-page outline, and I quickly scanned it. AT&T was about to purchase a big piece of McCaw Cellular, the country's largest independent cell phone company. McCaw had received a lot of attention in recent months when it won a bidding war against BellSouth for Lin Broadcasting's cellular a.s.sets. In my world, it was a seismic event, as if IBM bought a portion of Apple. No wonder these guys, some of the top bankers in the firm, looked as if they had ants crawling around inside their Brooks Brothers pants.

"Here's the deal," said one banker. "Tomorrow morning, AT&T is going to announce that it's buying 33 percent of McCaw Cellular. AT&T is paying $42 a share for 47 million new shares of McCaw, a 57 percent premium over its trading price, and $49 per share for 38.5 million shares held by British Telecom. That makes the transaction worth about $3.7 billion. Ed and Dan, what do you think of this move?"

Whoa! Suddenly we were on the spot. Because Morgan Stanley had been AT&T's lead banker for years and years and AT&T seemed to always have a deal pending, I had not been allowed to write reports on the company or rate its shares. According to federal securities regulations at the time, anything I wrote could be perceived as putting Morgan Stanley's interests ahead of investors. That was because Morgan Stanley had a huge incentive to plug AT&T's stock, since it received fees whenever a deal involving AT&T went through. Rating AT&T a Buy could be considered an attempt to convince shareholders to vote for the deal, which of course would benefit AT&T and, by extension, Morgan Stanley. So Morgan Stanley's lawyers required Ed and me to stay mute.

This silence had become something of a problem for me, since not only was AT&T-the original blue-haired grandma stock-in the news virtually every day but its stock was held by just about every investor on the planet, and I wasn't able to make a call or advise my clients on what to do with it. (The SEC would later choose to not enforce the rule requiring a.n.a.lysts to recuse themselves, facilitating a huge wave of banker-research conflicts of interest.) I didn't feel particularly good about AT&T-influenced by my MCI days, I thought of the company as a huge, lumbering oaf that was going to lose its s.h.i.+rt to all of the new rivals out there-but I did intuitively like this deal. I wasn't sure what to say.

Fortunately, Ed jumped in first. "I think it's a brilliant deal," he said. "McCaw is the largest independent cellular company in the U.S., cellular is a very rapidly growing business, and the ability to jointly provide long distance and cellular services ought to give AT&T an edge over MCI and Sprint [neither of which offered cellular]." Ed did point out that AT&T's earnings would drop as a result of the acquisition, which would probably cause the stock to fall a bit initially, but said that overall the impact on future growth would be very positive.

Then it was my turn. "Anything to add to that, Dan?"

"What strikes me," I said, "is that AT&T is declaring war on the Baby Bells. It's acquiring a technology that could be used someday to connect directly to customers, potentially displacing the Baby Bells' copper wires." I said I thought most large investors would think it was good news for AT&T and bad news for the Baby Bells.

That was all the bankers needed to hear. I wondered why Ed and I were there; would they have sc.r.a.pped the deal if we'd thought it was a terrible idea? I doubt it, given the buckets of banking fees they would earn if the deal went through. But the bank had a committee that required all parts of the organization to be consulted. The guy running the meeting asked if anyone around the table had any questions or concerns about Morgan Stanley's involvement in this transaction. Was there anything that the press, other investment bankers, or my clients, the inst.i.tutional money managers, might criticize us for? Was there anything in the deal's structure or valuation that might harm our venerable investment banking reputation? No one said anything, so the committee voted to approve the deal.

We all got up to leave. And I found myself in possession of information that was going to make and lose many people billions of dollars in less than 24 hours. Owners of AT&T shares would likely lose a bit, as would owners of Baby Bell shares. Investors in other cellular companies would benefit, since the possibility rose of takeovers of other independent cellular companies. And obviously McCaw shares would surge when the news. .h.i.t the next morning.

As I walked out of the room, I felt confused and a bit giddy. No one had told me why I'd been called over the Wall this time but not other times, or how I should handle the confidential information swirling around in my brain. None of the seemingly important managing directors in the room had said h.e.l.lo or introduced themselves. Although they had asked for our reaction, it wasn't clear they had listened. We a.n.a.lysts still didn't command a whole lot of respect.

So now here I was, with almost a dozen clients to call back and another hour of trading to go in the market. I felt like a newly minted secret agent who now had to return to my regular life. The telecom a.n.a.lyst at Fidelity had called earlier in the day. So had Tim Armour, the telecom a.n.a.lyst at Capital Group, and several other well-connected buy-siders. I had to call them back. I had already learned that prompt responses to clients were a must if you wanted to get their votes on that survey of inst.i.tutional investors. Yet now I was in possession of information that could make my clients-and myself-rich, if I used or shared any of it.

Even though no one told me what to do, I knew that I couldn't breathe a word about the announcement. If I said anything, I'd be pa.s.sing on insider information and perhaps violating federal criminal laws. Luckily, I didn't cover AT&T, given its perpetual "restricted" status, and I didn't cover McCaw either. So it was unlikely that clients would be asking me about either one. But I still had to call them back. What if, somehow, rumors of the deal started to build? I'd be hit with a barrage of calls from money managers and buy-side a.n.a.lysts, as it was no secret that Morgan Stanley had done banking for both firms. They'd ask what I thought of the amount AT&T might be paying and how the shares of each would respond. I had no idea how to respond to these kinds of queries. I'd lived through the insider trading scandals of the late 1980s and remembered how those ended: with those bankers in handcuffs paraded in front of a band of photographers jostling each other for the best shot. I instinctively knew that if anyone asked me about a deal involving AT&T or McCaw, I'd have to play dumb. I got lucky; no one did. But my job had suddenly gotten a lot more complicated.

"You're the Only One."

As the 1990s went on, the planets of the bankers and the a.n.a.lysts slowly began to orbit more closely around each other. While there had always been interactions, now the bankers, long the alpha dogs, were beginning to realize that research could wag its tail too. If used in the right way, those nerds in the back room might help them make big money.

My first strategy session with Morgan Stanley's bankers happened long before my first over-the-Wall experience. Late in July of 1990, a group of bankers and a.n.a.lysts had gathered in Vermont for a few days of brainstorming at the bucolic Woodstock Inn. It was kind of funny to see all these harda.s.s New Yorkers out of their element: most of them looked as if they'd hit the deck if a deer trotted out of the woods.

On the first day, we got together with the bankers who covered telecom. Ed and I sat on one side of the conference table, while the bankers, facing us like opponents in a chess game, sat on the other. Among them were Jeff Williams and Paul Taubman, Morgan Stanley's main telecom bankers. Also sitting across from us was a man who worked in Morgan Stanley's San Francisco office and was responsible for relations.h.i.+ps with technology companies. His name was Frank Quattrone.

The mood was congenial-no one was bellyaching over our investment ratings-but still, the bankers needed our help ginning up deals that made sense for their corporate clients. After all, they got paid a percentage of the total value of the deal. We discussed each telecom company.

"Any holes in BellSouth's portfolio?" the banker responsible for BellSouth asked, hopefully. "Do they need to make an acquisition? Will they need to sell stock or to refinance any soon-maturing bonds?"

Ed and I did our best to answer all their queries. I saw nothing wrong with this-after all, many of these companies were certainly going to do deals as the sector consolidated-and we weren't suggesting anything we didn't tell our investor clients. We were there for just a day, and then left so the bankers could go back to their side of the Chinese Wall, discussing secret deals that were already in progress.

Shortly after the retreat, Morgan Stanley split up its telecom and technology banking departments, in large part because of Frank Quattrone. Frank, a dapper, low-key guy from Philly with a Tom Selleck mustache, had joined Morgan Stanley in 1977 and quickly built up a reputation as a banking stud. Among his early initial public offering (IPO) successes were Cisco Systems and Silicon Graphics Inc. One of the first to lock in on the growing number of small technology companies using the public market to raise money, Frank was well-respected at Morgan Stanley, largely because he was bringing in so much in the way of fees.

But he was aware, even then, of the benefit of a positive a.n.a.lyst report. According to The Wall Street Journal, The Wall Street Journal, after handling an IPO for a company called Mips Computer Systems Inc., Frank allegedly pushed an a.n.a.lyst, Rick Ruvkun, to put out a positive report on the company in 1990. Ruvkun wrote a report, but rated the stock Hold, not Buy, showing that there were limits to Frank's clout. after handling an IPO for a company called Mips Computer Systems Inc., Frank allegedly pushed an a.n.a.lyst, Rick Ruvkun, to put out a positive report on the company in 1990. Ruvkun wrote a report, but rated the stock Hold, not Buy, showing that there were limits to Frank's clout.1 Frank denied the account in the Frank denied the account in the Journal. Journal.

In 1986, Frank moved to Silicon Valley to start Morgan Stanley's California-based banking group devoted to technology. It was seen as a huge affront to Morgan Stanley telecom banker Jeff Williams, who believed he was in charge of both tech and telecom. But Frank was onto something. Where other people saw obscure technology and engineers who forgot to shower, Frank saw possibilities. He was fast becoming one of the most powerful forces within Morgan Stanley and in Silicon Valley as well.

BY THE BEGINNING OF 1993, after three and a half years on the job, life at Morgan was finally becoming comfortable. Coming to the Street had absolutely been the right move for me. I felt more confident about my performance. I occasionally left my attic on the weekends, and I'd started to get some attention on the Street for my calls. I even found myself enjoying some of the social side of the business-not the schmoozing per se, but the discussions with my clients over the future of this new industry. 1993, after three and a half years on the job, life at Morgan was finally becoming comfortable. Coming to the Street had absolutely been the right move for me. I felt more confident about my performance. I occasionally left my attic on the weekends, and I'd started to get some attention on the Street for my calls. I even found myself enjoying some of the social side of the business-not the schmoozing per se, but the discussions with my clients over the future of this new industry.

The period was a real turning point for telecom, a time in which everything was possible and no one company had the obvious edge. Everything was open to debate, and debate we did, hour after hour, trying to decide the investment implications of this new world. Telecom had seemed like something of a backwater at first, but it was gaining momentum, thanks to the regulatory reforms that were creating compet.i.tion and the increasing popularity of cell phones. I was thankful that I wasn't in some dead or dying sector like steel or chemicals.

One bl.u.s.tery day in early January, the phone in my office rang. My a.s.sistant put through the call, which I thought at first came from a client. "Dan, we hear you're doing great work," Les Carter barked. Carter ran recruiting firm Carter Stone, one of the many firms recruiting Wall Street a.n.a.lysts.

"I'm sure you're happy at Morgan," Les said, "but Merrill Lynch is really interested in you. You're the only one." Les invited me to breakfast, and I accepted, more out of curiosity than anything. I'm the only one? only one? The guy knew how to make a man feel good. Even if it was a bald-faced lie, which it was, I liked what I heard. The guy knew how to make a man feel good. Even if it was a bald-faced lie, which it was, I liked what I heard.

I hadn't been looking for a change, but the call came at a good time. I had been ranked as a runner-up in the Inst.i.tutional Investor Inst.i.tutional Investor survey in October 1991, which meant I was in the second tier, below the top three a.n.a.lysts, and then moved up to third place in the most recent poll, which had been published in October 1992. Robert Morris of Goldman Sachs was number one in both of those years, as he had been for the past eight years, and Jack Grubman was number two in both surveys. survey in October 1991, which meant I was in the second tier, below the top three a.n.a.lysts, and then moved up to third place in the most recent poll, which had been published in October 1992. Robert Morris of Goldman Sachs was number one in both of those years, as he had been for the past eight years, and Jack Grubman was number two in both surveys.

Normally, this would have meant a big b.u.mp in my pay, but 1990 had been a terrible year for the investment banking business, with lots of a.n.a.lysts getting canned. I was cheap compared to the other a.n.a.lysts, so there wouldn't have been much point in firing me even if I hadn't made the I.I. I.I. list. Even so, in 1991, Morgan had doubled my compensation to $350,000, and my ego was getting healthier by the day. I wondered if it was time to break free from Ed. list. Even so, in 1991, Morgan had doubled my compensation to $350,000, and my ego was getting healthier by the day. I wondered if it was time to break free from Ed.

But Merrill? If Morgan Stanley was the aristocrat of the Street, Merrill was the arriviste, at least when it came to banking. Morgan Stanley had no retail arm, whereas Merrill's bread was b.u.t.tered by the small investor, served by over 10,000 brokers in 500 offices throughout the world. Morgan Stanley stuck to its fee structure and prided itself on being choosy, while Merrill-eager to convert its highly successful retail brokerage into a world-cla.s.s investment bank-offered aggressive discounts to win banking business. Cool and snooty versus aggressive and loud; pink pants versus pinky rings; country club versus Paddy's Pub; the two firms couldn't have been more different.

After a pleasant breakfast with Les, he told me that Merrill's head of domestic research, Andy Melnick, would like to meet me on January 20. All the banks had secret clubs or restaurants where they did their wooing. Andy liked to do his recruiting at Fraunces Tavern, a colonial-style eighteenth-century restaurant near Wall Street where George Was.h.i.+ngton made his farewell address to his officers in 1783. It made perfect sense; Merrill, the firm with the nouveau reputation, tried to buy itself gravitas with meetings at a place like this. I guess they had a deal with the management, because we met for breakfast, even though Fraunces Tavern didn't serve breakfast-not to regular folks, anyhow.

For us, they did serve breakfast, but apparently we didn't merit heat. I could see my breath as I chatted with Andy and Jack Lavery, Merrill's head of global research and Andy's boss. There was one waiter, clearly brought on for these special meetings, who must have known more about Merrill's pay structure than anyone else in the world. I should have hired him as a consultant when I was negotiating my salary.

"We are in the process of building the number one research department in the world," Andy said, "and you are critical to our success. Our firm is completely focused on telecom, and to get a piece of the coming privatization wave, we must have the best possible U.S. telecom a.n.a.lyst."

Jack and Andy mentioned that they had thoroughly checked me out with buy-siders and were convinced that I was moving up in the I.I. I.I. rankings, which they seemed to be very, very concerned about. They also talked up the power of their trading operation, which meant that an a.n.a.lyst's calls would have a lot more impact than they would elsewhere. rankings, which they seemed to be very, very concerned about. They also talked up the power of their trading operation, which meant that an a.n.a.lyst's calls would have a lot more impact than they would elsewhere.

I was impressed, and asked how they would feel about bringing over my a.s.sociate, Rick Klugman. Rick was a young, eager, loyal guy whose s.h.i.+rttail was invariably hanging out of his pants. He was very bright and worked his tail off, and I hoped to get him a big raise. It didn't seem to be a problem. Andy presented himself as the kind of guy who would mentor young a.n.a.lysts but otherwise stay out of the way. I found his "aw shucks" approach appealing, even if I didn't totally buy it.

What I didn't realize at the time was that Merrill was desperate to recruit an I.I. I.I.-rated a.n.a.lyst because the British government was about to choose several firms to lead the third and final phase of the $22.9 billion privatization of British Telecom, and had indicated that no bank without an I.I. I.I.-ranked a.n.a.lyst would be considered.

A few days later, I met Dan Tully, Merrill's CEO and chairman, in his office, which was decorated in standard-issue Wall Street: lots of golf mementos and pictures of Tully with various presidents and CEOs. A jovial, smart, and charming guy, Tully and I hit it off right away. I was flattered that he was making time for me, which was of course the point. With his gift of gab and Irish charm, it was easy to see why he'd been so successful. He quickly homed in on my favorite topics-skiing and family-and we spent the entire time talking about our kids. He called me "Danny Boy," to break the ice. Later, whenever we ran into each other, we'd race to be the first to call the other "Danny Boy!" I knew I was a bit insolent, but Tully was more the common man than any other executive I had ever met.

Having met the approval of Merrill's CEO, I then met, on February 2, 1993, with Tom Davis, its head of investment banking, and Jerry Kenney, who was Jack Lavery's and Andy's boss and Merrill's chief strategist. Again, the meeting was treated with as much secrecy as Nixon's trip to China. It took place at the Ess.e.x House, an upper-crusty hotel on Central Park South. My instructions, which had a satisfying whiff of James Bond about them, were to ask at the front desk for the key to room 2112 or whatever it was. Merrill rented a suite there, and when I walked in the room, the two executives were already waiting for me.

I had had to sneak out of the office, telling Rick Klugman that I was going home for my luggage, as I was bound for Amsterdam that evening. Because we worked so closely together and talked so frequently, even when I was traveling, it was a real challenge to come up with a valid excuse for going AWOL. I had enjoyed the process so far, but I wasn't at all sure I wanted to make the move. Things were going really well at Morgan Stanley, and the pay, of course, was dramatically higher than I could have imagined making just a few years earlier. But Merrill understood something that Morgan Stanley didn't. The countries of the world, from Indonesia to Britain, were now in the process of privatizing, privatizing, that is selling to the public, scores of nationally owned phone companies. If one bank could become known as the go-to place for these deals, there were literally billions of dollars to be raised and hundreds of millions in banking fees to be made. Morgan Stanley took privatization seriously on a case-by-case basis, but once I heard the Merrill guys' pitch, I realized that they were a lot more ambitious. that is selling to the public, scores of nationally owned phone companies. If one bank could become known as the go-to place for these deals, there were literally billions of dollars to be raised and hundreds of millions in banking fees to be made. Morgan Stanley took privatization seriously on a case-by-case basis, but once I heard the Merrill guys' pitch, I realized that they were a lot more ambitious.

"Look," Jerry said, "we need to have the world's premier telecom research, because fifteen countries or more are going to privatize their telecom companies over the next five years. We want you to be our global telecom leader, and we want you to be our main U.S. telecom a.n.a.lyst as well."

It seemed as if Merrill was offering me the chance to build my own team, see the world (first cla.s.s, of course), and partic.i.p.ate in the economic restructuring of the postCold War era. It had been four years since the fall of the Berlin Wall, and capitalism was now the only game in town. As governments from Europe to Asia to Latin America privatized their largest companies, they could raise a huge amount of cash and inject capitalism into a large part of their economies. Telephone companies were perfect for privatization: they sold a necessity, demand was growing steadily in Europe and very rapidly in the developing world, and new services such as cellular were blossoming.

Then there was the money part. If Merrill was right about the market, the privatization fees would be so huge that the salary and bonus of an a.n.a.lyst was basically irrelevant, a point no one hesitated to make. The headhunter had told me that the job would pay in the high six figures, and I had in my head a sense that that probably meant about $800,000. It was an absurd amount of money, especially because I would be doing something I enjoyed so much.

"Hi, I'm John Mack..."

All of this happened just before bonus checks were handed out on Wall Street. Bonus time on the Street was the most eagerly antic.i.p.ated, tension-filled month of the year. The rumors began early and spread faster than the usual s.e.x or political gossip. And, once you found out your "number," it was time to move.

The end of February on Wall Street was the equivalent of summer in the Serengeti Plain, with the annual ma.s.s migration not of zebras and springboks, but of bankers, brokers, and a.n.a.lysts to their compet.i.tors who were willing to pay more. It was a time to plop new b.u.t.ts in all the suddenly empty chairs, disconnect and reconnect phone lines, empty and fill cabinets, and order new corporate credit cards. It was perfectly normal to walk in one morning and discover that the chemicals a.n.a.lyst you sat next to had evaporated into thin air. One day he was your neighbor; the next day he and his crew had decamped to Goldman, where they were already at work launching coverage. It wasn't worth it to make great office buddies, because they didn't last.

So the Tom and Jerry Show continued, climaxing with Jerry Kenney, the strategist and designated closer, making an offer that made my toes curl. "This is going to be your platform," he said, mustering up all of the salesmans.h.i.+p he normally used on banking clients. "Merrill's sales force will help you move to number one [on I.I. I.I.]." And, oh yes...how would you feel about $1.2 million per year, guaranteed for three years?

"Holy. f.u.c.king. s.h.i.+t." I almost blurted aloud. Four years earlier, I was a cog in MCI's wheel, making $70,000 a year. Now I would earn in one year what I once yearned for in a lifetime. And they also were offering me the chance to head the global research team leading the privatization charge and advising governments around the world. How could this be?

What I didn't know at the time was that I hadn't been the first choice for the job. Merrill had gone after a few better-known a.n.a.lysts, including Frank Governali of Credit Suisse First Boston (CSFB) and Joel Gross of Donaldson, Lufkin & Jenrette (DLJ), and had come up empty. Merrill had offered them a lot less money to begin with-apparently not enough to convince them to leave their safer perches and try to build a new platform. Merrill had upped the ante with every succeeding offer.

Even though I probably would have taken the lower offers they made to Frank and Joel, I got the benefit of Merrill's panic. So I tried to paste on a poker face and told Tom and Jerry I'd let them know. I needed to go home to get my luggage (it wasn't a complete lie) and then on to JFK to catch that plane to Amsterdam. Jerry knew that. "Tell you what," he said, putting a cherry on top of the sundae, "after he drops me off at my apartment on Park Avenue, my driver will take you home to Scarsdale to get your stuff, and then to the airport."

After talking it over with Paula, it became clear that going to Merrill was a no-brainer. I was getting a promotion to managing director and a huge salary increase, and I would have a bigger staff and more dollars to pay them. Equally important, Merrill had far more investor clients-and potential I.I. I.I. voters-because it served not just the largest money-management inst.i.tutions, as Morgan Stanley did, but also many smaller ones. But I still had to play the game. voters-because it served not just the largest money-management inst.i.tutions, as Morgan Stanley did, but also many smaller ones. But I still had to play the game.

On February 9, exhausted from the one-day trip to Amsterdam, I walked into the office of Jay Cushman, head of Morgan Stanley's domestic research, to get my bonus numbers. Jay and Jack Curley, the head of global research and Jay's boss, greeted me with huge smiles.

"Congrats, Dan," Jack said. "You had a great year and we're going to b.u.mp you up from $350,000 to $475,000. You're doing a great job, and this percentage increase is really good compared to the average for the division."

Most people would have seen a 30 percent increase as a pretty fantastic raise. I would have too, if I hadn't had that sizzling offer burning a hole in my pants pocket. I had no intention of staying at this point-I felt Merrill understood the importance of telecom in a way that Morgan didn't-but this game had rules and I had to play it out.

"To be honest," I said, "I'm quite disappointed." This was the script everyone knew to use when you were contemplating making a move. Jay was silent. Jack repeated his line, that the increase was much better than the department average and that it was a reflection of the great work I was doing.

Although I was leaving, I couldn't say anything to anyone until my bonus check cleared at the end of February. As soon as it did, I told Ed the whole story except for the amount Merrill was offering, which I didn't want to leak out. Ed told me my decision made a lot of sense, but asked for a day or so to see if there was anything he could do. I was going to miss Ed, but I knew that this was the right move and that we'd stay friends for years to come.

A day later, Jay came into my office and closed the door. "We've talked with the bankers," he said, "and the bankers really pay the bills. We want you to stay, and we're thinking that next year we can pay you $750,000." Clearly, this was a gangbusters offer in his eyes.

But then came the catch: "Of course, Dan, it's dependent on the telecom bankers making their budget for 1993...."

That was all I needed to hear: I had no idea what the bankers' budget was, or what their chances of reaching it were, and I certainly didn't want my pay tied to how much money the firm received from the companies that I was a.s.signing stock ratings to!

That evening, I flew to Kansas City and St. Louis for meetings with a.n.a.lysts and portfolio managers at American Century, Waddell & Reed, and Boatman's Bancshares Inc. I called Andy Melnick at Merrill the next morning to tell him it was a go. After my meetings, I went to the airport and then spent much of the rest of the day grounded by a snowstorm, having Andy fax a contract to the airport's business center so I could review it and then forward it to my lawyer.

On March 1, I told Jay I had decided to take the Merrill offer. I'd already taken all my important reports home with me, because when you leave, you're outta there the second you give notice. Any files and professional material belong to Morgan, not you. There aren't any good-bye parties on the Street. It's just one big see-ya...and don't let the door hit you in the a.s.s on the way out.

Hold on, Jay said. "Bob Greenhill [Morgan Stanley's president] wants to see you. Go to his office at 2:30 PM PM today." Well, okay then. So at 2:30 on the nose, I went upstairs to the president's office on the 32nd floor. I waited in his office for quite a while, until finally someone walked in. It wasn't Bob Greenhill at all. today." Well, okay then. So at 2:30 on the nose, I went upstairs to the president's office on the 32nd floor. I waited in his office for quite a while, until finally someone walked in. It wasn't Bob Greenhill at all.

"Hi, I'm John Mack," he said, shaking my hand. Mack headed Morgan Stanley's fixed income department. He was a North Carolinian of Lebanese descent whose father had been a wholesale grocer. Unlike most of the big shots on the Street, Mack was deadly serious and not one for shooting the breeze. He got right to the point.

"Bob resigned today," he said. He apologized for being late and for the crazy circ.u.mstances of him standing in for Greenhill. Mack was very charged up, having just found out a few hours ago that he was being promoted to president of the firm. He had a bunch of crises on his hands already, such as how to hold on to all those Greenie loyalists who might be offered lucrative deals by Smith Barney, where Greenhill had gone. He did focus on me, though, for about 10 minutes.

"I don't know you, Dan," he drawled, "but I've been told that you're a very valued employee of the research department and telecom is very, very important to this firm. We would like you to stay. Have we mistreated you?"

"I really appreciate that, John," I said. "I have been treated very well here. I don't have specific complaints. Morgan Stanley is a great firm, the research department is tops, and I am making far more money than I ever dreamed."

"So why do you want to leave?" he asked.

"I'm just really impressed with the seriousness with which Merrill is approaching the telecom sector, the amount of resources they are throwing at it is huge, and the staff I will be able to hire there is larger than I would dare ask for here." In other words, I'm outta here.