Confessions of a Wall Street Analyst (5 page)

Unlike that Grubman guy, this was someone whose approach to Wall Street research I appreciated. Ed was a deep thinker and extraordinarily thorough in his analytic work. He also was a no-bullshit kind of person who told you what he thought and why. And he was really good at the other side of the Wall Street job—interacting with buy-side investor clients and executives of companies like mine.

At the time, I only vaguely understood that being an analyst required a bit of socializing too. Not only were you wined and dined constantly by the companies you covered, all of whom hoped desperately to convince you to say positive things about their company and its stock, but you in turn had to market yourself—and your research—to as many professional analysts and money managers as time would allow. Your reputation didn’t come only from the quality of your thinking, I later learned, but instead that was just one piece of a jigsaw puzzle that included how responsive you were to a client’s questions, how well clients liked you, and what kind of special tidbits you could dole out to them to make them feel special and appreciated. Basically, you had to be smart, you had to work your tail off,
and
you had to be popular. It reminded me of high school.

In November 1988, Ed proposed that Morgan Stanley sponsor a European investor-relations “road show” for MCI. A road show for a company was a marketing trip in which its executives traveled around the country or the world, meeting with investors and, hopefully, convincing them to buy its stock. Acting as a friendly adviser, Morgan Stanley had offered to arrange meetings with the largest mutual and pension funds in each of Europe’s major cities. Morgan’s salespeople, along with Ed, would chaperone us around from meeting to meeting, telling our story.

Jim convinced MCI’s new CFO that the trip made sense, since MCI needed more visibility in Europe and it would be good to be sponsored by an analyst and firm as well-respected and bullish on our shares as Ed Greenberg and Morgan Stanley. We offered Ed a ride on MCI’s corporate jet, a Falcon 50, and he accepted, naturally; six hours in the air with MCI’s CFO was an analyst’s fantasy, not only an opportunity to learn lots of new things about MCI and its strategy, but an experience he could layer into every conversation he had with his large investor clients, thus enhancing his reputation as a “well-connected” analyst.

So that Monday morning, Ed picked me up at my house in a taxi. My
home, at the time, was nothing super fancy, but my wife, Paula, and I had put a lot of sweat into it and were quite proud of it.

Ed took one look at the house and almost started laughing. “You ought to come to Wall Street and hit the big time,” he said. “I’m serious. You’d be good at it, you’d make plenty of money, and you’d get to do analysis all day long instead of just parroting management bullshit.”

Parroting management bullshit? I was offended—until I realized that he was absolutely right. That was exactly what I’d spent much of the last year and a half doing in investor relations. My job was not to express my own opinions but rather to pass on the company’s party line.

Our trip to Europe was a blast, made even more fun one day by the fact that the Morgan Stanley salespeople had arranged for us to be chauffeured in a sleek black Bentley, complete with a wonderfully obsequious driver. Even by Wall Street’s standards, this was over the top. I started to wonder exactly how much money Wall Street analysts made, anyhow. What they did didn’t seem any more difficult than my job, and it did sound more appealing to be the one whose opinions moved markets rather than the one who had to react to those opinions. I figured if I could be about 30 percent as smart as Ed and 20 percent more practical, I had a chance to do all right on the Street.

I knew the basics of how an investment bank worked, but not much more than that. My understanding was that they advised companies on strategic and financial issues and raised money for companies by selling stocks and bonds, taking a piece of the proceeds. And they worked with investors, helping them select investments, matching up buyers and sellers of securities, and charging a commission on every trade.

But I had no desire to move up to that snake pit called New York. I was fine in D.C.; Paula had a good job, and we now had two young daughters. By early 1989, I was promoted to director and put in charge of MCI’s business analysis group, running a group of MBAs analyzing everything from how to price a new MCI service to how much to spend on new technologies. But then Ed came back to me, telling me that he was rethinking his own career. Because Ed was so smart, he was also easily bored, and he was bored with being an analyst after so many years. He wanted to do something different. He decided to become a banker.

“Come work at Morgan Stanley,” he cajoled, “and take my job. I’ll train you and make you as good as me.” I told him I wasn’t moving. The cost of liv
ing in New York was way too high. Ed just laughed. “Just come up here and meet the people,” he said.

So I did. In fact, I took two trips to meet various research managers and institutional salespeople at Morgan Stanley. I’d been told that Morgan Stanley was a white-shoe investment bank that advised many of the largest and best companies in the world. It had a reputation of being genteel, refined, and snooty, with an old-money sensibility about it. Morgan Stanley didn’t trample all over people trying to bring in business like some banks did. It didn’t have to.

I enjoyed myself during these visits to Morgan Stanley. The meetings convinced me that the job would be fascinating and fun and that, with Ed’s tutelage, I could probably do it. I didn’t meet anyone from the banking side: apparently they didn’t care who replaced Ed as telecom analyst. I really had no idea what bankers did or why they might matter. My vague notion was that bankers made the lion’s share of the dough on the Street and that their job was the most prestigious. They served as advisers to the top executives at top companies, helping them to find other companies to acquire or merge with and raising money for them. It never occurred to me that they had anything to do with analysts, or that there was any significant interaction between the two groups. In any case, if Ed was interested in being a banker, they couldn’t be all that bad.

At the end of my second visit, Peter Dale, Morgan Stanley’s director of U.S. equity research, told me he would call me in the next few days with an offer. I still wasn’t sure if Paula would be willing to move, or of how disruptive such a move and career change might be to our family and marriage. I’d read an article in
The Wall Street Journal
that said top-ranked analysts were making $250,000 and up. That seriously impressed me, but of course there was no guarantee I’d ever be a top-ranked analyst. Plus 1988 had been a bad year on Wall Street. The stock market had been flat and investment banks had been in the tank. So when Peter called with my offer, I held my breath. “We’ll start you at $150,000,” he said. That meant $75,000, plus a $75,000 guaranteed bonus. My heart raced; he was doubling my salary.

Paula and I had calculated that it would take $175,000 to replicate our D.C. lifestyle by buying a similar-sized house in a comparable school district. This magic number also meant Paula could stay home with the kids, a luxury we hadn’t had until now and one we might need given the grueling travel schedule of a Wall Street analyst. For days, Paula and I stewed over
how to handle the negotiations. Would I blow the deal by asking for another 25 grand? What if they wouldn’t give it to me? Could I still accept the job or would I have lost face? It seemed so, well, forward to ask for more. But that was the way it worked up there, wasn’t it?

I called Peter and nervously laid out my proposition. “This is the right job for me,” I said, trying to sound cool. “But,” I said, speaking like the true quant guy I was, “it’s tough to make the numbers work.” I needed another $25,000, I croaked.

“Okay,” Peter said, as if he’d just been asked to pass the salt. “Fine.” He didn’t have to ask anyone for permission; there was even the hint of a smile in his voice. Geez, was I clueless about the scale and scope of life on Wall Street. Apparently, $25,000 was the equivalent of a sneeze up there. “Dammit!” I said to Paula. “I didn’t ask for enough!”

Although I was excited about the money, that wasn’t why I was uprooting my family. To some it may sound disingenuous—everything on Wall Street, I was soon to discover,
was
all about the money—but for me that was never truly the point. Sure Ed loved to tease me, saying, “Dan, I drive a
Beemer.
What do you drive?” (I drove a four-year-old Chevy Nova and Paula drove a Pontiac 6000 station wagon.)

The money was certainly appealing. But it was more about the intellectual challenge and avoiding that malaise, that blah, that
woulda-coulda-shoulda
of making the safe choice. I could stay on at MCI, but my next job was probably going to be managing the accounts payable department, made up of 300 clerks. The Morgan Stanley job, by contrast, was a chance to test myself against some of the smartest people in the world. I wanted the brass ring. I wanted to become a top-ranked analyst in that poll, whatever it was called. I wanted to take the challenge and I wanted to win.

If I needed any more assurance that I was making the right move, I got it when we had dinner with Steve and Gloria, neighbors of ours in Potomac. Steve was an economist at the Federal Home Loan Bank Board. He was smart, well connected, and, in my view, way too comfortable. Five years older than me, he was already thinking about the day when he could retire from his job as a government employee.

“Dan,” he said, “you’ve got a great career going at MCI, you know all the top execs, and you have an extensive network of relationships throughout the company. Why would you give that up and start all over? You’re not young anymore, you know. You’re 36.”

Suddenly, I had a flashback to my grad school days in public policy, when I had planned on a career in government or academia, or even at a think tank. Like a lot of people who came of age in the early 1970s, I thought anything that smacked overtly of capitalism or the private sector was crass, tacky, bloodsucking. But in the summer between my first and second years at grad school, an internship at the Department of Education made me feel differently. Something had happened to all those idealists once they got into a slow-moving bureaucracy with job security. They had come in thinking they were going to change the world. Now they were 40 years old and hated their jobs. These guys had become bureaucrats through and through; as their idealism faded, their cynicism expanded. They no longer yearned to change the world, at the Department of Education or anywhere else. They were simply marking time until retirement.

On the ride home from dinner with Steve and Gloria, I said to Paula, “What Steve was saying was in a couple more years I’m going to be afraid of change and afraid of risk. I’ll end up like him. I will never forgive myself if I don’t at least give it a shot.” We made the decision to move that night.

Breaking the news to my colleagues at MCI wasn’t easy. One day, I ran into Orville Wright (yes, that is really his name), MCI’s vice chairman, in the hall. He was a big, tall, bald, conservative, former IBM man who always wore a white shirt. When I told him my news, I expected the standard pat on the back, but instead, looking down at me (he was a lot taller than me), he said, “Dan, I sure hope you know what you’re doing,” as if he knew something that I didn’t about the ways of Wall Street. Orville walked on without even congratulating me on what was the most important decision of my career.

A few days before my last day at MCI, Jim, my colleague in investor relations, came in and gave me a teasing look, that same look he used when he was looking for an impromptu audience for his latest tales of female conquest.

“Danny, I know how well you rise to challenges,” he said. “I was just talking to your best buddy on the Street.”

I rolled my eyes. “Which one might that be?” I parried, knowing full well who it was.

“I wasn’t going to tell you this, because it might make it difficult for you to sit next to him in meetings,” he said, “but Jack Grubman says you’re not going to make it on Wall Street.”

“Oh, really, why?” I queried. “Because I’m not a good liar or what?”

“Not exactly, Dan,” Jim responded. “He said you’ll never be able to handle the marketing and selling part of the job.”

I laughed it off when Jim said that, but this was, of course, exactly the thing I was most nervous about. I didn’t want to have to sell myself as much as my ideas. I was not an exaggerator or a cheerleader type. I’d never really been a backslapping, beer-chugging, frat guy. I didn’t want to overplay everything in order to get attention, the way I thought Jack did. I simply hoped I could write reports from the quiet of an office overlooking midtown Manhattan as competently as any telecom analyst out there. Maybe Jack was right. But it was too late. I had already given notice at MCI and it was time to make the move. It was July 1989.

From the Jetway to the Attic

It turned out that $175,000 in Scarsdale translated into a house that was pretty darn similar to the Potomac house that my friend Ed had maligned. We bought a four-bedroom colonial that was maybe 300 square feet bigger but cost us $65,000 more than we sold the previous house for. It was one of the smaller houses in town, but it did have an attic—which I set up as an office. I had no idea how much time I’d be spending in it over the next several years.

My first few months at Morgan Stanley were remarkably free of the types of pressures that would later be splashed across the front page of
The Wall Street Journal.
My job was to cover telecommunications services—primarily the Baby Bells, which along with GTE provided local phone service, as well as AT&T, MCI, Sprint, and a few others that sold long distance service.

Ed was still the main telecom analyst at Morgan Stanley, so he just showed me to an office next door to his and told me to get cracking on my first report. I was to sit in that room, research the bejesus out of this industry, and come up with a groundbreaking report that would put my name on the map and bring the firm some attention. I didn’t have to test my marketing mettle yet; I was just supposed to think, reason, puzzle. No one told me what to say, how to react, which companies were our banking clients, or anything else for that matter. Not even Ed, who had been positive on the Baby Bells, tried to sway me to his point of view.