Blood on the street

Jan. 17 issue - Jack Grubman, the king of Wall Street's telecom analysts, didn't always hate AT&T. He had worked for the company once, as did his wife. And as an analyst, he often had been positive on the stock through the 1980s and into the mid 1990s. But Grubman's research turned considerably more negative on AT&T after federal legislation in 1996 gave a big boost to new rivals like WorldCom and Global Crossing. They emerged as Grubman's favorite stocks, and his relentless championing of those companies put his firm, Salomon Smith Barney, and its parent, Citigroup, first in line to underwrite billions in stocks and bonds to raise money that the telecoms needed to build their massive networks. Grubman knew how to work the systemýearning an average of $20 million a year. Grubman grew even more bearish on AT&T when C. Michael Armstrong was named CEO in 1997. Outgoing and smooth, Armstrong had been a top salesman for IBM, and later CEO of Hughes Electronics. He vowed to shake things up at AT&T, by slashing expenses and making acquisitions. Grubman didn't buy the strategy, though, and he soon put a "hold" on the stockýa no-confidence vote for Armstrong. Inside the telecom industry, people knew Grubman's opinion wasn't just about business. Grubman despised Armstrong. At conferences and in chats with his top clients, Grubman bashed the AT&T CEO as an "empty suit," a "delusionist," or a "f------ fraud." Despite its reputation as a place shrouded in numbers and complexity, Wall Street is really a business of relationships, where deals are made over cocktails at 21 or during dinners at Campagnola, one of New York's best Italian restaurants. And the story of Grubman and AT&T offers a startling window into how Wall Street firms put their interests well ahead of the small investors it was supposed to be helping during the bubble years. Sandy Weill, who was Grubman's boss, had long been close with Armstrong. Armstrong had served as one of Weill's directors in his various companies through the years. So it wasn't a surprise when Weill picked Armstrong in 1998 for his board at Citigroup, the financial service powerhouse created by merging Travelers and Citicorp. Armstrong returned the favor when he asked Weill to join AT&T's board. With Weill and Armstrong joined at the hip, Salomon, an arm of Citigroup, had become one of AT&T's top bankers. The Weill connection was a wonderful asset. One internal document listed members of "Citigroup's AT&T Corp. Team." At the top was Weill, with his email and direct line. By the late 1990s, Armstrong's comeback strategy was falling flat, and Grubman was telling investors there was nothing Armstrong could do right. For Weill, one of the worst things about being on the AT&T board was hearing complaints from directors about Grubman's bearishness. Armstrong even told Weill that Grubman's behavior was threatening "the relationship" between AT&T and Citigroup. Weill asked Grubman to take a "fresh look" at AT&T. Armstrong was willing to do his part. In mid 1999, Armstrong gave Grubman access to AT&T's top brass so he could fully understand the new strategy. Weill even joined Grubman for a meeting at AT&T's headquarters, where Armstrong chided Grubman "for going out of your way to portray us as dopes." Grubman said he was ready to give AT&T a fair hearing. Inside Salomon, people were getting a different story. Grubman told his assistant, Sherlyn McMahon, that he was holding fast to his current negative rating. McMahon was his confidantýshe often had direct contact with his inner circle, and Grubman even gave her a peek at his close relationship with Carol Cutler, the analyst at a Singapore pension fund he communicated with almost daily either by phone or through email (many of them laced with explicit sexual banterýone email from Cutler rhymed on the word "rod,'' including: "Now as I've got such a great bod, I really doubt you need much of a prod.''). Grubman's game plan, McMahon would later say, was to bury AT&T in paperwork and demand confidential information that no company would be willing to divulge. But word began to spread on Wall Street that AT&T was preparing a huge stock deal to finance a spin-off of its wireless telephone unit. The underwriters could earn upward of $60 million in fees. Grubman sensed a new urgency at Citi: This was one deal they couldn't afford to lose. Closer to home, Grubman faced another challenge. For more than a year, he and his wife, LuAnn, had been asking colleagues about preschools for their twins. Recently, they had settled on one of the best, the 92nd Street Y in Manhattan. It's not just another elite preschoolýit's more like an exclusive finishing school for toddlers. Yet the twins didn't even make the waiting list. Grubman had no clout with the preschool, but he knew someone who did. Grubman and Weill weren't very close, but by late 1999, they were communicating daily as Grubman took his "fresh look" at AT&T. It didn't take long for Grubman to come up with a solution to make everybody happy. In a two-page memo titled, "AT&T and the 92nd Street Y," Grubman reminded Weill of his "very productive" meetings with AT&T's top executives. But Grubman said he needed to elaborate on the "ridiculous but necessary process of preschool applications in Manhattan." Grubman needed Weill's help. "The 92nd Street Y is, without question, the one we'd love our children to attend." Grubman even attached a list of Y board members for Weill to call. Weill didn't wait long to fulfill his end of the bargain, and made a proposal: a donation of $1 million if the Grubman kids were admitted. The school was receptive, and Grubman became more receptive to AT&T's business model. On Nov. 29, Grubman announced to Salomon brokers that with AT&T's new cable strategy, there was no telling how far the stock could climb. The market agreed. Shares of AT&T spiked. As AT&T's board moved forward with the wireless deal, speculation spread that Grubman's upgrade was just a ploy. It was common knowledge that bankers applied pressure to analysts to skew ratings, but now it looked like Grubman was taking heat from his CEO. Salomon did land part of the AT&T wireless deal. Despite his public support for AT&T and its "new" direction, Grubman still privately bashed the company and its CEO to his inner circle of money managers and telecom executives. When one of them ribbed him about "selling out" his research to win a banking assignment, Grubman set the record straight. The upgrade, he said, had little to do with the wireless spin-off. "I needed to get my kids into the 92nd Street Y."