Part 13 (1/2)

By October of 2000, AT&T's shares were un shortly after the announcement of the AT&T Wireless IPO back in 1999 On October 4, 2000, The Wall Street Journal The Wall Street Journal ran a story on the front page of its Money & Investing section about Jack's ill-tiht hurt Salo business, which had hit a phenomenal 350 million in fees in 1999 It read, ”everyone seemed to win-everyone, that is, except investors who heeded his call and bought AT&T stock” ran a story on the front page of its Money & Investing section about Jack's ill-tiht hurt Salo business, which had hit a phenomenal 350 million in fees in 1999 It read, ”everyone seemed to win-everyone, that is, except investors who heeded his call and bought AT&T stock”16 Incredibly, two days after the article appeared, Jack reversed hi AT&T shares to a ”2,” or Outperforrade shocked e clients, but it was old news for many of the professionals Back in May, when Jack rated AT&T shares a Buy, or ”1,” and just after the AT&T Wireless IPO was completed with a 63 million payoff to Jack's fire fund ”Fyi, Jack is pissing all over AT&T,” he wrote, suggesting that Jack's private comments to some institutional investors were far more bearish than his written reports, which Salomon Smith Barney's brokers and individual investors relied upon

Jack's tactics were finally attracting soative attention I was happy about it, and I wasn't the only one Just after the Journal Journal article caot an e-mail froative articles about Jack as a ot an e-mail froative articles about Jack as a etting drubbed on the att round trip Major oppty for you to crush hi events?”

Unlike Frank, I wasn't much of a self-promoter, so I simply responded, ”Any ideas?” and the discussion ended there I was glad I wasn't the only one noticing Jack's diminished status

It was at about this ti decided to throw in the towel on his cos voice, video, and wireless into one bundle of services Instead, he decided to break up AT&T all over again by dividing the co Distance, AT&T Wireless, and AT&T Broadband (cable TV and modern services) Unbeknownst to ht in to plan the restructuring On October 23, I was called over the Wall, along with Goldman's telecom analyst, Frank Governali, to hear a previehat Mike and his CFO, Chuck Noski, would say the next day at a hastily arranged analyst

We met secretly in AT&T's virtually uninhabited don Manhattan offices at the foot of Sixth Avenue Almost all of AT&T's executives worked out of the New Jersey headquarters, but the cos They had draft slides ready to go and wasted no ti from Chris Lawrence, CSFB'S AT&T banker, or his team, so this was all brand-new to ration I asked why a few different ways, but he only said that the stock had been pounded and that the y In effect, he was saying that the rand transformation plan He see he would be back to his ebullient self, confident smile and John Wayne voice at the ready

And then AT&T's CFO, Chuck Noski, told Gold to announce about earnings and revenues It was horrendous The competitive pressures from WorldCom, Sprint, several new startups, and, of course the Bells, were causing AT&T to lose share and cut prices at a far faster pace than expected I was suffering along with the co recommended AT&T at Merrill almost two years earlier, at a post-split 52 per share AT&T shares had fallen 48 percent since then and were now trading at 27

With the exception of IDB back in 1994, upgrading AT&T had been otten steadily worse But noithAT&T for the next year or two, I didn't think I should be issuing any opinions CSFB's coreed, so I was instantly restricted fro on AT&T and its shares From October 23, 2000, I couldn't write or say a word about AT&T As frustrating as this was, I was also relieved: my call had been a disaster and this, at least, stopped the bleeding

The analyst o over well AT&T shares fell another 13 percent And theto realize that the disease that was afflicting AT&T-brutal co distance free for cellular calls, and thedistance companies ood old Qwest Exactly a week after AT&T's dour earnings announce in Manhattan, at the Waldorf-Astoria Hotel As we sat in the Grand Ballroo Joe Nacchio's talk, the mood was defiantly confident It see Clearly, whatever one thought of Joe, he was doing so robust and on-target growth in revenues and operating cash flow

Suddenly, the lights die lit up Out alia and pith helmet, to the overdramatic sounds of the music froe were a series of burning torches, each one representing one of Qwest's competitors There was a torch for AT&T, another for WorldCo, Verizon (the former Bell Atlantic), and several of the other Baby Bells You can iine what came next Nacchio, coe to each one of his rivals' torches and delivered a shortwith each one of them Then, with evident pleasure, he snuffed out each of their fla torches, each one representing one of Qwest's competitors There was a torch for AT&T, another for WorldCo, Verizon (the former Bell Atlantic), and several of the other Baby Bells You can iine what came next Nacchio, coe to each one of his rivals' torches and delivered a shortwith each one of them Then, with evident pleasure, he snuffed out each of their flauys in the industry,” he repeated over and over during the course of the ed, the econoional econorowth sources, such as data, Internet services, and wireless services, wereThen there was the stability of US West's local business, which was still more or less a monopoly If there was to be only one Survivor, he assured all of us, it would be Qwest

While the skit was silly, those of us still reco somewhat of a relief There were still so was that the day of reckoning for the incu-distance companies that I had warned about five years earlier was upon us So their lunches eaten; others were prospering It wasn't a slon in overall demand as much as a Darwinian shakeout

But that sense of relief didn't last long Just as I was leaving the Qwesta surprise analyst ured it was going to be bad news, and it was I intentionally arrived early at the et the press release as soon as it ca to create two, yep, tracking stocks, one for services to businesses and one for services to consurowth projections due to ”intense pricing pressures, unfavorable foreign exchange rates and the shi+ft of consuets were dismal, it sure looked as if Scott Sullivan and his team had done extremely detailed analyses of WorldCoets were dismal, it sure looked as if Scott Sullivan and his team had done extremely detailed analyses of WorldCoht, these are huge cuts The water torture of the past three quarters had turned into a downpour I knew this would be very bad for WorldCom's share price, and I knew I needed to tell CSFB's sales force as quickly as possible But first I wanted to get a better understanding of as happening Bernie was not around yet, but I found Scott and asked a few questions about as driving the bad news He had so's answers a week earlier When I asked about his new forecasts, he said he would not talk about the that I wasn't going to getwould be ending soon, I pulled out my BlackBerry and started to type up an e-mail to CSFB's sales force

With its wireless e-mail capability, the BlackBerry had co to beatto wait until a hts back to rade WorldCom's shares for the second time this year, this time from Buy, or ”2,” to Hold, or ”3” I also dras estimates for 2001 to 110 per share, down 46 percent froe 27 billion dollars of annual profit had just disappeared

At the , even Bernie seenize we have let you down,” he said, pro to do better ”When I was 16 years old, I was a six-foot-three, 130-pound kid trying out for the high school basketball tea a Native Alish I was coht but 100 pounds heavier The coach threw the ball out into the center of the court and said whoever comes up with the ball is the starter I ca to coht this effort as never before”

Later, he was a lot less sanguine ”People have a legitiht person to lead the co18 WorldCoated disaster for virtually everyone in the investers still owned the stock, which had already been suffering and was about to get crushed, and virtually all Wall Street analysts were still reco that made the pain bearable for us was the fact that this business was all about coot hosed, at least ere all in it together

A day later, two other investraded WorldCoue Adam Quinton, and Wachovia Securities, both from ”Buy, or ”1,” to Neutral, or ”3” Salo-stock deal, so I assuain about the SEC's No-Action Letter Jack reiterated his Buy, or ”1,” rating, in a lengthy report approved by his coan By this point, coh the loopholes in the SEC regulations, with plenty of room left over for an investment bank and its analyst to do whatever they wanted Thanks to the No-Action Letter, analysts knew they could write about virtually anything they pleased, conflict or no conflict, with no fear of getting in trouble Arthur Levitt's sleepy SEC appeared to pay not a whit of attention

What had at first seemed like a bit of softness for one co distance incu that was a virtual carbon copy of the others, except it didn't announce a tracking stock, because it already had one I was of two est the news On one hand, I was devastated to have est and -distance coht, if only I had stuck with that position that I had launched with a bang back in July of 1995 and never upgraded those stocks to Buys I should have ignored all the data and Internet hoopla and stuck to oing to get creauilty vindication My overall theory that the Baby Bells were the best situated to cothened, not weakened, by what had just transpired Now WorldCom, Sprint, and AT&T were too weak and too distracted to attack the localthe Baby Bells still more power

In our insular Wall Street world, I suddenly looked a lot better than a lot of ratulate rade of WorldCoinning to bear fruit Jack, they said, was no longer looking as savvy as he had just a few , we all intuitively understood What we didn't yet understand was exactly how seis the results would be

9 Crash and Burn Crash and Burn

2001

The victory couldn't help but feel hollow When I caratulatedto keep you going now?” It was a good question The twin toere down, the markets were down, much of the telecom industry was down, the reputation of analysts was down, and even Jack Grubman was on the way down Every part of , from the companies I followed to the firms I worked for

The Crash

MR REINGOLD,” the voice an, ”I saw your report today about WorldCom” I didn't knoho he was, but his voice had an oo doith lies about the couys short the stock and then go out there with your negative reports and force the stock down” By now, he was starting to breathe heavily, growingto take you and your fir away You guys and all the others like you will pay pay! See you in court!” He hung up

The first time this rade of WorldCos estimates for the coot calls froan to teeter and tumble, there were understandably many more of them By October 2002, when the e had lost 38 percent froh, while the NASDAQ co 78 percent Some estimates put the total value of stock market losses at about 8 trillion

Yet today, after analysts have been excoriated-and rightfully so-for rean to build, there's a part of the story that is rarely understood That's the unslakable thirst of investors-whether pros, individuals, or that new breed, day traders-for bullish commentary, as if such commentary could make ”the value of these stocksperpetually rise,” in Jack Grubman's words of 1999 My irate caller's rant caic wand to reverse a stock's decline, si it wasn't so He saw us as all-powerful, e turned out to be anything but In a panic-driven roup could halt an avalanche The true believers couldn't, and wouldn't, accept this reality

A few ain and left even es, full of venoal and security departments The folks in security actually hired a private detective to find out , they discovered that he was an attorney in a Boston suburb with a history of class-action lawsuits against Wall Street That al ured, so as I walked into the office

But as -was that he seemed utterly convinced that we at CSFB were artificially forcing down WorldCoreat irony, of course, is that WorldCo While he was apoplectic that WorldCoh of 64 to 15, the company was essentially bankrupt already I'ative on the stock at the time, not less I certainly wish I had

There had been countless press stories ro the stock market and the brilliant an to sink into an unforgiving quicksand, the pendulu to the other extreme First came the dot-com debacle Petscoo under, in November of 2000, with hundreds of others soon to follow A bitterly funny Web site, fuckedcoossip about each failed dot-com and the number of layoffs associated with it In a split second, the y on these new co is real” There were still jokes, but the tone changed froallows huh the eyes of a bystander, or so I thought As the dot-com meteorites quickly disappeared into a black hole, it still see on there there was a South Sea Trading Co in teleco to stop talking on the phone, obviously And businesses were not going to stop sending information and data froh the traffic wasn't asCo in teleco to stop talking on the phone, obviously And businesses were not going to stop sending information and data froh the traffic wasn't as much as prophesized

Sure, the Teleconificant har-distance companies, and sure, the bull market had funneled too much cheap money to the startups, but the Baby Bells still seee of owning a real phone co's business came mostly from overseas, where competition wasn't as intense

What an incredible piece of self-delusion No one had realized it, but our sector was headed for a collapse that would make the dot-com crash look like a fender bender

As 2001 dawned, soan to hit roup to lose favor was the startup local telephone co up to meet the new telecom needs of the dot-coms Companies such as ICG, Winstar, Metromedia Fiber Network, McLeodUSA, and XO Communications, which provided local phone and data service in coan to buckle under the weight of their enormous debt, which they had easily raised from investors who believed they would fill a massive unmet need for coht that the winners a them would be the ones that built real networks and were not dependent upon the Baby Bells to connect to custo local infrastructure-that last mile to the ho tih the startup local carriers were enerous stock and bond markets, the money came so easily that they wasted a lot of it on fancy headquarters and lected their buildouts

Ultimately, the dot-com collapse had a domino effect on the local carriers: when the dot-coms' capital dried up, they cut back their expansion plans and canceled orders for communications lines The Bells, with their healthier finances and well-diversified customer base, weren't affected nearly as much

The local-carrier collapse hit Jack the hardest, because he continued to strongly reco with Saloan to tumble The first to file for bankruptcy was ICG, in November 2000, followed, five months later, by Winstar Communications, a company that had been a top pick of Jack's and of Mark Kastan's Although Mark was more selective in his recommendations than Jack, all of us were slow to see what poor competitors a lot of these co would dry up But as the year went on, it was Jack's reputation that took more and more of a hit He'd always claimed to be in the co-pilot's seat with these companies So why didn't he know they were about to crash, his critics asked?

Yet as strange as it iven the speed hich thewas pretty anticli stuck in a shi+p taking on water There was no single event that told everyone that it was over Instead, we experienced a slow-e and later seemed somehow normal The Dow had peaked in early 2000, but fallen and risen several tiht still be a short-term correction rather than a major bearAlthough fewer people were listening, those believers provided a final lifeline for the investors who hadn't yet realized that a ht have disappeared

With no real idea how long all of this would last,in and stuck to their investment theses For me, that meant I continued to talk up the Bells and Qwest and to talk down WorldCo distance I remained restricted on AT&T and couldn't talk or write about it I think that u-distance co trouble- just how all-encolut of telecommunications services would be I still believed that there would be survivors in this industry, and that one of the with a Buy, or ”2,” rating

For Jack, sticking to the progra to pound the table for his favorites-WorldCom, Global, Qwest, and virtually every local startup-and to steer investors away fros on SBC and Verizon, two of the three Baby Bells The reot, the louder he talked, as if he could make it so simply because he said so It wasn't actually an unreasonable point of view, given that until now most people seemed to think he really did make the world turn

The Show Must Go On The 2001 CSFB Global Telecom CEO Conference took place in March, as always, but the tone was decidedly less exultant than it had been the prior year Many months earlier, we had decided to move from the Plaza to the Grand Hyatt to better accoone The NASDAQ had dropped a shocking 59 percent in the past year alone, taking along with it most of the telecom startups We had 25 percent fewer people than the year before, but it was still a good turnout considering the huge snowstorm that hit New York on the first day There was a lot of talking going on, but not a whole lot of dealto ter to be a winner-and that, in fact,losers

In the meantime, we had a show to put on We didn't exactly party like it was 1999, but we didn't go into et for the conference had been bumped up by almost 40 percent, to 23 ood show, and we obliged We considered a lot of big na and Seinfeld

The going rate for these guys was as inflated as the stock of the executives they were perfored between 600,000 and 11 million, plus six first-class and nine coach round-trip plane tickets, 14 hotel rooround transportation, and production Seinfeld required a 550,000 fee, along with private aircraft or two first-class round-trip airfares, one hotel suite, and one single rooet, they just see in the markets

We ultiain” cost of 375,000 plus two first-class and 18 coach-class round-trip airfares, two suites, and 18 rooround transportation and production costs I thought he su for-serious and classy Instead of MP3 players, we gave out Motorola walkie-talkies It was still absurd-just not quite as absurd as it had been the year before

We had to walk an odd tightrope in this i environ, and my bosses didn't want to project that On the other hand, tooon in the world and in the market, and that, too, would co of Verizon, Qwest's Joe Nacchio, and Duane Ackerman, CEO of BellSouth AT&T, WorldCom, and Sprint executives were nowhere to be found The idea of being pelted with questions fro to them