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National Review Online, November 20, 2002

Even the politically conservative Wall Street Journal is joining this media onslaught. Last week it took the lead by pillorying former Salomon Smith Barney telecommunications analyst Jack Grubman and his boss, Citigroup CEO Sanford Weill, uncritically putting every supposed "smoking-gun" e-mail and memorandum leaked from Spitzer prominently on their front page.

But what the media doesn't want to admit is that they, themselves, churn out a far greater quantity of stock research than Wall Street does. Their research is consumed by a far larger audience. Their research is every bit as congenitally bullish as Wall Street's, and just as frequently wrong. And their research is every bit as "tainted."

Consider Gretchen Morgenson, a Pulitzer Prize-winning reporter and columnist for the New York Times. Her column of Sunday, November 17 -- "Does the Rot on Wall Street Reach Right to the Top?" -- blamed Weill and Grubman for huge losses suffered by investors who followed Grubman's advice to buy shares of AT&T in 1999, advice allegedly tainted by business and personal motives: Morgenson wrote that "thousands of individual investors lost millions of dollars because of what appear to have been self-interested actions by Mr. Grubman and Mr. Weill."

But then, right in the middle of Morgenson's column, a confession appears. Morgenson wrote, "To be sure, Mr. Grubman was not the only analyst who was bullish on AT&T in 1999. This column quoted one in May 1999 who incorrectly projected a positive future for the company and its shareholders. What a bad call of mine that column was!"

Now why would Gretchen Morgenson go out of her way to confess that she quoted an analyst who was positive about AT&T? Why was doing that such a "bad call"? Simple -- just go to the New York Times online archives and be ready to pay your $2.50. You'll find out for yourself that the analyst who "projected a positive future for [AT&T] and its shareholders" was none other than Gretchen Morgenson.

The column in question was published on May 9, 1999. In it Morgenson does in fact quote one analyst who was bullish on AT&T: Dave Powers of Edward Jones in St. Louis (Who...? I don't know him either...). Powers got 72 words in the column. The other 489 were all Morgenson's.

The column, titled "An Internet Play for Widows and Orphans," was a ringing endorsement of AT&T. It's probably more effusive than anything Jack Grubman ever said about the company, and it certainly is more directly aimed right at the "individual investors" whom Morgenson said "lost millions" by listening to Grubman's milder advice.

In the column Morgenson celebrates AT&T's acquisition of several cable TV companies, part of the now-failed business strategy of CEO Michael Armstrong. Morgenson wrote, "The vision that Mr. Armstrong, 60, has for his company is vast. . . . In the meantime, AT&T, unlike technology upstarts, had $53 billion in revenues last year, $6.4 billion in earnings and -- what's this? -- a dividend. . . . [Armstrong's] biggest act yet may be turning stodgy AT&T into a top-performing technology stock that even a conservative investor can love. The stock has risen almost 20 percent so far this year. But at 28 times trailing earnings, it is downright cheap for an Internet play."

These weren't the views of Dave Powers, whom Morgenson now says she regrets quoting. These were the views of the stock analyst named Gretchen Morgenson.

And that bit about "widows and orphans" wasn't just the work of some over-enthusiastic headline writer. Morgenson wrote, "C. Michael Armstrong . . . has morphed the 114-year-old behemoth into the kind of hot technology concern favored by day traders on the Internet. Widows and orphans, say hello to the Motley Fool."

I asked Morgenson why her recent mea culpa was for having quoted an analyst, and not about her own endorsement of AT&T. She told me, "I was absolutely saying that was my opinion. I said it was a bad call." A reporter of Morgenson's caliber should know better. She should have been more clear about that distinction if she intended her readers to make that distinction. If her intention was to take personal responsibility, why even mention quoting the analyst at all?

At least Grubman admits he made the upgrade -- in fact, he subsequently retracted it. And at least Grubman never said that AT&T was for widows and orphans.

And yet, Grubman's career has been ruined in what was called in the McCarthy era a "trial by slander." Morgenson, meanwhile, is still cranking her printing press, still acting as both stock analyst and prosecutor-at-large.

She wrote this week, "Mr. Weill's request of Mr. Grubman draws him into the circle of people that investors can consider at least partly responsible for losses they incurred by following the analyst's advice. Between his upgrade of AT&T when the stock was at $57.43, and his downgrade, at $28.88, some $80 billion in market value vanished."

But when Grubman upgraded AT&T, all he did was adopt the same "bad call" that Morgenson herself had made months earlier, when the stock was priced higher. Morgenson's May 9, 1999, column was written when AT&T was trading at $60.44, within a couple points of its all-time high. If Weill and Grubman are in for $80 billion, what does that put Morgenson and the New York Times in for -- $100 billion?

Not according to Morgenson. She told me, "Grubman holds himself out as an expert on telecommunications stocks. I'm just a reporter trying to cover the news, just trying to do the right thing."

Surely telling millions of individual investors who read the New York Times that AT&T is just the stock for widows and orphans is something more than covering the news. Surely, taking this position in a column in the New York Times constitutes holding one's self out as an expert. But for Morgenson the crucial distinction -- at least the one she hopes that her public will make -- is that, right or wrong, while she was "trying to do the right thing," Grubman was doing the wrong thing.

In her column this week Morgenson reprised the Grubman case. She wrote, "The story so far: in early 1999 Mr. Weill asked Mr. Grubman, a man whose job it is to monitor by the minute what is happening at telecom companies, to 'take a fresh look' at AT&T. Mr. Grubman, who had been negative on the stock, coincidentally upgraded it to a buy in November 1999. A few months later, Mr. Weill's firm helped AT&T sell shares in its wireless division to investors, reaping bountiful fees."

Yet this flatly contradicts facts reported by Morgenson herself in her story of August 24, 2002, when Weill's potential involvement in Grubman's AT&T upgrade first surfaced. Then she showed that Salomon's underwriting business from AT&T was not actually affected one way or the other by Grubman's rating: ". . . the bank was not shut out of AT&T's deals. In February 1999, for instance, while Mr. Grubman was still lukewarm on the company, AT&T sold $8 billion in bonds, at the time the largest corporate debt offering in the United States. Salomon was one of that deal's lead underwriters along with Merrill Lynch. After Mr. Grubman became negative on AT&T in October 2000, AT&T included Salomon in a top role in five of its six subsequent major stock and debt sales."

It's difficult to see how Morgenson's circumstantial evidence of "reaping bountiful fees" after the upgrade is persuasive when she, herself, has said that there were in fact no circumstances.

Under the surface Morgenson and Grubman -- media research and Wall Street research -- aren't really so different. They're each ordinary people trying to make a living, working for organizations that do business with other organizations. It's not an important distinction that Grubman had a higher salary than Morgenson, or that Salomon earns investment banking fees from AT&T while the New York Times earns advertising fees. All stock research is "tainted" in some way -- and any reasonably intelligent consumer of it, from whatever source, should realize that.

There is one major difference, however. Grubman just wrote about stocks. But Morgenson writes about stocks and Grubman and herself. She gets to make history, and then write the history book.

Think of it this way: they're both tainted. But in the end, Morgenson has so very much less accountability.
 

Donald L. Luskin is chief investment officer of Trend Macrolytics LLC, Menlo Park CA.
don@trendmacro.com