by Maggie Mahar
Bull!
A History of the Boom and Bust,
1982–2004
Maggie Mahar
To Raymond, who believes that everything is possible
Contents
Acknowledgments
Prologue
Henry Blodget
Introduction
Chapter 1— The Market’s Cycles
Chapter 2— The People’s Market
Beginnings (1961–89)
Chapter 3— The Stage Is Set (1961–81)
Chapter 4— The Curtain Rises (1982–87)
Chapter 5— Black Monday (1987–89)
The Cast Assembles (1990–95)
Chapter 6— The Gurus
Chapter 7— The Individual Investor
Chapter 8— Behind the Scenes, in Washington
The Media, Momentum, and Mutual Funds (1995–96)
Chapter 9— The Media: CNBC Lays Down the Rhythm
Chapter 10— The Information Bomb
Chapter 11— AOL: A Case Study
Chapter 12— Mutual Funds: Momentum Versus Value
Chapter 13— The Mutual Fund Manager: Career Risk Versus Investment Risk
The New Economy (1996–98)
Chapter 14— Abby Cohen Goes to Washington; Alan Greenspan Gives a Speech
Chapter 15— The Miracle of Productivity
The Final Run-Up (1998–2000)
Chapter 16— “Fully Deluded Earnings”
Chapter 17— Following the Herd: Dow 10,000
Chapter 18— The Last Bear Is Gored
Chapter 19— Insiders Sell; the Water Rises
A Final Accounting
Chapter 20— Winners, Losers, and Scapegoats (2000–03)
Chapter 21— Looking Ahead: What 353 Financial Cycles Mean for the 21st-Century Investor
Epilogue (2004–05)
Notes
Appendix
Searchable Terms
About the Author
Copyright
About the Publisher
ACKNOWLEDGMENTS
More than a hundred people contributed to this book, sharing their experiences, their insights, and their knowledge. I would like to thank the many who agreed to be interviewed, often more than once, including Gail Dudack, Bob Farrell, Byron Wein, Henry Blodget, Richard Russell, Steve Leuthold, Ralph Acampora, Jim Chanos, Jim Grant, Jay Diamond, Abby Joseph Cohen, David Tice, Bill Gross, Peter Bernstein, Marc Faber, Jean-Marie Eveillard, Marty Whitman, Ralph Wanger, A. Michael Lipper, Don Phillips, Fred Sheehan, Jeremy Grantham, Maureen Allyn, Mark Headley, Clyde McGregor, Bill Fleckenstein, Martin Barnes, David Shulman, Laurence Tisch, Steven Einhorn, Nassim Nicholas Taleb, John Di Tomasso, Jim Awad, Jim Bianco, Paul Saffo, Robert Shiller, Hank Herrmann, Charles Biderman, Rick Ackerman, Bob Davoli, George Noble, John Collins, Edward Wolff, Bob Nurock, Charlotte Herr, Elizabeth Rivera, Lise Buyer, Jonathan Cohen, George Kelly, Stephen Roach, Neil Barsky, Bill Seidman, Arthur Levitt, Senator Jon Corzine, Joseph Stiglitz, David Ruder, Bert Ely, Harold Bierman, Allan Sloan, Jane Bryant Quinn, Mark Hulbert, Kate Welling, Jeff Madrick, William Powers, Herb Greenberg, Dave Kansas, Jonathan Weil, Ed Wyatt, Steven Lipin, Joe Nocera, Doug Henwood, Shirley Sauerwein, Jim Tucci, Ed Wasserman, Gary Wasserman, and Michael Malone.
Many reporters and financial writers contributed to this book. Since this is both a social history and a financial history, I turned to the media for a record, not just of what happened, but of what investors thought was happening during the Great Bull Market of 1982–99. In many ways, the media served as a mirror for investor sentiment, and sometimes as a lamp, illuminating the facts. I am indebted to the many reporters who kept that record and have tried to acknowledge that debt in my endnotes.
I also would like to thank Barron’s for giving me the time and space to explore so many aspects of the financial world, in depth and in detail, in the stories that I wrote while working there from 1986 to 1997. During those years I learned much of what I know about both Wall Street and Washington.
I developed many of the ideas in this book in the late nineties while writing for Bloomberg News and Bloomberg Personal Finance. I especially want to thank my editors at Bloomberg Personal, Chris Miles and Steve Gittelson, for giving me the opportunity to explore themes that were not always popular at the time: market timing, bear markets, value investing, the importance of dividends, the dangers of the trade deficit, and the fallibility of the Fed.
From the time I began thinking about this book, Mary Bralove, a former Wall Street Journal editor and loyal friend, has proved the best sounding board a writer could have. When I began writing, she became my first reader. Since then, she has read and reread the manuscript, bringing an editor’s eye and a reader’s ear to the unending challenge of smoothing the narrative while keeping the argument on track. Or, as she would put it, turning spirals into straight lines. I could not have had a better reader.
Gail Dudack also became a collaborator. She provided many of the charts for this book, and her remarkably lucid and often prescient analysis has helped me focus my ideas.
Jim Chanos generously lent me his “New Era” files, a wonderful collection of often funny, always telling clippings that he kept as a personal record of a financial mania.
Susan Chace, Fred Sheehan, Bob Farrell, Gertrude Hughes, Steve Leuthold, Allan Sloan, Gail Dudack, Maureen Allyn, Jeff Madrick, William Powers, and Michael Klotz all read sections of the manuscript and provided valuable suggestions.
Johanna Piazza, Gregg Wirth, Chian Choo, Viken Berberian, Charlie Katz-Leavy, John Giuffo, and Carol Dannhauser did an admirable job fact-checking a manuscript filled with facts.
Most of all, I want to thank my family—Emily and Michael and Raymond—for their warm support and absolute faith that I could finish this project.
Last, but far from least, I would like to thank John Brockman, my agent, and Marion Maneker, my editor. Without John Brockman’s professional integrity and encouragement I never would have gotten past Chapter 1.
Without Marion Maneker’s faith in the manuscript, I never would have arrived at Chapter 21. A writer himself, he is a writer’s editor. I particularly want to thank him for the role he played in shaping this story. He recognized, before I did, the importance of financial cycles as the underlying theme of the book. I also want to thank Edwin Tan for smoothing the path to publication with such diplomacy, efficiency, and finesse.
PROLOGUE
—HENRY BLODGET—
As Henry Blodget rode the elevator to his office in the North Tower of the World Financial Center one morning in the late autumn of 1999, he had no idea that someone had left a message on his voice mail during the middle of the night.1
The 34-year-old Merrill Lynch analyst was accustomed to the pressures of his job. In recent years, Wall Street firms had realized the importance of turning their analysts into brand names, and “Blodget” had become a brand. With just a few words, he could send a stock to the moon.
He had made his reputation doing just that, less than a year earlier, by raising the bar for one of the New Economy’s most dazzling stars: Amazon.com. Henry Blodget was still a relatively unknown young analyst at CIBC Oppenheimer in December of 1998 when he boosted his forecast for Amazon from $150 to $400 a share. At the time, Amazon was trading at $240; within weeks, it blasted straight through the $400 target.
He was young; he was blond; he was on his way to becoming very rich. Almost immediately, Blodget became a media darling. CNBC’s bookers wooed him; USA Today called him the “man of the moment.” By the end of 1998 even The Wall Street Journal showcased him as one of a group of “Savvy Pros” who “Had an Early Line on This Year’s Biggest Winners.”2
In February of 1999, Merrill offered Blodget a plum job—first chair on the firm’s Internet research team. Before lo
ng, the press would be speculating that, in 2001, Merrill Lynch paid Blodget as much as $12 million a year.
Blodget was still amazed by the effect that one call had on his career. The truth was that he had not been entirely comfortable with the $400 forecast, but Oppenheimer’s sales force needed a new estimate. When he rolled out his first report on Amazon in October of 1998, the stock was trading well over $80, and he set a target of $150—adding that he thought the stock was worth anywhere between $150 and $500. By December, Amazon had shot past $200, and his firm’s sales team began pressing him for a new target. Blodget felt obliged to pick a number. Privately, he was confident that Amazon would hit $400—he just didn’t know if he had the balls to say it. But as his very first boss on Wall Street had told him, “You’re not a portfolio manager—you’re not trying to sneak quietly into a stock before someone else sees it. You’re an analyst: your job is to go out and take a position.”
So he said it—$400. And Amazon turned out to be a home run. His career had turned on that one call. Three years earlier, he had been a trainee at Prudential. Now, in the small but shimmering pond called the Internet, he stood second only to Morgan Stanley’s Mary Meeker, the Internet analyst Barron’s crowned “Queen of the Net.”
Entering his office, Blodget glanced out the window—his office faced uptown, flanked on one side by the Hudson River, on the other side by the World Trade Center. Automatically, he checked his voice mail. As he listened, he recognized the caller—a fund manager who owned some of the stocks that he covered:
“You are so pathetic,” said the voice that suddenly filled the room. “I listen to you and I am disgusted. You don’t own these fucking stocks. We own these stocks. You have something to say? Shut up. You hear Meeker saying anything negative? No. You hear anyone else? No.
“Then shut up.”
Blodget flushed with anger. The day before, he had said something remotely negative about a stock that the anonymous caller owned. It was not as if he had issued a sell recommendation—he had not even downgraded the stock. But he had not been entirely enthusiastic. The money manager’s message was clear: We own the stock. We own you.
This was not the first time that a late-night caller left an intimidating message on Blodget’s answering machine. On more than one occasion, he had received physical threats. He knew it was foolish, but the calls rattled him. There were things worth dying for; stock picking was not one of them.
As far as he was concerned, the caller had crossed a line. Blodget understood that the mutual fund managers and other large institutional investors who did business with Merrill were his clients, and he did his best to please them—after all, they had an enormous amount of control over his career. They voted in the Institutional Investor rankings that could make his reputation.
Each year Institutional Investor (II ) magazine polled these professional money managers, asking them to rank Wall Street’s analysts by sector, and then published the results. Some analysts professed to scoff at the rankings, and a few refused to play the game. But almost everyone who had a shot at the top of the list paid attention. The higher an analyst ranked in II ’s beauty contest, the bigger his brand name. And the bigger his name, the higher his pay.
Ranking as one of the two or three top analysts in a particular area meant that the analyst could bring in banking—the investment banking business that was the lifeblood of most Wall Street firms. If a high-profile Internet start-up was looking for an investment banker to take it public, its first choice would be a firm where the Internet analyst was a star. Not only could a powerful analyst attract the banking business, his or her word would stir enough excitement among investors to insure that the new offering fetched the highest possible price.
Blodget understood that to Merrill’s Internet banking team, he was a key asset. This was no secret. As The New York Times pointed out at the end of ’99, Merrill had lagged in the race to take Silicon Valley companies public, in large part because it lacked such a star—and this, the Times sources suggested, was one reason that Merrill’s stock had disappointed investors.3 Over the course of the year, Morgan Stanley’s shares had gained 85 percent. Since going public in May, Goldman Sachs’s stock had climbed 53 percent. Over the same span, Merrill’s shares had risen just 17 percent. Nevertheless, since hiring Blodget eleven months earlier, Merrill had made progress: it now boasted an estimated 7.8 percent share of all Internet banking business. Admittedly, this was still only half the market share of influential rivals such as Morgan Stanley and Credit Suisse First Boston, but the Times noted that by cultivating Blodget, the firm was doing its best to remedy the situation. From the point of view of someone who owned shares in Merrill Lynch, this was good news.
Blodget was under pressure to be a rainmaker for Merrill’s bankers. But what many outside Wall Street did not understand was that, for an analyst, the worst pressure often came not from his own firm’s investment bankers but from the companies he covered—not to mention the portfolio managers who had bet millions on those companies. Since an analyst’s career turned on his Institutional Investor ranking, he needed the support of those big institutional investors—money managers at fund companies such as Fidelity and Putnam—to shine. And, you did not make a lot of friends if you downgraded the stocks they owned. Especially if those stocks were volatile.
That was the problem. In 1999, Internet stocks such as AOL took investors on a wild ride, but overall they continued to climb. It didn’t matter if the company was any good; if you downgraded it, you were almost certain to be wrong. And, on Wall Street, the reality was that picking a good stock was far more important than picking a good company.
But now, things were getting out of control. At the beginning of ’99, while he was still at Oppenheimer, Blodget had told the The New York Times, “I don’t think there’s a sector in history that’s been valued at these heights. It’s totally frightening.”4 Eleven months later, prices continued to spiral. Then, there were the threatening messages like the one he had received today.
At the end of the year, Blodget promised himself he was going to downgrade the Internet stocks that he covered.
It was a promise that he would not keep.
Over the next six months, the market that had made Blodget’s career peaked. The Dow Jones Industrial Average topped out on January 14, 2000, at 11,722.98. Not three months later, on March 10, the Nasdaq index reached its apogee: 5048.6. Two weeks after that, the Standard & Poor’s 500 hit its bull market high: 1527.46. Then, the long slide began.
As the market slithered south, Henry Blodget became the poster boy for all that had gone wrong. “Even 60 Minutes did a story about me,” Blodget recalled in a 2001 interview. “I couldn’t watch. I hid in the next room, and my wife would come in during the commercials and tell me what they were saying about me.”
New York Attorney General Eliot Spitzer launched an investigation. “Why,” Spitzer asked, “had Wall Street’s top analysts continued to recommend overvalued stocks? Where was the research?” Before long he demonstrated, beyond a doubt, what everyone on Wall Street knew: no one is paid $12 million a year to do research about anything. Wall Street’s premiere analysts had two more pressing jobs: serving their institutional clients’ interests and drumming up investment banking business.
Spitzer’s investigation took him to Merrill Lynch. There, he began sleuthing Blodget’s confidential e-mails, and before long he found what he was looking for: evidence that Merrill’s star Internet analyst had doubts about more than one Internet stock. In October of 2000, Blodget sent a message to an analyst on his team, telling him to downgrade Infospace: “Can we please reset this stupid price target and rip this piece of junk from whatever list it is on? If you have to downgrade it, downgrade it.”
Two months later, Blodget received an e-mail from a longtime Merrill broker complaining about the firm’s rosy forecasts (“We had better stop whistling through the graveyard and pretending we are adding value to our clients’ portfolios”). Blodget se
nt the message on to his colleagues: “Attached, an e-mail from a disgusted Merrill Lynch veteran. The more I read of these, the less willing I am to cut companies any slack, regardless of the predictable temper tantrums, threats, and/or relationship damage that are likely to follow….” By January of 2001, he was getting fed up. When an institutional investor sent Blodget a message asking “What is so interesting about GoTo.com except the banking fees [that Merrill might hope to receive from the company]?” Blodget sent him a one-word reply: “Nothin’.”5
Clearly, Henry Blodget was becoming uncomfortable in his role as cheerleader. And internally, at least, he was questioning the priorities that firms like Merrill followed when deciding which stocks to recommend. For some time, he had expressed doubts about the sky-high prices assigned to Internet stocks—as early as March of ’99 Blodget had been quoted in the newspapers using words such as “bubble” and “euphoria” when talking about the sector.6
