Bull! Page 13

  Alan Greenspan, however, did not have to run for office in the autumn of 1992. He would remain chairman of the Federal Reserve, and throughout the nineties, he would manage to maintain Wall Street’s confidence.

  The Fed chairman’s power was manifest when a newly elected President Clinton unveiled his economic plan to a joint session of Congress on February 18, 1993. When the camera panned the House gallery, it found Hillary Rodham Clinton, the president’s wife. On her left, Alan Greenspan.

  The king is dead. Long live the king.45

  THE ANALYSTS

  The nineties may have cast Abby Cohen as Wall Street’s leading lady, and Alan Greenspan as its wiseman, but of course there were other seers. Some tried to resist the role, but the media tended to treat Wall Street pros, such as Morgan Stanley’s Byron Wien and Barton Biggs, Prudential’s Ralph Acampora, PaineWebber’s Ed Kerschner, and Donaldson, Lufkin & Jenrette’s Tom Galvin, as clairvoyants. And they were not the only soothsayers who found themselves in the media spotlight.

  Suddenly, once-humble research analysts found a star on their dressing room door. In the past they had labored alone, in small cubicles, surrounded by tall stacks of paper. Traditionally, very few women could ever hope to become traders or portfolio managers on Wall Street—who would trust them with all of that money? But an intelligent woman could hope to be hired as a research analyst. That fact alone defined the status of the job.

  In the nineties, however, “research analysts” were no longer extras. As the bull market rolled forward, Wall Street firms discovered that their analysts’ reports could send an unknown company into orbit. On television, the chattering classes took analysts’ “estimates” of what a company might earn as a target—and companies learned to make sure that the target was reached.

  A decade earlier, only investment bankers and top traders could hope to take home what Tom Wolfe called “salaries like telephone numbers.”

  But now analysts such as Salomon Brothers’ Jack Grubman, Merrill Lynch’s Henry Blodget, and Morgan Stanley’s Mary Meeker were seen as the New Era’s wheeler-dealers. During Act II of the bull market most investment bankers kept a low profile: the pin-striped players had their fill of publicity in the eighties. Now, the analysts began moving center stage. Grubman, a veteran telecom analyst, reported that his wife called their sudden prominence “the revenge of the nerds.”46

  Mary Meeker

  A year after Abby Cohen joined Goldman, the firm that would become Goldman’s chief rival in the decade ahead, Morgan Stanley, hired the woman destined to play the ingenue in the drama about to unfold, Mary Meeker. Before the decade was out, the 30-something Internet analyst would be anointed the diva of the dot.com world. When Barron’s crowned her “Queen of the Net,” the magazine explained that in the Internet sector, Meeker was “the ax.” In the race to go public, her word decided which new companies made the final cut.47

  Business Week, which had applauded Abby Cohen for her “sensible shoes,” seemed to like Meeker for some of the same reasons. “Raised in rural Indiana, she’s plain-spoken and humble. But all that only masks her laser-sharp analytical skills.”48 In other words, she was very smart, but no Martha Stewart. Wall Street liked arrogance only in its men—not in its women.

  Nor was she a vamp. Meeker wore little or no makeup and kept her straight brown hair short. She belonged to the generation who played Xtreme Sports in college—sometimes she slipped into surfer talk, calling someone “wicked smart.” In other words, she was part of the generation that “got it” about the New Technology. Indeed, in 1995, Mary Meeker and Netscape wunderkind Marc Andreessen estimated that perhaps only 400 people on the planet “really get the Net.” Meeker was perhaps the only one of the 400 on Wall Street. “She sees how large the opportunity is—and encourages us to think big,” said Amazon CEO Jeffrey Bezos.49

  Frank Quattrone, perhaps the best known, and certainly the most flamboyant, investment banker of the nineties, recruited the 32-year-old Meeker for her job at Morgan Stanley. No doubt he recognized a kindred spirit. Granted, Meeker came from a small farming community in Indiana, while Quattrone had grown up in a two-story row house in south Philadelphia (a neighborhood best known by non-Philadelphians as the setting for the movie Rocky). But both were self-made, and they shared the same drive. “They were each very focused,” said a colleague who knew them well. He paused. “Mary is not unlike Frank and Mary and Frank are not unlike Sherman going through Atlanta.”50

  Meeker’s interest in the market began early. As a high school student in Indiana, she entered a stock-picking contest and watched her choices double. After graduating from DePauw University in Illinois, Meeker spent two years as a Merrill Lynch broker in Chicago before heading east to earn an MBA at Cornell. At Cornell, Meeker was never very interested in courses that involved crunching numbers, but she was smart—and extremely ambitious. “She knew exactly what she wanted,” said Harold Bierman, one of her professors at the time. “And my course in corporate finance—which involved a lot of numbers and a lot of symbols—was not what she looking for. She let me know that.

  “My course insisted on the details,” he added. “She was interested in more intangible things. She was a visionary, not a number-pusher.” Still, he admired her confidence and determination. “With some students, you wouldn’t care if they didn’t like your course. But she was bright, very composed, very self-confident; she knew what she was looking for, and I wasn’t teaching it.” When Meeker graduated from Cornell in 1986, she landed her first job on Wall Street at Salomon Brothers in New York. “At that time, we didn’t give graduates much help in finding jobs,” Bierman recalled, “but I give her credit—she must have really bird-dogged it to get that job.”51

  At Salomon, Meeker found her niche as a junior analyst, working with the firm’s senior computer analyst, Michele Preston. When Preston jumped to S.G. Cowen in 1990, Meeker followed. A year later, Frank Quattrone spotted Meeker and offered her the opportunity to become a senior analyst at Morgan Stanley, following PCs and computer software. Before long, she had found two of the stocks that would make her reputation: Dell and AOL. Mary Meeker was on her way, with Frank Quattrone as her guide.

  Over the next few years Quattrone built his reputation as the New Technology’s top investment banker. By the end of the decade, he would wind up at Credit Suisse First Boston, overseeing his own investment banking fiefdom—and earning a reported $100 million a year. Wherever Frank Quattrone went, he took Silicon Valley’s investment banking business with him. After he moved to Credit Suisse, the firm would take more technology companies public than any other firm on Wall Street. When the party ended, some would call him “the nineties’ Mike Milken.”52

  “Frank was probably the best banker I’ve ever run into: incredibly smart, and equally shrewd—which is different,” said a colleague at Credit Suisse. “The bad side was that he had only one word in his vocabulary: more. ‘What have you done for me today? Fine. What are you doing for me tomorrow? Fine. The day after? Fine. The day after that?’ He was the kind of guy who could say, ‘Great, you’ve brought in $100 million worth of business this year. But it’s December 27. There are four days left in the year—what are you doing now?’” 53

  Quattrone had joined Morgan Stanley in 1979, a time when few on Wall Street knew much about what was happening on the West Coast. “High-tech deals were dominated by smaller California firms,” said a former colleague. “But Frank was shrewd enough to make the Valley his home. And, when he went to meet with a CEO, he wore a sweater and a polo shirt.” Meanwhile, the investment banking divisions of other Wall Street firms were still based in New York. “They would send bankers out here wearing yellow ties and suspenders,” recalled one venture capitalist. “Frank, on the other hand, understood that this is not the land of the CEO with a corporate dining room and servers who wear white gloves. Out here, no one asked, ‘Where did you go to college?’ They asked, ‘Where do you work?’ In the investment banking world of New York, Ivy Leag
ue schools and bloodlines were still very important. But here, the college dropout drew as much—or more—reverence than the guy with all the grades. Output was more important than pedigree.”54

  In 1990, Frank Quattrone snagged Cisco as a client and took the company public—a major coup for Morgan Stanley. But in the years that followed, Quattrone did not feel that he was receiving his due. Each time he made the pilgrimage to the bank’s Manhattan headquarters, he made clear what he wanted: more. More control over the investment bankers who worked for him. More control over the research analysts. More money.

  Morgan Stanley president John Mack gave him more, but not enough. On Easter Sunday, 1996, in what insiders at the firm called “the Easter massacre,” Quattrone would decamp for Deutsche Morgan Grenfell, taking top members of the investment banking team with him. Once he settled into his new job, Quattrone tried to steal Meeker as well. But, shrewdly, she elected to stay behind.

  Meeker would take over Quattrone’s job. Her title was still research analyst, but now she was the one who would take the lead on Morgan Stanley’s IPOs. A year earlier, when Morgan Stanley took Netscape Communications public, Meeker was already an important part of the investment banking team. She claimed to have brought the company to Quattrone’s attention—a claim that Quattrone denied.55 What is clear is that she felt some responsibility for the fledgling IPO—the first profitless company ever to offer its shares to the American public.

  Its first day out, the stock spiraled. By day’s end, the market had decided that Netscape was worth $2 billion. The next morning, The Wall Street Journal insisted that the IPO’s “breathtaking rise” was not a red flag signaling that the market was frothy. After all, it was only one stock: “Netscape isn’t worrisome to the bulls,” the paper assured its readers.56

  While the Journal remained sanguine, Meeker was frankly terrified. As Netscape soared, she stood on the trading floor, amazed. When it hit $72, someone turned to her to say, “Isn’t this exciting?!”

  “I just looked at him, and almost started to cry because now I had to deal with this,” Meeker later recalled.57

  Nevertheless, she was a pragmatist. Once she steadied herself, Meeker forged ahead, making the most of the opportunity. In 1995, just four months after Netscape went public, Meeker published a 300-page research report called simply “The Internet Report.” On Wall Street, an eight-page research report was considered thorough. Her opus made her famous. “At that point, she went from 0 to 90,” said Morgan Stanley partner Byron Wien.58

  At Morgan Stanley, Meeker brought in the business. Fledgling companies chose Morgan Stanley over other investment banks because they wanted Meeker’s imprimatur on their offering plan. Many of the firms she attracted would become the New Technology’s blue chips. At the end of 1995, she recommended a portfolio for investors interested in playing the Internet: America Online, Ascend Communications, Cascade Communications, Cisco Systems, and Intuit. (Morgan Stanley had helped all five raise cash, either through IPOs or secondary offerings.)59

  Meeker’s loyalty to the Internet companies that she covered would be nearly messianic: “Mary felt it was her mission to get the word out about the Internet—that these companies were special—that it was her responsibility to tell the world about them,” said a colleague who was also a friend. When Deutsche Morgan Grenfell analyst Bill Gurley downgraded Netscape in 1997, “he saw that the orders were not coming in—and Mary went ballistic. Even after the numbers came out, proving that Bill was right, she was furious. To this day, she blames Gurley for Netscape’s downfall. As she saw it, analysts weren’t there to investigate and tell the story—they were there to write the story—to transmit the vision.”60

  —7—

  THE INDIVIDUAL INVESTOR

  THE RISE OF THE 401(K)

  Over the course of the eighties, employers took one look at a generation of baby boomers treadmilling their way toward middle age and paled. Boomers who had given up smoking before they turned 30 were switching from red meat to fish and replacing Scotch with lite beer. They checked their cholesterol yearly, swam laps weekly, and weighed themselves daily. Appalled at the prospect of supporting a horde of octogenarian vegetarians, corporations began to rethink pension plans that pledged lifetime benefits to all of their retirees.

  By 1991, one-third of all retirement plans were 401(k)s.1 Until then, the majority of all pensions promised a fixed benefit equal to a percentage of the employee’s salary during his final years of service. Under these plans, employers agreed to keep the checks coming, year after year, for better or worse, as long as the retiree might live. As a safety net, the federal government set up an insurance pool funded by private-sector employers. In ’91, if a company underfunded its pension plan and then went belly-up, the insurance pool covered pensions up to $27,000 a year.2

  The 401(k), by contrast, avoided commitment. Under the new “defined contribution” plans (which included both 401(k)s and profit-sharing plans), employers promised only that they would contribute a certain amount to an employee’s nest egg while he was working. What happened to the money after they parted was the employees’ responsibility. How long they lived, and how far their savings stretched, was their problem, not his.

  Corporate management feared that long-term liability, not only because boomers could be expected to live so much longer than their parents, but because corporate profits were sluggish. “The 401(k) was the child of a slow-growth period in the American economy,” William Wolman and Anne Colamosca observe in The Great 401(k) Hoax. “[It was] the years beginning with the OPEC oil embargo in 1973, to the mid-1990s that undermined the old pension system. The 401(k) became the new model, not during a period when American capitalism was enjoying great economic success but rather when the corporations were having a tough time making money.”3 In the meantime, the Employee Retirement Income Security Act (ERISA) passed in 1974 had made it both more difficult and more expensive to run a traditional pension program—a particular problem for smaller employers.

  For the employer, then, the advantages of a 401(k) were clear. The new retirement plans offered low-cost marriage and no-fault divorce. From the outset, 401(k)s were far cheaper than traditional pensions: employers saved both the expense of managing the money and the cost of paying the premiums for federal pension insurance. (401[k]s would not be insured.) And, over time, the employer’s role in funding the plans would shrink: in 1989, employers contributed roughly 70 percent of the money that went into retirement plans; by 2002, employees’ cash contributions outstripped company payments into retirement plans of all kinds—including traditional pensions.4 Moreover, while employees put cash on the table, employers often matched their money with company shares. In this way, a corporation could mask the expense of funding a pension: accounting rules allowed corporations to contribute stock to a 401(k) without deducting the cost on their income statements.

  No wonder so many companies embraced the 401(k). But employees proved almost as enthusiastic. Gamely, the majority accepted the responsibility of managing their own retirements and took pride in their new freedom. Your employer no longer decided how to invest your retirement money—you did.

  The new system offered other major advantages. For one, the new retirement plans gave employees a chance to defer paying taxes on their nest eggs—a tax break second only to the deduction for home mortgages. Secondly, the 401(k) was portable. If an employee changed jobs, he could take his retirement fund with him. For an increasingly mobile workforce, the portability of the new plans was essential. Under a classic pension plan, a worker could lose his benefits if he made a move; at the very least, job hoppers saw their benefits diminished. (Because a defined-benefit plan builds up slowly, most of its worth comes in the later years of an employee’s career, making it most valuable to the employee who stays for the long haul.)

  Labor unions were the only major group to view the 401(k) with mistrust, and they retained power only in the public sector. There, old-fashioned pension plans would remain t
he rule: in 1998, more than three-quarters of all unionized workers were still covered by a guaranteed fixed payment.5 But in the nineties, unions held little sway over private-sector workers, who, by and large, embraced the benefits of the new plan. By 2000, less than 30 percent of all U.S. workers covered by a retirement plan could count on a fixed, continuous payout after they retired.6

  In a single stroke, the risk of saving and investing for retirement flipped from the employer to the employee. It would prove a seismic shift.

  The Individual Investor Fuels Act II (1990)

  Without the 401(k), it is fair to say, Act II of the bull market might well never have gotten off the ground. The LBOs of the eighties had dried up, and the professionals who oversaw the old-fashioned pension funds of the early nineties still preferred bonds over stocks. But the employees who began managing their own retirement funds in the early years of the decade proved more daring. By 1993, 401(k) investors were wagering more than half of their savings on stocks or stock funds.7

  New investors poured into the market. Mutual funds marketed to them. Newly launched financial magazines advised them. Financial experts urged them to take more risk, warning that unless they achieved double-digit returns on their savings, they would never be able to retire. With interest rates on both money market accounts and bank savings accounts sinking, equities seemed the new investors’ only choice. By 1995, Fidelity Magellan, the king of equity funds, reported that 87 percent of the fresh money flowing into its coffers could be traced to retirement savings.8

  Of course, not all of the newcomers were buying stocks for a 401(k). But the 401(k) led the way, bringing a new class of investor to the market—one who could ill afford to lose his savings. Some of the newcomers were buying stocks for other tax-deferred plans: IRAs and Keoghs were becoming increasingly popular. Still others, drawn by the sizzle of a market that was making their neighbors rich, bought equities with savings earmarked for college tuition or the down payment on a house. As early as 1992, Americans with incomes under $75,000 owned 42 percent of all publicly traded stocks.9