Bubble Economy Series: Investment Bankers
With Jonathan Krim
Washington Post Staff Writer
Thursday, Nov. 14, 2002; 11:30 a.m. ET

Join Post staff writer Jonathan Krim to discuss the fourth part of the Post's Bubble Economy series on the practices of investment banks during the stock market heyday. Read Banks Go From Powerhouses to Pariahs (Post, Nov. 14).

Send your questions and comments now or during the discussion.

Tossing aside old ways of evaluating companies and creating complex schemes that only a handful of specialists could understand, investment bankers would do just about anything to solve a client's problems. No bank epitomized this approach more than Credit Suisse First Boston Corp., where the prevailing ethos was "you never turn down a deal."

The Bubble Economy, once known as the New Economy, had everyone cheering and the activity of the financial markets became a national obsession.

Starting around the mid-90's, investors were jumping to get in on the Internet action, unemployment virtually disappeared, companies projected 20, 30, 40 percent annual growth rates and stock prices were flying high.

But in 2000, the bubble burst, the good times halted and shortly thereafter, the economy sank into a recession. Meanwhile, the talk on Wall Street shifted to corporate scandals and speculation about when the Dow would rise above 10,000 again.

The Post's six-part series takes a retrospective look at the key players in the Bubble Economy and gives an analytical view of the bubble phenomenon. Read the Post Business Special Report: BUBBLE: The Roots of the '90s Boom and Bust.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Jonathan Krim: Hello, and welcome to the forum on investment banking and the bubble. I'm happy to have the opportnity to answer your qustions, so away we go.

Washington D.C.: Solly and Grubman are now facing dozen's of class-action suits from investors who feel they were defrauded on stock research. There are dozens more suits filed in connection with the IPO business. Do you think that these class-action suits will actually get investors anywhere in addressing their complaints? How can awards be extracted from companies that claim to have huge debts?

Jonathan Krim: Virtually all of the banks are named in class-action suits. It's always impossible to predict how those things will go, but their hand gets strengthened every time there are new revelations from regulators. As for their ability to pay if they lose, they all have plenty of money.

Washington, DC: Is there a future for the IPO business?

Jonathan Krim: Yes, tho it's unlikely to be the huge money-maker for the banks that it was during the bubble years. The bigger question is whether the standards at the banks change for evaluating whether companies should be taken public.

New York City: Mr. Krim,
Do you think the investment banking culture -- the Masters of the Universe ethos -- has realy changed? Or has it just gone underground until the Bull is king again?

Jonathan Krim: I doubt it has changed, though I'm sure the banks will be much more careful about their image under the glare of scrutiny.

Richmond, Va.: I'm glad to see New York's attorney general Eliot Spitzer is probing Wall Street firms. It is about time someone lead an initiative against these investments banks.
Thanks for your coverage on this subject matter.

Jonathan Krim: Thanks.

Washington D.C.: Does the market go through cycles of crisis periodically. Looking back through history there seem to be scandals that accompany every bubble bursting. Why is this time any different?
Thanks for taking my question!

Jonathan Krim: You are correct. There are bubbles that inflate and then pop. Often, improper behavior is involved, but rarely is it the sole cause. I think what was different about the tech bubble was the willingness to suspend rational judgment about what companies are worth. The banks were certainly not the only ones; there were many players here.

Washington D.C.: It seems that I-Bankers will always be the king of Wall Street despite the bad apples in the bunch. If they are the women and men that fuel M&A, IPOs, etc., how can the market do without them?

Jonathan Krim: Te markets definitely need the banks, and the role they play. But its important for the public to better understand just how crucial and powerful their role is, given that they sit at the center of so many parts of the market system.

Arlington, Va.: Extraordinary story. You mention Quattrone "was feeding the market what it wanted to eat." An early Post article in this series described the role of analysts in hyping stocks. It appears the analysts made 'em hungry so the bankers could feed them trash. Yuck.

I saw that the head of Citigroup, Sandy Weill, maintains that he merely asked his top telecom analyst Jack Grubman to "take a fresh look" at ATT? I can imagine that conversation:
Jack: "You know, Mr. Chairman, I've been meaning to dust off my report on the LARGEST telecom company in the US, but I've been so busy and the kids are sick and I just haven't gotten around to it."
Sandy: "I understand. But why don't you take a fresh look at the company."
Right.

Jack Grubman gets the market hungry so Sandy Weill can feed it garbage.

washingtonpost.com: Banks Go From Powerhouses to Pariahs (Post, Nov. 14)

Jonathan Krim: thanks.

Arlington, Va.: One major problem is that analysts aren't very clear in their ratings of companies. I know there has been talk of changing that. And now analysts need to disclose their relationship and their firms' relationship with the companies they rate. Do you know where things stand now? Do you think that this is going to make a big difference or will we still encounter the same problems?

Jonathan Krim: The major banks are in settlement conversations with federal and state regulators, and it is possible that an industry-wide deal will be reached that will govern the structure of banking and research going forward. But with the changes at the SEC, things are very uncertain. Stay tuned.

Towson, Md.: This series has pointed out there are symptoms that all bubbles have, what are those symptoms and how come no one caught on?

Jonathan Krim: The big symptoms were in four categories: 1) There was a tremendous amount of capital looking for a home in the 1990s. Demand to invest was high. 2) People really thought the Internet would alter the business world more fundamentally than it has; that was not so thoroughly absurd at the time, but it led people to toss out tried and true metrics for valuing companies. 3) There was no cost control; everyone was drunk on money, and greedy. 4) There was accounting corruption.

McLean Va.: Have you thought of making a documentary film from your fascinating series?

Jonathan Krim: I have not, but i'll pass your idea along to the editors. Thanks.

Bethesda, Maryland: Hi Jonathan,

Some people think that we are currently in a real estate bubble. If so, do you think the same checks and balances are failing us today with real estate as they did 2 years ago with stocks? For example, there are still advertisements by Fannie Mae/Freddie Mac promoting home ownership, Greenspan relentlessly lowers interest rates, real estate agents pump houses as if prices will always go up, lenders allow easy credit, the government promotes housing in its tax laws, the media doesn't talk about it, etc. If this is a bubble and prices go down, will we see reports on these groups?

Jonathan Krim: I really don't know what to make of the housing bubble theory. Even in Silicon Valley, where I lived for almost 20 years, prices have held up fairly well considering the tech crash. I think you are right to note that interest rates will be a huge factor. The optimistic scenario is that rates allow housing to stay relatively firm until the economy improves. On the other hand, prices are very high. The difference is you don't have the accounting issues in real estate.

Vienna, Va.: During the hearings I became aware that investment banks would provide companies with expertise in creating off-shore accounts and complex networks that would change the manner in which transactions are ultimately reported on the financials.

This should have been nipped in the bud way back when it first started in the 1980s. Is there one particular influence that was a driving force behind this?

Jonathan Krim: This was a big role the banks played. And they benefitted from industry battling to beat back efforts to beef up disclosure rules.

Washington, D.C.: How has the bubble bursting changed the culture on Wall Street?

Jonathan Krim: Well, I'm not up there evey day, but I don't think culture change happens overnight. And if history is any guide, previous scandals have not changed the culture in major ways. I do think some banks are serious about restoring integrity to research.

Boulder, CO: Why do you think the Bush administration appointed such a controversial man as Harvey Pitt to head the SEC, when everyone knew of his ties to the industry he was now overseeing? Did the administration believe that this would inspire investors to have confidence in the market?

Jonathan Krim: I can't really speak for the administration. It obviously has proved to be an embarrassment. The key question is who will get the job now.

So then. . . : what is the solution? It seems to me that there was plenty of information out there mostly in the Risk Factors section of the Offering Document that should have alerted the investing public in most cases that these companies were not making money, no real prospects of making money in the forseeable future, if the public and analysts thought that throwing out valuation models was appropriate then it seems that "buyer beware" becomes the watchword. Of course this analysis does not apply to situations where there was fraudulent accounting or analysts giving bogus recommendations because their firm has a stake in the offering.

Jonathan Krim: Alas, there is no one-size-fits-all solution. The buyer- beware watchword is critical, and that means investors need to do a lot more homework. But the bubble was a failure of every actor in the drama, some in illegal ways. Mutual funds, credit agencies, regulators, everyone fell down on the job. Those folks need to rethink.

Re: Housing Bubble: I think that if the bottom falls out on the housing market, those that will be hit the hardest are those who are buying the overvalued paper houses otherwise known as McMansions.

washingtonpost.com: The Bottom Line: A Roaring Housing Market, But Will It Last?

Jonathan Krim: You might be right, but often, the most expensive houses lose the least value overall, because the ranks of those who can afford them rarely thins. It's the next tier down that is most vulnerable: the houses that those doing well can afford but will have to give up if things go sour. Then you get a glut of those on the market, dropping prices, etc.

Jonathan Krim: One more thought about all the players who fell down on the job. I wish it weren't true, but I think we in the media belong in that group as well. There were lots of signs, and not enough of us paid close enough attention.

Jonathan Krim: That's all the questions we have. Thanks for participating.

washingtonpost.com: Hey folks, we got a few more of your questions that Jonathan Krim will be answering.

Washington, DC: Where are we with respect to the conclusion of the process? The market bubble began bursting in March 2000 and 2.5 years later, we hit lows we hadn't seen in years. Are we halfway through the boom-bust cycle, more than halfway? How much more bad news is on the horizon?

Jonathan Krim: If I could predict the answer on this one, I wouldn't be slaving away here at he Washington post! ;-) I do't think we're out of th woods by a long shot. Much of the market is still overvalued. Be careful out there.

Portland, Oregon: Given the investment banking scandal with kickbacks of IPO shares to wealthy customers, is there a prospect for any new investment bank firms to pop up touting higher integrity?

I'm wondering if there are any market forces which would counteract the insider game that screwed individual investors during the bubble?

Jonathan Krim: Doubtful that we will see new banks. In fact, I expect to see some further consolidation in the industry. What we might see, however, is a blossoming independent research industry that would compete with the research provided by the banks. Keep an eye on the settlement talks, because they might produce this.

Somewhere, USA: Will consumers be more inclined to look at the company's history before investing their money? how does this affect 401K savings?

Jonathan Krim: I certainly hope people will look more closely before investing. And understanding how your 401k works is vital. Especially important is to determine how much a company sponsored 401k plan is invested in the company's stock. This has killed employees of companies like Enron and Worldcom. 401ks need to be diversified.

Arlington, Va.: Do you think we'll ever see the same sort of IPO mania again?

Jonathan Krim: Anything is possible, i suppose, but probably not for a very long time. Remember, though: IPOs are important for young companies and not all bad.

Somewhere, USA: I don't understand who we can trust if we can't trust the investment bankers to find the stable stocks and bonds that will ensure that our money will increase over time. What advice do you give for those who are looking at retirement?

Jonathan Krim: There are plenty of independent financial advisors out there, and many consumer organizations that can help locate them.

Somewhere, USA: Then what can we do about our retirement savings? Should we just stick to a savings account and bonds and CDs?

Jonathan Krim: As I said, you should consult an independent financial advisor. Good luck.

That's all we have time for today. Thanks again for joining us.

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