Free Confessions of a Wall Street Analyst by Dan Reingold

the entire Firm, including the Research Department, that we do not make negative or controversial comments about our clients as a matter of sound business practice.” 3
    This, of course, was absurd. Did Clay think we should rave about every stock in the entire stock market, even if it was a dog? Although Clay’s memo was later portrayed as a one-off outburst, he clearly felt strongly about the issue. Earlier that year, Clay had written a draft memo proposing that research-analyst pay be determined partly by how much they had helped bankers win deals, with analysts getting an A, B, or C grade depending on how “instrumental” they were in the firm’s winning of a transaction. 4
    What Clay was trying to do, in effect, was make the analysts earn their keep. He, and some others, were trying to change the analyst’s job from giving good advice to investors to helping bankers do deals. For me, it was the first example of the crossing of that supposedly sacred line between banking and research.
    What Clay was experiencing was the end of the genteel old world of banking, in which belonging to the same country club and living in the same town was as much of a draw for a corporate executive choosing a banker as the actual services the bank was offering. As banking became more competitive, these relationships weren’t enough anymore. Banks needed to offer something extra, some special sauce. As time went on, that special sauce would often involve bullish research.
    I guess I was lucky, both because I had an old-school banker in Bob Murray, who didn’t interfere with my opinions, and because the telecom sector did virtually no deals at that point, so there was no reason to meddle and no way to assess my level of “cooperation.” At the same time that my colleagues were murmuring that they were starting to get heat for their opinions, I had a Sell rating on one stock, Ameritech, and Holds on most of the Baby Bells, and never heard a peep about it from anyone.
    In any event, someone eventually leaked Clay’s memo to The Wall Street Journal, which ran a front-page story on the shenanigans in July of 1992. It was a huge embarrassment for Morgan Stanley—the most highbrow firm now essentially being caught red-handed trying to influence research. As faras I know, Clay was never disciplined. He went on to have a long career as a senior banker at several major houses. The whole episode is a reminder that the scandals of the late 1990s, as shocking as they were, had plenty of precedent and plenty of warning.
    I heard these things but reacted to them a little bit like an ostrich. No one was bothering me, so it didn’t seem like something to get worked up about. In my world, Morgan Stanley seemed pure. I didn’t see anyone daring to put the squeeze on Ed, my mentor. He managed to have strong opinions—positive and negative—without being pressured by anyone, not bankers, not management. As his protégé, I felt insulated and protected.
    By now, Ed had initiated coverage of the cellular, or mobile, phone industry with negative views. He predicted much lower prices resulting from increased competition, as the federal government was awarding many new licenses. He assigned Sell ratings to five of the seven cellular companies he covered and Hold to the remaining two. Several of the companies were even Morgan Stanley investment-banking clients. Yet no one seemed to raise an eyebrow. Ed’s Sell ratings made sense in the context both of his detailed analysis and of the overall stock market. Indeed, the major stock market indices had been trading sluggishly for quite a while and there was nothing to suggest that was going to change anytime soon.
    Ed’s report was outstanding, perhaps the best I had ever seen. It was deep in its analysis, thorough in its consideration of the numerous variables that would drive the future of the cellular industry, and prescient in its prediction that the federal government would allow many more