City of Schemes
THE NEW YORK TIMES MAGAZINE – October 6, 2002, Sunday
City of Schemes
AREN’T ALL THESE awful crooked C.E.O.’s and C.F.O.’s out in the sticks just . . . awful? How did this spirit of shameless greed come to infuse the corporate cultures of the heartland? Enron: Houston. Arthur Andersen: Chicago. WorldCom: Clinton, Miss. Adelphia: Coudersport, Pa. Tyco: Exeter, N.H., and Boca Raton, Fla. Here in New York City, we’ve spent the last year selflessly working together toward physical and psychic recovery, all of us engaged in a painful but glorious existential civic introspection. Meanwhile, out there, beyond the Hudson, in the vast unfathomable America of discount superstores and chain restaurants and sun-baked suburban business parks, a decadent amorality had worked its way like some malignant rot through the nation’s fiber. Consumed with the struggle to rebuild, we New Yorkers were feeling fully American as we hadn’t in decades — and now, suddenly, the ”real” America is revealed as a manic, festering hive of greed and corruption. It turns out all the Bedford Fallses are actually Pottersvilles. Which makes us, as we observe the mess from the Upper West Side and TriBeCa, feel all the more victimized and righteous. And by the way? For the record? We always had our doubts about the Internet and its associated financial madnesses.
Would that it were so, that New York could now revel in its innocence. In fact, if you have to choose the primary breeding ground for the various business misdeeds now consuming national attention, New York, I’m afraid, is the place. I’m not even thinking mainly of Sam Waksal and Martha Stewart and her socialite stockbroker, or of the Upper East Side convicts Alfred Taubman and Dede Brooks. I’m talking about all the ugly corporate implosions all across the country. No matter where they are, lines of blame for the companies’ current circumstances lead straight back to our city. And it’s disingenuous to pretend otherwise.
New York’s (false) sense of distance from all this malfeasance derives in no small part from a coincidence of timing. The first seriously negative news article about Enron in this newspaper happened to appear Sept. 9, 2001. The subsequent revelations, which shriveled Enron’s share price from $35 to 29 cents in eight weeks, started appearing in mid-October, when New Yorkers had more immediate concerns than the accounting practices of Houston-based energy-trading companies. Months passed before we heard about the other big corporate scandals — WorldCom, Adelphia, Tyco — and by then we had already acquired the habit of lordly obliviousness. Financial monkey business in places like Clinton, Miss., and Coudersport, Pa., was not really our affair.
But if infectious greed is the virus, New York is the center of the outbreak. We may prefer to think of it as the American cultural capital, or as a breathtaking physical creation, or as simply the place where a plurality of the country’s most interesting people live. But New York is also, inarguably, the money center of America and the world, the capital of capitalism.
The two global superbanks, Citigroup and J. P. Morgan Chase, are here. The New York Stock Exchange is, of course, here. And most important for this discussion, the big investment banks — Morgan Stanley, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers, Bear, Stearns, J. P. Morgan and Citigroup’s Salomon Smith Barney — are all here, too. It was New York investment bankers who drove the mergers-and-acquisitions deal culture of the 80’s and 90’s and who most aggressively oversold the myth of synergy that justified it. It was New York investment bankers and their Wall Street brothers who trained a generation of obedient American C.E.O.’s (by means of stock-option-based compensation) to worry more about jacking up their share prices in the short term than about running their companies well for the long haul. It was they who permitted the digital-technology giddiness of the late 90’s to spread beyond Silicon Valley; Palo Alto venture capitalists may have doled out most of the initial dot-com money, but it was New York investment bankers who took all those companies public for billions of dollars, thus enabling the national festival of greed. It was they who created an inherently corrupt equities research establishment. It was they — with their lawyers at the big New York firms — who invented the novel financial architectures of Enron and WorldCom, just as it was the New York consulting firm McKinsey & Company that provided Enron with its egregiously go-go, ultra-fast-company ideology.
Moreover, it was the example of New York investment bankers, earning gigantic salaries for doing essentially nothing — knowing the right people, talking smoothly, showing up at closings — that encouraged businesspeople out in the rest of America to feel entitled to smoke-and-mirrors cash bonanzas of their own.
New Yorkers didn’t create the digital-technology mania of the 90’s. But while nearly all of the real achievements of the Wired Decade — laptops, flat screens, faster chips, cheap and huge memories, P.D.A.’s, WiFi, instant messaging, browsers, the Web itself, all the actual stuff — were accomplished by people elsewhere, it was New Yorkers who made the scramble for instant wealth the endeavors’ overriding purpose. The dreamers and tinkerers of Silicon Valley were not innocents, but they were, at worst, Drs. Faustus willingly seduced by the slick Mephistophelean agents of New York’s blue-chip money culture.
At least one of the émigrés from the Northeast was more like Conrad’s Kurtz, seducing the natives as he went extravagantly native himself. Frank Quattrone, the Manhattan banker turned Palo Alto-based technology consultant for Morgan Stanley, ”was the first guy in the New York investment banking world to take Silicon Valley seriously,” the technology investor Roger McNamee told the magazine Business 2.0 last year.
Irrational exuberance bloomed around San Francisco in 1995, but most of Quattrone’s New York peers remained skeptical until around 1997, and the national news media — the overwhelmingly Manhattan-based national news media — held out until at least 1998. Yet like eager latecomers in all situations, when the Manhattan establishment finally did sign on to the digital revolution, they came as born-again enthusiasts. In just a year or so, the local conventional wisdom changed from supercilious bemusement to stunned resentment to bedazzlement and longing. In 1998, Condé Nast bought the San Francisco-based Wired magazine. In 1999, Gerald Levin, a smitten New Yorker, began courting Steve Case and AOL on behalf of Time Warner. (That crush, of course, has already become a very unhappy marriage.) Even later in the game, the fall of 2000, six months after the bubble had started to burst, the New York media company Primedia bought the Web site About.com for $690 million, or almost three times Primedia’s current market value.
And just last year Primedia, for which I worked in the mid-90’s as editor of New York magazine, acquired Inside.com, the online news service that I helped start in 1999. Inside had its offices in the Starrett-Lehigh Building, the chic, brutalist Moderne block of lofts in west Chelsea that was packed with dot-com enterprises (including, still, Martha Stewart’s). One day in the late winter of 2000, an investment banker from Bear, Stearns knocked on our door. Were we financed? Did we need capital? Incredibly, she was going up and down the grungy halls, making cold calls. This, we half-joked, must be a sign of the top of the market. In fact, the actual market top came a few weeks later — and a few weeks after that was ”Black Friday,” April 14, the day Nasdaq stocks declined by an average of nearly 10 percent. Inside.com closed its financing — from Chase, Goldman Sachs and Lehman Brothers, among others — the following week.
Probably the most significant media inflation of the bubble came from CNBC, the New York-based cable channel, which by 1998 had become the ESPN for Americans’ new national pastime — that is, sitting alone for hours, monitoring the growth of your 401(k) and I.R.A. wealth, a kind of merry Scrooge McDuck greed that before the mid-90’s was socially acceptable only in Manhattan. A 24/7 financial cable service required a steady flow of credible stock-pickers; as a result of their relentless exposure on CNBC and on CNN’s ”Moneyline” (also broadcast from New York) and CNNfn (ditto), equities analysts left their cubicles to become quasi-glamorous minor media celebrities in a way that can happen only in New York. And the best way for these analysts to maintain their new, lucrative celebrity was by continuously increasing their exuberance — by insisting that the Manhattan-based ice-cream-and-video-delivery service Kozmo.com would transform retailing, that Amazon’s share price would hit $400, that the merger of Time Warner with AOL portended the dawn of a new era of civilization. The three most important, bullish tech-stock analysts of the era were all New Yorkers: Mary Meeker at Morgan Stanley, Henry Blodget at Merrill Lynch and Jack Grubman at Salomon Smith Barney.
Moreover, the analysts — ostensibly objective judges of companies’ prospects, the reality check to investor-relations hype — had become active participants in the white-hot sales efforts of New York investment banks and brokerages. No one was more responsible for that new complicity than Frank Quattrone, who in 1998 persuaded his employer, Credit Suisse First Boston, to give him direct authority over the firm’s technology-stock research staff. He was therefore in an unprecedented position to enforce his analysts’ optimism about the stocks of companies that C.S.F.B. took public. And it worked: in short order, Quattrone turned C.S.F.B. from a minor I.P.O. player into the second-largest underwriter in the business. Quattrone worked in California, but the company’s world headquarters is on Madison Square in Manhattan.
At Salomon, meanwhile, Grubman was also very lucratively combining the roles of analyst and investment banker. It was he and his Salomon colleagues who engineered the improbable acquisition of M.C.I. by scrappy little WorldCom in 1997; without him, both companies, and all their investors, might be doing just fine today. Since 1997, Citigroup and Salomon have underwritten telecommunications I.P.O.’s worth $17 billion, including those of Global Crossing (whose board Grubman privately advised) and Teligent; both companies are now bankrupt. Grubman attended WorldCom board meetings and schemed with Salomon Smith Barney bankers to funnel shares of hot I.P.O.’s to WorldCom executives and directors. And who was the scrappy Mississippi company’s biggest customer? AOL Time Warner, the huge New York company, which paid $900 million a year to run its Internet traffic on WorldCom’s network — and which in return demanded hundreds of millions’ worth of dubious WorldCom advertising in AOL Time Warner media.
And did the putatively tough New York-based press scrutinize all this profligate fast-and-looseness? Ummm . . . no. Only now, months and years after the fact, are we hearing about the roles New York financial institutions played in maintaining the illusion of Enron’s health — indeed, that it was gangs of ingenious New Yorkers who choreographed nearly all of the most outlandish financial and legal acrobatics. J. P. Morgan Chase supposedly packaged Enron debt as ”credit derivatives” and sold it off to investors, and it also helped devise Enron’s questionable ”prepays” — that is, loans disguised as commodity trades intended to make the company’s huge debt look more manageable. Citigroup supposedly provided loans that were misleadingly recorded on Enron’s books as cash flow from oil-trading operations. In 1999, Merrill Lynch decided to buy several Nigerian barges from its client, Enron, seemingly increasing Enron’s annual profit. The next year, Merrill decided it didn’t need them and sold them back — at a profit for itself. And although Enron’s headquarters are in Houston, its two financial evil geniuses — the former C.F.O. Andrew Fastow and his former No. 2 Michael Kopper (who has pleaded guilty to wire fraud and money laundering), both grew up in the suburbs of New York, 45 minutes from Wall Street.
As for the accounting industry that gave its imprimatur to these shenanigans, it does not have a geographical locus (partly because the big firms try to project an image of both ubiquity and localism), but the headquarters of two of the Big Five — PricewaterhouseCoopers and Ernst & Young — are in Manhattan, and a third, Deloitte & Touche, is in suburban Connecticut. If anywhere on earth can be considered the accountancy capital, it’s New York.
Jack Grubman, like all analysts really just a glorified business beat reporter, was paid tens of millions of dollars by Salomon during the last half-decade. From Salomon’s perspective, there was, of course, a real (albeit unethical) economic rationale for such compensation, but from Grubman’s perspective, there was one additional factor: he lives and worked in Manhattan. The culture of Manhattan generates in normal successful people (and by ”normal,” I mean people who do not perform music or act professionally or lead their league in scoring) a hunger for insane as opposed to merely neurotic amounts of wealth. And those pathological Manhattan norms helped fuel the C.E.O. crime wave.
The C.E.O. crooks all yearned to be playas, and playas have to have at least a foot in New York. They needed to wake up in the city that never sleeps, to find they were kings of the hill, tops of the heap. Dennis Kozlowski, his little town blues just melting away, made Tyco buy him a New York apartment, and he rationalized it as a legitimate business convenience. But the scale and opulence of his convenience were all about living the only-in-Manhattan, M.B.A. Cribs lifestyle: an $18 million duplex on 5th Avenue dressed up with perhaps $7.5 million in decorations (including a $6,000 shower curtain) and another $4 million worth of supposedly sales-tax-free art. Such is the order of magnitude required to impress the Manhattan money culture.
The pharmaceutical entrepreneur Sam Waksal, now under indictment for forgery and insider trading, is routinely identified in terms of his deluxe Manhattan real estate — the ”art-filled SoHo loft,” where he was arrested at dawn one Wednesday this summer. The cable TV company Adelphia is based in unglamorous western Pennsylvania, but its founder, former chairman and supposed looter, John Rigas, was arrested (also at dawn on a summer Wednesday) in his corporate apartment on East 75th Street — one of Adelphia’s two fancy Manhattan apartments occupied by Rigases. Jean-Marie Messier, the former C.E.O. of Vivendi, is not a crook — but when he decided last year he was going all-out to become a global media presence, he had his company provide him a $17.5 million duplex apartment on Park Avenue. To his enemies back in France, this New York ostentation reportedly was proof that he’d been co-opted. And although he had famously derided other executives’ ”golden parachutes,” now that he has been fired himself, he reportedly would like to keep the duplex. In New York, the greed really is infectious, like glee.
Now that the Enrons and WorldComs have imploded, the endgames, too, are playing out between the Battery and 59th Street. Having been effectively concocted by Salomon five years ago, WorldCom is today relying on different New York investment bankers, the Blackstone Group and Goldman Sachs, to broker its deacessions and possible dissolution. And the best $600-an-hour New York criminal and bankruptcy lawyers are as furiously busy now as the best $600-an-hour New York securities and corporate lawyers were during the late 90’s. WorldCom has retained the firm of Weil, Gotshal & Manges. Sam Waksal is represented by Paul, Weiss. Dennis Kozlowski’s criminal counsel is the Park Avenue lawyer Stephen Kaufman. Another Park Avenue criminal lawyer, Peter Fleming of Curtis, Mallet-Prevost, Colt & Mosle, represents John Rigas of Adelphia, as well as Michael Odom, who had been one of Arthur Andersen’s chief Enron-minders in Houston. Fleming, who defended Drexel Burnham Lambert in the late 80’s, as well as John Mitchell and Don King, recently told this newspaper, ”I’ve never had a client I thought was guilty,” thus demonstrating another very New York trait — well-compensated, self-righteous chutzpah — that runs like a Day-Glo red wire through all these cases.
On the other hand, New Yorkers are also leading the efforts to nail the wrongdoers. Eliot Spitzer, the state attorney general, struck a settlement earlier this year with Merrill Lynch concerning the independence of its stock analysts; he’s now investigating how Citigroup’s Salomon Smith Barney became the lead underwriter on the AT&T Wireless I.P.O. in 2000, earning Salomon a $45 million fee, after Sanford Weill, the Citigroup chairman and AT&T board member, encouraged his star analyst — Grubman — to rethink his negative rating of AT&T. The U.S. attorney’s office for the Southern District of New York is prosecuting the Rigases of Adelphia as well as the former financial executives of WorldCom. The Manhattan district attorney is prosecuting Kozlowski, and investigating the Enron ”prepay” schemes contrived by Citigroup and J. P. Morgan Chase. And the New York financial cable channels and newspapers and business magazines, of course, are now zealously on the case. The downside is not as exciting to report as the upside was, but it’s a story.
However, except for a few unlucky, overreaching dweebs like Jack Grubman, forced out of Salomon in August, the New Yorkers who enabled the excesses of late-90’s-style American business are still running the show. And Frank Quattrone, for instance, was rewarded last November with an appointment to C.S.F.B.’s executive board — which presumably means he’ll be spending more time at headquarters here in New York.
In other words, it’s all about us — still, and again. A big reason people in this city were initially reluctant to drink the New Economy Kool-Aid was the sense that the digital revolution threatened our primacy in the national economy and culture. And indeed it did. So when the revolution was declared a failure two years ago, New Yorkers could, gloatingly, revert to their complacent status quo. And now? Now that we understand it was New Yorkers who pulled (and are pulling) the important strings behind the Enrons and WorldComs, that a Manhattanoid psychology fed the despotic grandiosity of C.E.O.’s all over America? Will we mumble apologies, lie low, try to atone? No: it will only make us more insufferably smug. New Yorkers by definition want to think of their city as the great imperial metropolis, the national locus of power and excitement, whatever forms the power and excitement assume. In addition to their official pride (in skyscrapers and art and baseball teams and firefighters and the glorious human mosaic), New Yorkers have always been happy to take perverse pride in this city: in high-end gangsterism, in the secret shadow zones, in the sharpers who seem to get away with it just because they’re New Yorkers. For better and for worse, New York rules.