Why does the New York Times publish this dreck? Charles Dodgson rants against Michael Lewis's article in the New York Times Magazine. Lewis reserves his sympathy not for the poor schmucks who took Merrill Lynch's analyses of the internet boom seriously ("of course Merrill Lynch's analyses are serious," they thought; "Merrill Lynch is in this business for the long haul, and doesn't want to blow its credibility for two years' worth of investment banking profits"), but for the poor schmucks whom bullish individual investors "forced--yes, forced--...to start spewing nonsense":
Through the Looking Glass: After Paul Krugman's "New Gilded Age" piece in the New York Times Magazine last week, they've published an article by Michael Lewis titled "In defense of the Boom", which is billed as a response.
Lewis starts out by discussing the role of the stock market in the dotcom boom, and the recent spate of lawsuits from Eliot Spitzer. He would like people to realize, for instance, that Merrill Lynch spent three years giving out realistic estimates of the true worth of dotcom stocks, before it started serving up the same stew of lies as everyone else. Not that he's saying any of that to emphasize Merrill's culpability; this is instead, like the title says, his attempt at a defense.
So, who is to blame for the crash? Why, the individual investors who forced --- yes, forced --- Merrill to start spewing nonsense about the market. On this view, Merrill was, in effect, paying its analysts not to try to figure out the true worth of companies, but rather just to tout the merits of stocks that seemed to be going up anyway, to make its customers more comfortable with their choices. And Merrill paid the analysts huge sums of money for this service. This is, again, what Lewis says in Merrill's defense.
(And this defense comes complete with a tendentious misreading of the email which Spitzer built his case on. Lewis quotes exactly one of these messages, and comes up with a twisted reading of that one message in which it just claims that the analysts are being bullish on the Internet. He also argues that Merrill's investment bankers were mere "incidential beneficiaries of the firm's new bullishness", as opposed to being beneficiaries of lies about specific companies. This strawman version of the case ignores the virtual festering heaps of more specific email also cited by Spitzer, in which Merrill's analysts describe specific companies which they were still touting enthusiastically in public as "junk", "crap", and worse, and in which specific bogus recommendations were tied directly to banking business. You don't have to look at the actual court documents to find that stuff, not that there's any particular difficulty in digging them up; those emails were widely quoted in the press, including the Times itself, at the time of the indictments. And yet Lewis claims that the one email he quotes is the only one of relevance to the case. Does the Times have fact checkers?)
Needless to say, Charles Dodgson is right. Here is Michael Lewis mendaciously misreading one email:
...In it Blodget responds to e-mail from a Merrill Lynch banker who wanted him to express greater optimism about some Internet company. [Blodget] writes:
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. If there is no new e-mail forthcoming from [Merrill management] on how the instructions below should be applied to sensitive banking clients/situations, we are going to just start calling the stocks . . . like we see them, no matter what the ancillary business consequences are.
Out of context, during a crash, that sounds pretty damning. It sounds as if Henry Blodget never called a stock as he saw it. But in context, at the end of a boom that has made Henry Blodget a little god, who knows? It's hardly uncommon on Wall Street for analysts to play head games with their firm's bankers and brokers. To me, knowing Blodget's record, it sounds as if the young analyst is simply flexing his muscles. He's saying: if you mess with my turf, I'll mess with yours. It's hard to say. And that's the point: motives in any company, let alone a Wall Street one, are far too messy to be honestly discerned from a handful of carefully selected e-mail messages...
And here's what the San Francisco Chronicle said about a bunch more emails that Lewis simply does not talk about:
Normally Lewis is dead on; I guess he overstepped in trying to make his point that (some of) the guilt for the crash belongs to individual investors.
Posted by: Jason McCullough on October 28, 2002 12:57 PMi thought his basic point was simpler (and as an observant/ participant in all this, i can attest to being quite correct):
Wall St. equity research is irrelevant.
A lot of people made some very silly decisions, and now are looking for someone to point the finger at (ideally, someone with deep pockets like Merrill Lynch). A fool and his money were lucky to get together in the first place. Besides, what about all those analysts at other investment banks who were dramatically less bullish? why weren't they voted Institutional Investor # 1 (as Grubman/ Blodgett were)?
These individual investors were quite happy to trade with minimal due diligence (how many day traders do you know who've studied finance theory) and quite frankly didn't care about research until they started losing tons of money.
And why aren't the institutional investors making a bigger stink about all this? Because they already know that equity research is worthless.
Posted by: on October 28, 2002 01:28 PMHmmm... so we have here yet another curious defense of Merrill Lynch; sure, the argument goes, their equity research was fraudulent, but that shouldn't matter because no one sensible believed it anyway (and, I gather, because the fools who believed it would have screwed up regardless). But one of the reasons so many fools rushed into the market was that endorsements from institutionally credible figures like Merrill Lynch analysts made it seem respectable.
Institutional investors aren't going to complain too loudly about the quality of a broker's analysis because they are, in effect, selling their own expertise --- a mutual fund manager, or a pension fund manager, who invests solely on a broker's say-so isn't likely to admit it (if such creatures even exist). Brokers tout their analysts as providing reliable guidance for the little guy. If they've been chosen, instead, to indulge the little guy's whims, never mind the fundamentals (as Lewis suggests), then the whole enterprise is deeply, deliberately dishonest.
Posted by: Charles Dodgson on October 28, 2002 02:27 PMRe:
>>I thought his basic point was simpler (and as an observant/ participant in all this, i can attest to being quite correct): Wall St. equity research is irrelevant. <<
But then why was Merrill Lynch so eager to hire Mr. Blodget? And why did internet businesses care so much about what he said about them?
Sorry, the "nobody pays attention to research, so any lies told were harmless" argument is not very convincing...
Brad DeLong
Perhaps it is crude to say so, but they were just high paid whores. What passes and passed for "resarch" was and is really offensive. And I suppose many of us knew it and others should have*. But that doesn't excuse those who did it. At the very least they should be drummed from the business and their names be so blackened that no one with any sense of shame would be seen anywhere near them. Ostracism is the least they should suffer.
But apparently no betrayal of trust and professional ethics is sufficient today for people to be disgusted. Oh no, it's just business as usual.
Well if betrayal of trust is business as usual then there is something very wrong with business.
* On the other hand I knew otherewise intelligent people who argued in 98/99/00 who argued that everything really had changed and that these valuations really were justified. And I believe these people believed it. But these people weren't professional analysts - who should have known better.
Posted by: Ian Welsh on October 28, 2002 05:02 PMWhat about the stuff Lewis said about the employees making (and losing) lots of money on shares held in their own companies? Analysts ratings aside, is that share economy information accurate and correctly presented, or is it equally manipulated? Is there something important to be learned about attitudes toward the boom in the credential gap between Paul Krugman (an economics professor) and Michael Lewis (a writer)?
Posted by: Paul O'Brien on October 28, 2002 07:03 PMPlenty of highly credentialed people called it wrong. I don't think that's the lesson.
Posted by: Ian Welsh on October 28, 2002 10:38 PMOk, time for a spirited defense of Michael Lewis. Hmmm. Well, Ian, looks like you have a stronger hand this time, but let's play.
First, a friendly warning to Dem partisans (principled lefties can ignore this bit): syncronize your sound-bites.
Last week we had Prof Krugman denouncing income inequality. He somewhat glided past the evidence that inequality really zoomed after Clinton's '93 tax hike on "the wealthy" and during the Clinton boom.
This week, we have Michael Lewis defending the boom. BOOO, Michael Lewis. But again, the boom was an integral part of the Clinton economic legacy, and will be a central theme in the campaign of whoever the Democrats nominate in 2004. Here, for example, is Ms. Clinton at a recent fund-raiser:
..."You know, I'm a fan of Clintonomics," she told the crowd while standing from a perch on the staircase of movie producer Alan Horn's art-filled Bel Air home, "and this administration is destroying in months our eight years of economic progress.' "
Sounds like the venue might have been that of a boom-beneficiary, but who knows?
Anyway, my suggestion, to partisan only, is, don't over-trash the boom - your soundbites will be re-circulated in less than two years as evil Righties mock your inconsistency.
OK, now on to Mr. Lewis. Let me introduce my defense of his defense thusly:
Where is the forest? Mind those trees!
Lewis made many points in his article. Briefly (when I am writing, "briefly" doesn't always mean what we think it means, but here goes), he said:
1. Merrill Lynch did not cause the tech bubble
True or false?
2. Wall Street generally did not cause the tech bubble. They exploited it, as did many others, none of whom are being asked for a refund.
True or false?
3. The system has cast about for a whipping boy, and settled on Wall Street.
Boy, is this an old game. Who else remembers the '87 crash and then the '89 S&L wipeout? Congress and the media decided that all the problems with S&L's were due to their purchase of junk bonds. This conveniently overlooked the bi-partisan increase in deposit insurance and the bi-partisan meddling in regulatory oversight that really caused the problem.
I have assurance that Google is reliable, so when I say "Neil Bush - Silverado", you know what I mean. Of course, republican partisans can think of some Dems who got involved with S&Ls, too.
Or, for Californians only, how about "Orange County"? Municipal treasurer bets big on interest rates - when he is right, the county can provide more services without raising taxes. When it turned sour, he was a victim of Wall Street. Please.
4. Post-boom, the "old establishment" is crushing the upstarts. During the boom, Microsoft, GE, and old-line Wall Street firms were losing talent to stock-option happy start-ups. This was bad? Now it's over, and corporate America has won. This is good? Lewis suggests, maybe not.
5. Hey, during the boom we all learned a lot, we shuffled the deck, and lots of new ideas got an airing - didn't quite work-out, but that is why people use the "hang-over" metaphor - it was fun while it lasted and, if history is a guide, we will do it again.
So, you might want to give fair consideration to his many points, rather than have a hard-drive crash on his most objectionable. He does bill the piece quite clearly as a defense, so he tips his hand that it may be advocacy as well as analysis.
Regards,
Well Tom, I wasn't aware my hand was too bad last time. :)
And I don't feel any particular need to defend Clintonomics, though I do feel that it was a lot better than Bushonomics and I think that though the tax raise was probably done the wrong way it was the right thing to do, since I believe that running constant deficits is a bad thing.
As for your argument - uh, with all due respect, so what? I mean seriously, most Wall Street analysts - including those at Merril Lynch, clearly touted stocks that they either knew or should have known were not good buys. That's a failure of either business ethics or competence and either way, it isn't acceptable. It's pretty hard to defend because it isn't defensible. So what if they didn't cause the bubble? They took advantage of the bubble in unethical ways in exchange for big wads of cash- and that's the bottom line. And their job was to not let that happen.
And it wasn't rocket science. I mean, sure, lots of the books were cooked, but by 97 people knew about how stock options (for example) were effecting the books, people knew that independent measures of profits were not agreeing with annual statements and people knew that most internet startups didn't have business plans worth blowing your nose in. And when I say people I mean I knew. And I'm not a professional in the industry. There is no excuse for professionals not to have been aware of these facts (and many others).
It was a classic bubble. There is no excuse not to have called it that and there is no excuse for so-called professional analysts to have been snookered. As I noted before they're either incompetent or corrupt. There are no other options.
Cheers,
Ian.
P.S. Of course you tend to get the behaviour you reward and they were rewarded for unethical behaviour, but that's another argument and that goes much higher than the mere analysts.
Posted by: Ian Welsh on October 29, 2002 07:02 AMAyn Rand foolishly placed the John Galts of the world on a pedestal. The far wiser Adam Smith warned that business people are innately inclined to defraud the general public. The at least metaphorical reality of Original Sin underpins the motivations and actions of all human beings. The Republicans seem to trust the business class far too much, and their counterparts within the Democrat Party are too enamored with government bureaucrats. The truth is this: be wary of everyone--even yourself.
Posted by: David Thomson on October 29, 2002 07:22 AMThe Lewis piece was titled "In Defense of the Boom". not "Merrill Lynch". I am not defending the behavior of analysts, or the screwed up compensation and organizational structures. Frank Quattrone's empire at wherever was more egregious than anything at Merrill. Hmm, was he at First Boston? But he moved. Damn, where is Google, I feel lucky.
But my point was, there was more to the article than that.
So fine, you hate analysts, Wall Street participated in the great fleecing, what else did Lewis say, and did it make sense?
Now, C Dodgson did move on, to embittered workers whose dreams were crushed. Well, OK, something to talk about, and I disagree. Although I have no doubt that "the bust" was an emotionally grueling and disappointing experience for everyone, I suspect that for some of those people, it was a great chance to escape the corporate treadmill and fly. Into a cliff, this time, but next time? Here in America, Icarus gets repeated chances. And you only need to succeed once.
Posted by: Tom Maguire on October 29, 2002 10:12 AMTom,
the entire article may not have been just about Wall Street, but Brad's excerpts were mainly about the author's strange reading of the behaviour of wall street.
And while Wall Street certainly didn't cause the bubble they did hype it when they should have known it was a bubble. Ah, you say, "caveat emptor", investors should have known better. Well, yes and no. In an ideal world they certainly should have and yet I find it hard to condemn someone for believing that if Merril Lynch or some other huge brokerage firm recomends a stock, they've done their work.
My father put it this way (and no, I'm not bitter because he lost some money). "I'm a professional forester and I certainly wouldn't expect some financial analyst to try and tell me how to run a logging operation. Why would I think I know better than a financial analyst with years of training and experience?"
1) People bought and hold because wall street advised them to.
2) Stocks therefore achieved higher prices than they would have otherwise and the bubble went on longer as a result.
3) Wall Street should have known better. It is their job to know better and to advise their clients properly.
4) Therefore, while I wouldn't say that they caused the bubble, they certainly did contribute.
I recall around the spring of 2001 having a conversation with a financial advisor (I work in a home office) who was, in essence, selling mutual funds (Variable life insurance to be specific). He had advised his customers on a portfolio of mutual funds. I questioned whether he thought that was wise. He repeated to me the mantra "stocks always outperform over time". Well, yes and no... Timing does matter, you can't just use the Dow or S&P (components change) and if you buy at the wrong time it can take a decade or more to recover. But he insisted, and his clients bought. And, while I haven't tracked that particular case I do know how those funds have performed since then. Suffice to say, that his clients are probably rather poorer. And he had plenty of pretty credentials and he was warned by back office. Now, I don't think he was corrupt, I think he was incompetent.
And I don't hate Wall Street - I hate crooks and despise incompetent people who refuse to learn. I judge on behaviour, and while there are certainly many honourable men and women in the industry it is also certainly true that far too many of them have not acted with honour, integrity or competence. It is also certainly true that their lack of honour, integrity and competence made the bubble worse.
Ian.
Posted by: Ian Welsh on October 29, 2002 12:58 PM