Where Are the Customers’ Yachts?

“Wall Street,” reads the sinister old gag, “is a street with a river
at one end and a graveyard at the other.” This is striking, but incomplete.
It omits the kindergarten in the middle.
“Where Are the Customers’ Yachts?”
Fred Schwed, Jr., 1940

I have been trying for sometime to locate the 1920s cartoon depicting a New York banker pointing out to his client the yachts owned by J. P. Morgan, Cornelius Vanderbilt and others of their ilk. The client, duly impressed, scratched his head and asked but Where Are the Customers’ Yachts?

Things have not changed.

Simply put, the problem with today’s stock markets is that the investing public feels that the players are hopelessly corrupt. The public’s faith in our capital markets has been relentlessly damaged as every day a new disaster emerges resulting from gross mismanagement to fraud committed by top corporate executives, Wall Street investment banks and brokers, these firms’ research analysts, accountants, and lawyers. Who have we left out?

The following are just a few of the extremes that have caused the present psychology.

– A well-paid brokerage executive: Christos Cotsakos, the 53 year old Chairman and CEO of E*Trade, has been doing very well. This is despite the fact that the on-line broker lost $276 million in the first quarter of this year. According to a proxy statement filed with the SEC, Cotsakos received a bonus of $4.1 million in addition to his salary of $797,880 and restricted stock valued at $29.3 million in 2001. He also received “other annual compensation” amounting to $32.97 million.

Further, E*Trade’s Mr. Cotsakos was granted options for 1.33 million shares in 2001, and he exercised options for 2.61 million shares realizing a gain of $11 million during the year. Should Cotsakos retire, he would continue to be paid $8.8 million a year under his contract. Should E*Trade be sold, he would receive a payment of at least $125 million.

When the Wall Street Journal reported the particulars of his deal, E*Trade dropped 30% to 5, down from a high of 70 in the last year. Reuters reported on May 10th that he gave back some compensation as one stockholder has sued him and the board to recoup some of Cotsakos’ enormous compensation. Christos Cotsakos said “I have listened to shareowner concerns and want to dispel any doubt that my commitment to the success of this Company is unwavering.”

We wonder where the buyers of E*Trade at 70 moor their yachts.

– A well-paid banker: William B. Harrison, Chairman of Chase Manhattan. Andrew Ross Sorkin in the April 7th New York Times wrote that Mr. Harrison was beaming when in September 2000 he announced the $30.9 billion acquisition of J. P. Morgan and said “It’s a very fair deal. And most importantly, when we look at the overall transaction two years from now, it should be accretive to the shareholders.” Sorkin points out that the stock has lost more than one-third of its value in the last 18 months.

Further, it seems that Mr. Harrison was paid very well for his services in the Morgan acquisition that took three weeks to negotiate. He received a special bonus of $20 million “on top of his $1 million salary and $5 million regular bonuses last year and whatever else he receives for this year.” Mr. Sorkin continues: “Mr. Harrison’s three lieutenants, including Geoffrey T. Boisi, a vice chairman who had joined Chase only four months earlier, received special bonuses of $10 million each, on top of their regular salaries and bonuses.

“All told, Chase directors paid the bank’s executives more than $50 million for their outing at the bank mall. (They had done a little window-shopping, chatting up Goldman Sachs and Deutsche Bank, before settling on J. P. Morgan.)”

– A well-paid corporate executive: John Chambers, CEO of Cisco Systems, was paid $154 million in 2001 while Cisco lost $1billion for the year. Cisco’s stock has fallen from a high of 82 in 2000 to a low of 11 in the last twelve months. Presently it is trading around 16.

– A well-paid investment bank’s analyst: Jack Grubman was paid $20 million a year for acting as an analyst and allegedly as an investment banker for Salomon Smith Barney. We believe the vast majority of the individuals buying Telecom stocks were completely unaware of the possibility that Jack Grubman was working for Salomon Smith Barney’s Corporate Finance Department as well as functioning as a Research Analyst. We suspect, however, that the firm’s management and its investment banking people knew exactly what Mr. Grubman’s functions were. Securities fraud attorneys are now suing Jack Grubman, Salomon Smith Barney’s super-star Telecoms analyst.

Reuters reported on April 11th that the Wall Street Journal reported a case against Jack Grubman was filed with the New York Stock Exchange on behalf of an investor who declared bankruptcy after losing “$445,000 on shares in bankrupt telecom company Global Crossing, which he bought based on Grubman’s bullish research.”

“The case comes amid intense scrutiny by federal regulators of Wall Street firms. The New York State attorney general (Eliot Spitzer) on Monday castigated Merrill (Merrill Lynch) after an investigation showed the Wall St. firm’s analysts boosted stocks in public but disparaged them in private.

“The attorney general’s inquiry will also soon begin to focus on Mr. Grubman’s stock calls and whether they were framed to help Salomon (Salomon Smith Barney), a unit of Citigroup Inc. win investment banking deals, the paper said, citing people close to the inquiry. The attorney general’s office has already issued a subpoena for documents and emails including those related to Grubman’s work, the Journal reported.”

Several of Mr. Grubman’s recommendations on March 15, 2001 seemingly stubbed their collective toes as, according to the February 28, 2002 Wall Street Journal, they suffered price declines from March 15, 2001 to February 27, 2002 as follows:

– Qwest Communications -78.1%
– WorldCom -54.7%
– Global Crossing -98.0% Virtually worthless now
– XO Communications -91.0% Virtually worthless now
– Winstar Communications -98.2% Virtually worthless now
– McLeodUSA -98.6% Virtually worthless now

On April 22nd Jack Grubman dropped his buy recommendation on WorldCom. The stock fell 30% and its co-founder and CEO, Bernie Ebbers, resigned only to become Chairman Emeritus a few days later. WorldCom stock’s high was $61.89 in the summer of 1999 when Mr. Ebbers made a $115 billion bid for Sprint. It is now trading at $1.13, down 98% from its high, and the May 1st Financial Times reported that it is “a bigger wipe-out than the $60 billion loss caused by Enron’s collapse.”

We understand that Mr. Ebbers will continue to receive interest rate subsidies that have been referred to as a “$100 million gift.” Mr. Ebbers pays WorldCom 2.18% to 2.21% on the company’s “controversial” $366.5 million personal loan to him. This is despite the fact that last year the company paid 7.29% interest on its own debt according to the May 2nd Financial Times.

The good news is that there will be reforms as capitalism is beginning to purge excess corruption.

New York Attorney General Eliot Spitzer is currently investigating nearly a dozen major firms. And you know who they are. Most importantly, a major difference now versus the past is that there is the threat that executives may face separate criminal charges and possible jail time as a result of present investigations. For example, David Duncan, the Arthur Andersen accountant who was in charge of the Enron account, plea bargained and plead guilty to obstructing justice on April 9th. Duncan now faces a maximum of 10 years in prison and a $250,000 fine.

While we understand that morality cannot be legislated, we look forward to the forthcoming changes which will be brought about as a result of the new attitudes and disciplines that will not exempt or grant immunity to any corporation, corporate executive, investment banker or broker, mutual fund, lawyer or accountant – regardless of size. Thank you Enron and Arthur Andersen.

We will enthusiastically welcome the new standards as they will help us to help you. We want our clients to thoroughly enjoy their yachts!

John W. Hamilton
May 16, 2002