New York’s attorney general, Eliot Spitzer, stood up in front of a Wall Street
crowd last week to give a 20-minute speech. He started with a joke: he was glad
he’d been invited, because he really wanted to put faces to emails. The following
morning, the assorted research analysts found outexactly what kind of emails
he was talking about. The front page of the Wall Street Journal had
a story which had clearly come directly from Spitzer, referencing a message
that Salomon Smith Barney’s star telecom analyst, Jack Grubman, had sent to
an unidentified client.
For the next four days, that email was front-page news. It was a masterpiece
of slow leaking for maximum damaging effect. First we learned that Grubman said
he had upgraded his rating on AT&T as a favour for Citigroup chairman Sandy
Weill; in return, AT&T chairman Michael Armstrong, who sat on Citigroup’s
board, would help Weill "nuke" his then co-head, John Reed. The following
day, the other shoe dropped: never mind Weill v Reed, now Grubman had done Weill
the favour in return for Weill getting his (Grubman’s) twins into the 92nd St
Y, a posh pre-school on the Upper East Side.
The revelations kept on coming: after the email, the memo; after the memo,
the name of the person to whom the email was sent. Feature articles were commissioned
about the competitiveness of pre-schools, and Spitzer announced he was looking
into whether Citigroup’s $1 million donation to the 92nd St Y – which
even Citi officials didn’t bother denying was linked directly to Grubman’s twins
– might have violated some regulations.
Even before the latest set of leaks, Citigroup had already had so much bad
press that, in the words of a recent piece
in Fortune, "in the public’s mind, Salomon Smith Barney surely
is regarded by now as the top villain among Wall Street firms." Last week’s
coverage, which was surely the worst yet that any bank has had to go through,
by all accounts made Weill incandescent with rage.
But curiously, no one seems to have covered the reason why all of this is going
on. The Wall Street Journal and the New York Times, it would
seem, are so keen to keep their channels of communication to Eliot Spitzer open
that they won’t print any speculation as to why he’s leaking all this stuff
to them. Rather, they continue to print pieces which follow the Spitzer line
slavishly: Gretchen Morgenson wrote
last Sunday that "thousands of individual investors lost millions of dollars
because of what appear to have been self-interested actions by Mr. Grubman and
Mr. Weill".
In order for this to be true, thousands of individual investors would have
had to have bought AT&T just because Grubman upgraded it, and then held
on to that stock all the way down to its present level: that is, trusted Grubman’s
upgrade, but not the downgrade he made a few months later.
The thing is, there’s no doubt that a lot of what went on at Citigroup during
the bubble years was smelly. But smelly is not illegal, or not always illegal
(although Spitzer has proved adept at using a dusty piece of New York State
legislation, the Martin Act, to make it so). And it’s now reached the point
at which practices which banks used to be very proud of are being looked at
askance. Fortune cites "tying", where banks make the granting
of a loan contingent on investment-banking mandates. Under the names "relationship
banking" and "one-stop shopping," this has been something many
banks have been bragging of for years: the way that they’re exiting their low-margin
lending businesses, or at least trying to "add value" to them by converting
them into high-margin client relationships.
So it’s easy to see where negotiations between Spitzer and Weill might have
become bogged down. Weill was paying Grubman $20 million a year: an extra $1
million donation to the 92nd St Y would be little more than a perk as far as
he was concerned, not to mention a donation to a worthy cause. In Spitzer’s
eyes, of course, it looks like a quid pro quo. And for all that Weill has now
embarked on a major spring-cleaning operation, including the defenestration
of Michael Carpenter, the head of Salomon Smith Barney, he remains the man who
spent $31 billion on Associates First Capital, a company which makes its money
by charging usurous rates of interest to individuals with weak credit.
My guess is that Spitzer long ago confronted Citigroup with the Grubman email,
and that Citigroup didn’t react with the degree of remorse required to placate
the crusading attorney general. After all, Grubman said immediately and publicly
that he’d made the whole thing up, and both Grubman and Weill seem to be in
full agreement that there was no basis in reality for the allegations in the
email: it’s likely that Citigroup wouldn’t consider it worth however many tens
or even hundreds of millions of dollars Spitzer wanted to get out of it.
So Spitzer made it public, in the most damaging way he possibly could. He wasn’t
just acting out of spite, either: he was getting public opinion on his side.
The more angry the public is at Citigroup, the more pressure Weill is going
to feel to make spectacular amends. Certainly, he now wants nothing more than
to make all the bad press go away.
And in a weird way, the more spectacular the settlement the better, for Citigroup:
the higher the dollar amount that Spitzer gets out of Weill, the more important
Citigroup is seen to be. After all, if no one paid any attention to Grubman’s
recommendations, then the damage caused would be zero. And whatever the final
sum works out to be, it’s going to be negligible in the context of Citi’s $16
billion in annual earnings.
Spitzer surely had another motive in dragging Citi through the mud, too: to
persuade the rest of the banks he’s got his eye on to be more cooperative in
their own negotiations, lest they, too, end up going through the same process.
Spitzer has neither the time nor the manpower to go after them all himself:
by some quirk, Goldman Sachs is being investigated by the state of Utah. It’s
in everybody’s best interest that negotiations come to a quick and clean end,
and maybe Citi is being treated harshly pour encourager les autres.
It’s one of the downsides to being enormous: you’re always the biggest and the
juiciest target.