(Fwd) Derivatives: New York, New York...

[Ivo Skoric]

Can somebody tell me what those people in monkey suits applaud 
to so damn cherfully every day at 4 pm at the close of trading at 
the NYSE? Dow Jones closed at its 4th year low yesterday. Yet, 
they were all smiles and clapping hands...
ivo

------- Forwarded Message Follows -------


City of Schemes
  --------------------------------------------------------------------------------

October 4, 2002
By KURT ANDERSEN


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 emigres 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, Conde 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.




Kurt Andersen is the author of the novel ''Turn of the
Century'' and the host of the Public Radio International
program ''Studio 360.''

http://www.nytimes.com/2002/10/04/magazine/06BLAME.html?ex=1034830126&ei=1&en=fb96ba541954aade





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It's ENRON, stupid, not Iraq.