WSJ: Let’s be Frank

I guess we just need villains to take the blame for our own stupidity. My old colleague Frank Quattrone was convicted on three counts of obstruction of justice on Monday. Guilty? Innocent? Who knows, but he is taking the fall for a lot of sins. And that, I suppose, is how eras end.

Barely four years ago, Frank was a real life Tom Wolfe-ian Master of the Universe. I worked with him at Morgan Stanley, and found him honest, but power hungry. He took Netscape public in 1995, then set up a multibillion dollar technology investment banking group at Credit Suisse First Boston. He called it a “Boutique inside a Bulge Bracket firm.” Checks and balances need not apply.

He was the best in the business and his army of bankers did every important deal in Silicon Valley. Shares of his hot IPOs were in greater demand than front-row seats to see Bruce Springsteen. Yes indeed, getting control of a capital-raising process on Wall Street is lucrative. J.P. Morgan had it at the beginning of the century. Michael Milken and Drexel controlled the junk-bond market, and John Gutfreund and Salomon influenced the market for Treasuries. Frank Quattrone made $120 million in one year, so like the others, when the bubble burst, he became the poster child of greed.

One thing I truly know Frank is guilty of is bad judgment. He took the company Mp3.com public. Remember them? If it wasn’t for Dr. Koop and Pets.com, it would be the dumbest idea ever invented. There wasn’t a single investor who didn’t laugh when they heard the road show pitch. But, as they say on Wall Street, when the ducks are quacking, you gotta feed ‘em. A casino mentality took over. It was a hot IPO, meaning demand was huge, but only because other Internet IPOs had traded up. Originally priced at $9, Frank’s group sold it to the public at $28, a $1.5 billion value for a company with no particular business and $700,000 in sales.

I was no Friend of Frank, we had our tussles. After getting almost no shares in most other deals, our fund miraculously got Mp3.com shares allocated to us. I must have owned them for an excruciatingly long 45 seconds, then sold them for $60.

They peaked at $105 — the founder was briefly worth $2.6 billion. So, who was buying this garbage? It was small investors who placed orders with no limits at Fidelity or ETrade or Schwab. These gamblers were the real villains, and the victims. And no, I don’t feel bad dumping my shares on them — a fool and his money.

So where was the breakdown? What was the root cause of this craziness? An investment banker caused this? Is there too little regulation? Or too much? We’ll never really know, but everyone has an opinion. The Feds obviously blame Frank. It was a boom, a bubble, a dislocation. Frank didn’t cause it, but he did get caught up in it.

There are a million reasons why it happened. Beyond the “Wall Street as a craps table thinking,” I found lots of silly regulations that are to blame for Mp3.com and all the other nonsense. And post guilty verdicts, these rules still exist. Regulations favor mutual funds that Buy and Hold over hedge funds that bet against losers. Liquidity provided by Wall Street firms dried up when they could no longer get wide spreads after a Lerach class action settlement in 1996. Most shares of newly public companies don’t trade for the first six months, as they are locked up. Don’t even get me started on the NYSE. No matter what kind of “boutique within a bulge bracket firm” was playing games, no one person or firm could have pulled this off.

I sat through a talk by Eliot Spitzer at a J.P. Morgan conference on Monday, as the Quattrone verdict was announced. The irony was piled high. Yes, the same J.P. Morgan that funded some of Enron’s shenanigans and paid a massive settlement a year ago to make charges of Wall Street research conflict of interest go away. Mr. Spitzer suggested that only the government could enforce integrity, fair dealing and transparency. Really? I suppose that would include the civil settlements he struck in cases against telecom execs and IPOs that enabled him to bestow millions of dollars in largess on community groups (read voters) across New York state.

Wall Street is considered self-regulating, and the ability of the Feds to swoop in afterwards means documents should be retained. Fair enough, but who is going to even create documents, let alone use e-mail anymore? Pay phones may flourish in downtown New York. CS First Boston should never have allowed a boutique inside their walls. Now, lots of changes will be forced on Wall Street. But new regulations will mean capital just goes elsewhere. Research is now doing solitary confinement and will wither. Firms like Goldman Sachs are trading more for their own account. Is this all for the better?

It probably doesn’t matter. Wall Street is the ultimate chameleon, changing its business model as new capital-raising opportunities arise. Whether it goes up or down, the stock market does the dirty work of capitalism, an invisible hand that magically funds companies it expects to grow — and pulls the plug on dying enterprises. It’s not always right, (may Mp3.com RIP.com) but the implication of guilty verdicts and new regs may mean the risk of future great companies like Amazon not getting funded. A sad end to an era.

Mr. Kessler is the author of “Wall Street Meat” (HarperBusiness, 2004).