Wrong--it was a conflict of interest of the worst kind. As the telecom bubble began deflating in 2000, Grubman and his band of telecom executives refused to admit publicly that the growth they had predicted simply wasn't happening. Rather than offering objective analysis, Grubman issued optimistic reports. When other analysts made more skeptical forecasts, as in the case of telecom startup Winstar, Grubman made withering rebuttals. At the same time, his pet companies, such as WorldCom, manipulated accounting and used tricks to show more growth and profits than were really there. Meanwhile, ordinary investors, with nowhere to turn to get the real story, lost trillions.
Now the U.S. telecommunications industry lies in a shambles, and it has the potential to damage the entire economy. Grubman is under investigation by New York Attorney General Eliot Spitzer and the National Association of Securities Dealers, and many of Grubman's favored companies have either gone under or are facing intense scrutiny from investigators.
While Grubman is an extreme case, he exemplifies the broader problem of conflicts of interest on Wall Street. It's always tempting to skew analysis and research in order to win investment banking business: The bigger the rewards, the bigger the temptation. Indeed, given the hundreds of billions in capital that the telecom industry raised during the 1990s, it was one of the all-time richest sources of profits for the Street.
The Grubman affair is a lesson in how not to conduct business. That's why Wall Street firms need to put up high walls between analysts and investment bankers. The first steps have already been taken, the result of Spitzer's actions against Merrill Lynch & Co. But more action, by both regulators and Wall Street firms, is needed to avoid future versions of the telecom fiasco.