In early 1999, I set up an appointment to meet the newish Internet analyst at Merrill Lynch. I'd been following his rise in the papers, and I thought he might be a good story for the magazine I was working for at the time. As it happens, that story never got off the ground because (the consensus was) not enough people were interested in Henry Blodget.
Today, everyone is interested in Henry Blodget. But he doesn't work for Merrill anymore, and most of the interest is in his words and actions in 2000 and early 2001, when Internet stocks melted down. Eliot Spitzer, the New York state attorney general, has been pressing an investigation against Merrill that paints Blodget as a sort of evil mastermind: He knew all along that this or that Net stock was bound to fail, but he lied to the public about it for the benefit of his firm's investment bankers, padding his own compensation in the process.
After reading the e-mails and sections of deposition transcripts provided by Spitzer's office, I don't really agree with the attorney general's affidavit's evil mastermind portrait. To me, Blodget comes off more as a guy who got in way over his head.
This is actually not so surprising if you've followed his odd career. Practically no one had ever heard of Blodget before he made a wildly bullish call on Amazon.com—which promptly came true. Suddenly he was a minor celebrity and was hired by Merrill. The latter event was a surprise because Merrill was a stuffy old firm, but it's pretty clear what it was getting: somebody who could make a positive case for Net stocks because the negative case was making Merrill look bad. In those days it was easy to make a name on the basis of little more than a kind of wide-eyed belief that we lived in a wonderful time, that great things were afoot, and that much money would be made. The ugly truth that Blodget was confronting in 2000 was that this period was over. Before, he could blithely say that most Net companies would fail, but a few would be home runs. Now came a harder question: Which ones?
In the e-mails, Blodget doesn't seem well-positioned to give an answer; on stocks that are the focus of the affidavit, he relies on the thinking of his staffers, who in turn seem to rely a great deal on the management of the companies they're covering. For example, Merrill had initiated coverage of InfoSpace with a buy in December 1999, when it was at around $150. It rose to $260 in early March, then stated to fall. In July a staffer sent Blodget a draft of a research note reiterating a strong buy on the stock. Blodget thought it was too bullish, and in one of the most-reprinted comments from the affidavit, wrote, "I don't mean to be a pain on this one, but this stock is a powder keg, given how aggressive we were on it earlier this year and given the 'bad smell' comments so many institutions are bringing up." But the staffer countered, "I have to react to fundamentals, not rumors, and the quarter will be good and the outlook is strong." The research bulletin carried the buy-reiteration language as proposed. Blodget comes across not as an investment banking collaborator but as someone who got in a staring contest with his staff and blinked. (Today InfoSpace is a penny stock.)
In August of that year, there was a brouhaha within Merrill about InfoSpace's place on a list called the Favored 15. When an e-mail about this got to Blodget, he asked, "What is the 'Favored 15' and why is INSP on it?" An amusing round of e-mails follows, in which no one will actually take credit (blame) for the list, but apparently it was compiled through a not-very-impressive-sounding screening process whose formula supposedly considered quantitative, technical, and fundamental analysis. This list changed often and was distributed by Merrill's "marketing" department to brokers in "the field." (One Merrill guy adds: "The Fav 15 was designed to be a VERY high octane, VERY high risk portfolio with VERY high turnover. My guess is that has not been transmitted to the field too well.") Blodget begged to get the stock removed. "I am getting daily hate-mail from brokers," he moaned.
By November, he's whining to his boss for clarity on "what the heck these ratings mean," asking for "a verbal description of what you—research [management]—believe every single rating combination means and in what circumstances it should be used." Elsewhere we find Blodget grousing that he needs to be given more time to focus on research, and we find his staff bending over backward to avoid upsetting tin-pot Internet honchos with ratings that might be insulting.
The investment bankers had more power than the supposedly influential Blodget, and so did the CEOs of the companies he was supposed to cover. Brokers reamed him in e-mails, and his staffers brushed aside his concerns. On a Saturday in February of last year, apparently while in Florida, Blodget had an exchange with another researcher in his group who wrote, "Don't tell me you've been at your computer the whole time." The presumably vacationing Blodget replied in part: "I'm going to have to work like crazy for the next few months. Definitely have that burned-out feel. This just ain't a low-stress job." Later that year came word that he was leaving Merrill.
The documents make it painfully clear that there's nothing like a "Chinese wall" between research and banking at Merrill, and the hunger to get a piece of the late 1990s investment banking bonanza led it and other Wall Street firms to make some very bad judgments. (Whether anybody should be surprised, let alone outraged, about that at this late date is a question for another time and place.) But I still don't buy the idea of Blodget as the great villain of the age: He's really a bit player, who was both created and destroyed by events way bigger than him.
As for my planned meeting with Blodget back in '99, it never came off. I was just about to leave my Midtown Manhattan office when his assistant called to say that the star analyst couldn't make it. Apparently he had lost his briefcase. We'd have to reschedule. We never did.