Why is Frank Quattrone credited with contributing to the growth of the dotcom bubble?

By Andrew Beattie AAA
A:

Frank Quattrone was one of the most powerful figures during the dotcom bubble. He was one of the first investment bankers to recognize the potential of the fledgling companies in Silicon Valley and established himself on the ground floor long before venture capital flooded in.

Quattrone was known and trusted by the entrepreneurs and, as the bubble heated up, he acted as the middleman between them and the venture capitalists looking to get in. His understanding of the needs of technology firms versus the demands of investors made him a rainmaker of extraordinary value. As the lead of Morgan Stanley's Global Technology Group, Quattrone ushered in the Netscape IPO - the largest IPO in Wall Street's history at that time. When he sought more power over analysts issuing reports on his IPOs, Morgan Stanley refused and watched as their rainmaker jumped ship.

Quattrone changed employers several times during the boom, receiving more money and power at each stop. At Credit Suisse First Boston, he was granted control over the compensation system for analysts and his own people in the IPO section. Quattrone also gained control over the pre-IPO share allocations he gave to potential clients in order to attract business. Using the double incentive of favorable analyst recommendations and a kickback in pre-IPO shares, Quattrone attracted more internet firms to CSFB than any other investment bank. The fees paid to CSFB for handling an IPO were not cheap, but the personal compensation given to the CEO through spinning put the CEO's personal desire above the interests of his or her company.

After the internet boom went bust, Quattrone was targeted by the NASD for breaking down the Chinese Wall. He sent a controversial email to his employees reminding them to follow procedure in destroying any documents related to the upcoming case. With vital evidence now deleted, that email became the smoking gun that hinged the case. Quattrone did not bring about the internet boom all by himself, but every other investment bank mimicked his strong arm tactics with their analysts. Investors, sadly, took many of the analysts on their word. The total cost to investors on the internet bubble has been estimated as high as $5 trillion. Further, a general loss of faith in Wall Street followed the "revelation" that analysts were far from impartial. Although Quattrone was convicted on circumstantial evidence in a second trial, his conviction was overturned on appeal in 2006. Throughout the trial, CSFB stood behind their rainmaker and his business tactics.

(For more on the dotcom bubble, read Crashes: The Dotcom Crash.)

This question was answered by Andrew Beattie.

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