(FORTUNE Magazine) – Okay, we were wrong.

Not in the "Saddam has weapons of mass destruction" kind of way, but we did lay out some expectations that weren't met. Seven years ago FORTUNE identified a new crop of black power brokers on Wall Street. Ambitious, well connected, educated at elite schools, and trained at some of the Street's top firms, these entrepreneurs seemed to represent a shift in African-American power from political circles to financial ones. Not content to stay in the backwaters of municipal finance, where black firms typically dwelled, they charged into the flashier business of investment banking. We featured people like John Utendahl of Utendahl Capital Partners and Ron Blaylock of Blaylock & Partners, who forged strategic alliances with major brokerage firms. The group, we wrote, was creating a new vision of what minority-owned firms could accomplish on Wall Street.

But a look at who's wielding real power in 2004--based on balance sheets, performance figures, and deal flow--reveals a different outcome. What we expected to be a climb to the upper reaches of the investment-banking world by these players has been more of a slow crawl, with some dashed hopes by the wayside. Instead, among African Americans on the Street, it is those with quantitative expertise or unsexy niche specialties in finance and asset management who have posted the most significant gains.

We were indubitably right about one thing. Black power on Wall Street will never be the same. Dreaming big dreams, our group of pioneers shared the determination of the civil-rights generation's heirs to succeed independently in the mainstream--and to do so in spite of, not because of, their blackness. Their goal was to build companies that were not the best only in comparison with other black-owned firms but simply the best in their field. That isn't going to change.

But we were naive, perhaps, to suppose that having the right credentials and even access to deep coffers would be enough to successfully infiltrate America's largest white-male fraternity--Wall Street. That may sound like an odd statement considering that Merrill Lynch, the biggest firm on Wall Street, has a black CEO, Stan O'Neal. But climbing a corporate hierarchy and starting a business are two different things, and the people we're concerned with have been trying to do the latter. In fact, there is a new group of African-American entrepreneurs finding success on Wall Street (more on them in a minute), but they are mostly specialists with niche businesses. Success has remained elusive for black-owned firms trying to build full-service brokerages and general equity asset-management businesses.

The group we looked at had found a new model: accepting capital and backing from established Wall Street firms as a way to address the historical problem of black-owned firms having limited access to capital. Utendahl was the first. He partnered with Merrill Lynch, his former employer--before O'Neal got the top job there--which ponied up seed money of $3 million and a $9.9 million line of credit in return for 20% ownership stake. The alliance was supposed to help Utendahl land underwriting roles and give Merrill entry into business allocated to minority firms.

Ron Blaylock, who played ball with Patrick Ewing at Georgetown and later became a top trader at Paine Webber, followed suit. In 1993 he set up his own shop with the help of Bear Stearns, which invested $10 million for a 25% stake in the firm. Three years later Blaylock & Partners became the first minority-owned firm to lead-manage a corporate bond underwriting.

Not only was there a new model, but there were new areas of businesses like private equity funds. Fred Terrell left Credit Suisse First Boston, where he had become a managing director after 14 years, to start Provender Capital. Terrell's firm makes direct investments in companies and multi-unit franchise operations. Currently Provender's portfolio includes investments in Carver Bancorp, the largest black-owned bank, LeGourmet Chef, a specialty retailer of kitchenware and packaged gourmet foods, and Prestige Brands, which buys unwanted brands from corporate parents, including the purchase of Prell Shampoo, Chloraseptic, and Comet from Procter & Gamble.

But it was the investment-banking business that was viewed as leading the way. Today some argue that the firms were like handsome facades run by salesmen with limited management skills. "If you painted a lot of these firms white, they would have never been viewed as becoming so successful," says one black investment banker, who, like many interviewed for this story, requested anonymity.

Whatever the reason, black-owned investment banks haven't been able to solidify and maintain their position in one of the most select areas of Wall Street: the lucrative business of underwriting stocks and bonds for large corporations, where fees are a beefy 6% to 7% of the money raised.

In some cases early success has turned into a struggle to remain profitable in the sustained market downturn. In 2000, Utendahl suffered a $6 million loss according to financial statements filed with the SEC, driving the firm into a negative-capital status, an apparent violation of NASD requirements. At the crux of Utendahl's financial woes was a $12.9 million loan from Merrill Lynch that it could not repay. Sources close to the company say that Merrill forgave the loan to keep Utendahl from closing its doors. (Utendahl declined to be interviewed for this story.) In 2001 an unusual clause was buried in the text of one of Utendahl's underwriting deals. It assured that Deutsche Bank would make up for any deficiency in Utendahl's capital if necessary. Those words sent up a red flag telling the industry that the firm continued to have capital problems and raising questions about Utendahl's relationship with Merrill, since it was Deutsche Bank that was stepping in. A Merrill spokesperson says, "We have had a relationship with Utendahl and continue to maintain that relationship today," declining to comment further.

The bruising economy also put Blaylock on the ropes. Its profits plummeted 30% in 2002. Sources say Bear Stearns grew impatient with its investment and unwilling to sustain further declines. That same year the Rev. Jesse Jackson helped "negotiate" a buyout and cash infusion by the American Insurance Group with a total value of $27 million, according to sources. Bear Stearns declined to comment.

After a highly publicized hiring frenzy last year, scooping up well-known analysts laid off from major Wall Street firms, Blaylock has recently reversed course with massive layoffs and has shut down the brokerage's Chicago office. (Blaylock declined to be interviewed for this story.)

So what happened to our class of '97? Politics, race, greed, fear, missed opportunities, and in some cases self-sabotage all contributed to confounding expectations. Specifically, the political climate changed markedly, scandals soured the industry, and when the market went south, the Street's attitude toward inclusion and its patience for working with small firms went with it. Price also became critical. As small businesses, most of the black-owned firms couldn't compete on price because they didn't have the high volume to make it work. The firms also didn't have reserves fattened by the earlier stratospheric rise of stock prices. That boom was led by technology and Internet companies started by nerds in garages--not the sorts of relationships these firms had been pursuing. "We were starving at a table that was a feast," says Harold E. Doley, president of Doley Securities and the only black owner of a seat on the New York Stock Exchange. And while larger firms with beefier staffs had the expertise and resources to switch gears and chase the technology craze, black-owned firms were left on the sidelines. So when the market reversed course, the drubbing was severe.

For a fuller understanding, rewind to the late '90s, when political and economic factors created perfect conditions for black firms to thrive. Clinton and the Democrats were in office, and big business wanted to curry favor with Washington by supporting programs and initiatives established or supported by the government. The Resolution Trust--the government's thrift-bailout agency formed after the savings and loan crisis of the 1980s--dumped $20 billion of mortgage-backed securities on Wall Street, with a government mandate that 15% of it be set aside for minority-owned firms. Not only did this provide an instant business source, it also allowed black-owned firms to develop relationships with large institutional clients--the kinds of alliances they had little chance of cultivating on their own.

Their position was further bolstered in January 1997, when Jackson tossed the fear factor into the mix with the launch of his Wall Street Project, designed to help people of color get a fair shake. Jackson wielded considerable political influence at the time, as he began what he called the "civil-rights movement on Wall Street." And no company in America wants its name on the wrong side of a Jesse Jackson call-to-action catch phrase. Suddenly black firms had what they'd never had before--leverage.

But as the new millennium dawned, a strong wind of conservatism swept the nation. With Republicans in control of the White House and Congress, the business environment shifted. Jackson began to draw criticism for allegedly strong-arming companies to get black-owned firms included in deals. Jackson defends his actions. "It is not a shakedown, it's a shake up," he says. "And as citizens we have the right to participate in nonviolent avenues for change."

The change in political leadership began to take its toll. "People don't realize how significant Clinton was in fostering opportunities and how damaging the current administration is," says J. Donald Rice, president of Rice Financial Products. Corporations take their lead from the public sector, and diversifying opportunities in the securities industry was not high on the new administration's agenda.

Later the stock market hit a wall. Profits at the bulge-bracket behemoths slimmed down, with net income at Merrill Lynch plunging 85% in 2001. Although suffering losses is common, even expected, on Wall Street, it's a generally accepted fact among black entrepreneurs that their clients become skittish quicker than others. "At the first sign of problems they think you don't have the resources and capital to survive, so they say, Uh-oh, those doors are going to close, I'm out of here," explains one investment banker.

With deal flow drying up to a trickle, those companies still doing business were all about closing deals quickly without any hiccups or delays (remember the Utendahl clause). "They were struggling to be competitive against a wave of reduced appetite," says Robert Lamb, a professor at the Stern School of Business at New York University.

But it can't all be blamed on the market, George W. Bush, or unfair perceptions. Some of the problems were bad business decisions. Take, for example, the consolidation fever that spread through the banking and brokerage industry as companies saw a need to create scale by combining efforts. By and large the urge to merge never hit the black firms. Why? "It's mostly strong egos," says Lamb and many others who concur, "and a regional bias not to go into areas where they didn't really know anyone. Meanwhile the white firms were playing regional hopscotch all over the place."

Then of course there is the basic driving force of Wall Street--greed--to which black investment bankers were not immune. "Most of them didn't put the capital back into the firm," says one observer. "It went out the door via jets, expensive vacations, and all sorts of things."

On the asset-management side, lackluster markets proved particularly harmful to the black-owned firms doing traditional equity management. Many found their clients less willing to ride out the bumps with them. "Black firms haven't been around long enough to prove to the industry that they can survive downturns. The minute your performance numbers or your capital slips, there's a fear that you won't last, and some clients head for the door," says James Francis, CEO of Paradigm Asset Management. Francis's own firm lost $2 billion in assets in 1999, but it has been slowly coming back and now has $950 million.

As for the big plan for black asset managers to use minority set-aside allocations to build track records and then break into the mass market--well, it didn't pan out. "It was a deadly trap," says Quintin Primo, co-chairman of Capri Capital. The set-aside allocations are so minimal that black firms can't generate the kind of revenue that would allow them to add research, marketing, and other capabilities that would let them go after larger clients. "That's not a business--you're doomed to failure," Primo says.

If that weren't enough, black Wall Street, as a microcosm of the greater society, had its own share of CEOs behaving badly. Alan Bond, a 40-year-old Harvard Business School alumni and high-profile money manager who was a regular on Wall Street Week With Louis Rukeyser, is now serving a 12-year sentence in a New Jersey federal prison after being convicted on six counts of investment fraud. Through his former firm, Albiond Capital Management, Bond allegedly ran a cherry-picking scheme that allocated profitable trades to his own account and unprofitable trades into client accounts. Bond's tactic lost his clients $54 million, while his own account coincidentally ballooned an eye-popping 5,000%, to $5.5 million. While he was amassing a warehouse full of exotic cars and a lavish Florida home, Bond was also allegedly receiving $7 million in illegal kickbacks.

In March, a superceding indictment was handed down against Nathan Chapman, a personable money manager and president of Chapman Co. in Baltimore. Representing the Maryland pension system, he was a client of Bond. Chapman, who cut his teeth as the first and only black at Alex. Brown & Sons, was well connected politically and financially. He was chairman of the University System of Maryland's Board of Regents, and his company became the first publicly traded black-owned investment bank. Chapman boldly declared that he wanted to be to blacks what the Rothschilds and Morgans were to Europeans and Americans.

Instead, jury selection for his trial begins this month. According to Chapman's indictment, as Bond's business began to deteriorate under the weight of Bond's indictment, Chapman "compelled" Bond to buy shares of Chapman's own firm, eChapman, whose stock price was nearing loose-change levels. But the company did not meet the investment criteria for the pension fund at the time. According to Chapman's indictment, Bond did as Chapman wished, fearful of losing yet another client, and the state pension system lost $4.7 million. Chapman is also charged with stealing more than $518,000 from his firm and using some of the money to buy gifts for various women--none of whom was his wife.

The good news is that there are new black winners on Wall Street. Mostly new to us, that is--these companies have been around for years but are in arcane or unflashy businesses that don't get much media play. The power circle of 2004 is a niche gang. J. Donald Rice stands out among them. His ten-year-old firm, Rice Financial Products, is a specialist in the funky world of derivatives--financial instruments whose value depends on the characteristics of underlying assets or instruments. It's an industry so esoteric that even seasoned professionals occasionally admit to cluelessness. Not Rice, who earned an engineering degree from Kettering University and an MBA from Harvard Business School. He easily drifts into conversations about floating interest-rate swaps, structured securities, and other minutiae of financial engineering.

Rice's firm helps local governments and municipalities lower their borrowing costs when they sell bonds to raise money. Since opening its doors, Rice Financial Products has completed well over $20 billion in structured financial transactions, $7 billion in 2003 alone--executing the contracts itself and putting its own capital on the line, thereby reaping greater profits even in depressed markets. The privately held firm now sits on about $90 million in assets, Rice says.

If you think interest-rate swaps are unsexy, what about convertible bonds?

Meet Tracy Maitland, 43. Back in the go-go '90s when stocks garnered all the spotlight, Maitland was preaching his gospel of good defensive strategies, the value of convertible bonds, and protecting for the downturn. The former convertible salesman from Merrill Lynch didn't get much love. But his New York firm, Advent Capital Management, continued to land among the top convertible bond and high-yield asset managers, according to the Investor Force database. Over the past two years undying affection, in the form of $2 billion, has poured in from corporations, foundations, and high-net-worth individuals. Now Maitland, a Bronx native and a Columbia University alumnus, sits at the helm of a $3.6 billion asset-management business, which includes a closed-end mutual fund that trades on the New York Stock Exchange and a successful hedge fund. The hedge fund hasn't had a down year since its inception in 1996. And going after minority set-aside business is not part of Maitland's plan. "There's 98 cents in the majority bucket, and if you're lucky, 2 cents to share in the minority bucket," he says. "You do the math."

Christopher J. Williams, head of Williams Capital Group, uses the new model with a different approach--selling a 20% stake in his company to German banking powerhouse HypoVereinsbank, but taking a cue from the retail world with an intensive focus on customer service. The idea of keeping close and quickly responding to the needs of the customer may sound a bit touchy-feely for the investment-banking world, but Williams makes it work. For the past four years Williams's company has earned the distinction of being the only black-owned firm to land among the top 20 underwriters on Wall Street, according to Thomson Financial. This month Williams was elected to the board of Wal-Mart. Although Williams, who has an MBA from Dartmouth, has no technical specialty, he has been consistently profitable through down markets--setting himself apart from the rest of the investment-banking patch.

Among asset managers, specialties are also king. Daryl Carter, 48, and Quintin Primo, 49, co-chairmen of Capri Capital, built a $7 billion asset-management shop with offices in Chicago, Washington, D.C, San Francisco, and Irvine, Calif., by focusing on commercial real estate. The two were high school buddies but parted after graduation. Each got an MBA--Carter at MIT, Primo at Harvard. Carter joined Continental Bank, specializing in construction lending and workouts, and later Westinghouse Credit, where he headed the Western commercial real estate division in California. Primo joined Citicorp, now Citigroup, and by the mid-1980s was running its real estate investment-banking operations in the Midwest. Each started his own company, and both were crushed by the collapse of the real estate market. Being broke had a bonding effect, and the two decided to team up. They started a service to advise pension funds on how to invest in real estate, focusing on buying distressed loans at a discount from financial institutions. After a slow start they later bulked up with acquisitions, buying a mortgage-banking business and an equity-management arm. The company currently has a $5 billion real estate loan portfolio and collects management fees on properties valued at $2 billion.

All of these guys have done it right--building well-capitalized companies with proven track records and experience in troubled markets. And while we'll be watching their progress, we won't count out the fallen leaders either. For if one thing is clear, it's that the black-power movement on Wall Street still is a force that cannot be ignored. America's demographics are changing. Financial institutions are looking to woo the burgeoning middle and upper-middle class of African Americans. In real estate development and finance, urban centers are the final frontier. As Primo puts it, "Suburbia doesn't need another mall." To understand the financial and social dynamics of these areas, black-owned firms will be crucial. Then "cultural" expertise in dealmaking and finance will become a hot commodity on Wall Street. And that is true black power.

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