Let the Sun Shine on Wall Street - Industry Trend or Event - Brief Article

Jonathan Weber "Let the Sun Shine on Wall Street - Industry Trend or Event - Brief Article".
Industry Standard, The. FindArticles.com. 20 Jun, 2012.

I've always had mixed feelings about financial scams. Certainly it's deplorable when con men bilk the unwary out of their hard-earned money. But most of the frauds I've written about over the years have featured a mind-boggling combination of greed and naivete on the part of the victims. If someone you don't know calls you on the phone with a weird investment scheme that promises huge returns, don't send a check. Hello?



I can't help but feel the same way when considering the wave of lawsuits against investment banks filed by investors who lost money on Internet stocks. [See story, page 32.] Anyone who was paying any attention at all could see these were very risky investments. Everyone was happy to cash in when Net stocks were going up, and it seems craven to hold the stock analysts responsible when they go down.

That said, the Net stock bubble and its aftermath have exposed some serious problems in the way investment banks go about their business. First off, there is the analyst question. Stock analysts have the ability to move stocks up and down with their recommendations, and it's critical that investors understand what is influencing those recommendations.

While the banks allegedly have so-called Chinese Walls separating their research groups from the bankers, everyone understands this to be a fiction. Analysts in fact often have a direct financial interest in the stock market success of the companies they cover, through the fees that are earned by their banking counterparts for helping to finance those companies. In many cases, the analysts also own stock in the companies themselves.

These facts need to be trumpeted loudly, and the very notion that analysts employed by investment banks are neutral assayers of value should be dismissed. The best answer here is not legal restrictions on what analysts can and cannot do, but rather requirements that everything they do -- including collecting investment banking fees and trading for their own accounts -- be out in the open. If individual institutions want to get ahead of this by eliminating analyst participation in banking fees or prohibiting analysts from holding stocks in companies they cover (as Merrill Lynch and Credit Suisse First Boston have already done), so much the better.

Journalists hold part of the responsibility here: The well-worn habit of finding an analyst to support a particular point of view about a company needs to be drastically curtailed. When analysts are quoted, their conflicts should be noted, too. CNBC and other broadcast outlets should require guests to disclose their conflicts.

The issues surrounding the IPO share-allocation process are trickier, but the same principles of transparency should apply. Investment banks should be required to disclose their criteria for allocating IPO shares. If the requirement turns out to be that the client must pay an inflated trading commission, well, OK. If that was common practice, the IPO process as it currently exists would not function -- and that's precisely the point. Any practice that cannot survive public scrutiny is by definition based on back-room manipulation by insiders and is therefore inappropriate for the public markets.

It wasn't all that long ago -- perhaps 75 years in this country -- that financial markets were viewed by almost everyone as a rigged game controlled by powerful financiers for the benefit of a few. Creating the structures and the trust that enabled nonprofessionals to play the game was one of the great advances of modern capitalism. In an open financial system, individuals need to take responsibility for making informed investment decisions. But regulators and industry leaders need to enable such decision-making and assure that the public's hard-won confidence is not allowed to slip away.

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Jonathan Weber "Let the Sun Shine on Wall Street - Industry Trend or Event - Brief Article".
Industry Standard, The. FindArticles.com. 20 Jun, 2012.

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