Global settlement. It conjures up grand images of finality on a worldwide scale. But the US regulators’ $1.4 bn settlement with Wall Street investment banks is about as global as the World Series and as settled as the weather at a UK seaside resort – not ‘very’ on either count.
Given that it is widely accepted in the financial community that a large chunk of analyst research is misleading or lacking in independence in some shape or form, the long-awaited settlement is vague and does little to satisfy the core problem of analysts sitting in the same building as investment bankers.
On the plus side, the ten banks in question are among the world leaders in their field and the slap on the wrist will, undoubtedly, have some impact upon the way they – and the industry – run their operations. The settlement does, after all, sternly call for the banks to separate analysts from the investment banking pressures that may ‘taint’ the independence of their research. Some cynics have suggested they thought that separation already existed.
Whether the settlement will have an immediate impact outside the US or, indeed, outside of the named banks and analysts, remains to be seen. The universal banking model, whereby analysts sit in the same institution alongside their investment banking colleagues, has been allowed to continue, albeit with some restrictions on the way in which analysts can earn their money from helping to draw in investment banking work.
From a ‘settlement’ point of view there are some positives to take account of, too. The agreement has taken months to hammer out and involves key bodies like the SEC, New York State, the North American Securities Administrators Association, the National Association of Securities Dealers, the New York Stock Exchange and others with an interest in how the Wall Street web is woven.
However, to say that this is the end of the matter would be a failure to understand the nature of the charges. These investment banks may not have admitted guilt but they have accepted enforcement actions for effectively misleading investors. $1.4 bn may sound hefty but it pales in comparison to the billions of dollars potentially lost by the investing public.
The ‘settlement’ simply opens up the floodgates for securities lawyers to launch wave after wave of class action lawsuits. While none of the investment banks involved has admitted liability – for fear of making themselves even easier prey for the lawyers – the name and shame tactics of the regulators do leave them more open to attack than their peers. Some reports suggest that Eliot Spitzer, New York State’s Attorney General and a leading architect of the settlement, has had numerous approaches from non-securities lawyers eager to learn the trade of class action lawsuits and feast upon the what they perceive as the injured investment banks left exposed at the back of the herd.
Of course, to suggest that all the other investment banks outside the global settlement are equally guilty would be a legal nightmare. But the idea that the regulators expertly narrowed the field down to the ten named banks and that no others undertook similar actions, particularly during the 1990s bull market, constitutes a failure to understand how the financial community works. As one investment bank analyst suggested during the regulatory investigation, ‘Yes, the little guy, who is not smart about the nuances, may get misled. Such is the nature of my business.’
The ‘global settlement’ was a clear chance, backed up by e-mail evidence, for US regulators to lead the way for the rest of the world and to call for the separation of investment banking and analyst research. The failure to do so may still be rectified by US politicians but it is likely to make the process a whole lot more painful and may mean that nothing concrete happens before we enter the next bull market. When investment greed kicks in once more you can be certain that cracks will begin to appear in those hastily rebuilt Chinese Walls. The next generation of Henry Blodgets, Jack Grubmans, Frank Quattrones and their investment banking colleagues will be eagerly waiting to pounce.
