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To: LPS5 who wrote (10141)	5/5/2002 4:03:43 PM
From: Dan Duchardt	Respond to of 12617

LP, That's one of the major issues I have with regulators undertaking flippant, hastily patched-together market engineering initiatives: they often do so while real problems - criminal chop shop operations, pump-and-dump internet promoters and the like - go unnoticed or, worse yet, noticed but unaddressed. On this we most certainly agree. The inevitable consequence of failure to deal with questionable practices is that they become the norm, unfortunately leading to those "hastily patched-together" initiatives in response to what has become a crisis of some sort. This is manifest in the response from the article posted in Message 17425093 During the negotiations, Rosemary T. Berkery, Merrill's executive vice president and general counsel, has steadfastly argued against such a prohibition [against analysts being involved in sales pitches with investment bankers], saying it puts Merrill at a competitive disadvantage with other Wall Street firms... The argument is well founded. It is extremely difficult, if not impossible to compete if you are not employing the same proven strategies as your competitors. If those strategies are creative and legitimate (a weasel word I have no intention of trying to quantify) then they deserve to be rewarded and emulated. But if they are only creative, and not legitimate, they should not be tolerated. Unfortunately, when any competitor raises an issue about what someone else is doing instead of just doing it themselves they are immediately branded as a whiner (as many I'm sure are). It's a lot easier to just go with the flow. I would ask this though: in your personal assessment, did you find that your negative, personal experiences - certainly painful, I have no doubt - have ultimately made you far savvier than your peers and associates on such matters, perhaps even giving you the hard-won experience and wisdom to provide them advice in that regard? Sure. I am older, wiser, and a great deal more cynical than I have ever been before. Based on my sample, I now know that the majority of people in the financial industry are either liars who will distort the truth to the maximum extent they think they can get away with, or promoting themselves as having some sort of knowledge or expertise they do not posses, or simply pawns working for those other people. I can't take any of that to the bank, though it may reduce the frequency of my visits there to pay for my ignorance. I also now have good reason to believe there are selected investors who are the beneficiaries of questionable practices, not because they are smarter, or more creative, but simply because they are aligned with those who have the power to influence "the market" to their advantage. You don't have to have exceptional predictive abilities when you know that certain actions you take will, with high probability, determine outcomes that work to your advantage. And that really is the heart of the issue here when all is said and done. The companies know the analyst's reports influence the market value of their stock. The investment bankers know it. The analysts know it. The public knows it. The public can know everything there is to know about the fundamentals of a company without having one bit of control over what an influential analyst is going to report. They can only react to it. A private investor can be spot on in their analysis, and still get taken to the cleaners if the powerful analysts issues a contrary report. I'm not talking about some grand conspiracy here. I'm simply talking about collective behavior that when left unchecked permits the powerful to exploit those who have no power. I remember reading many individual investors talking about how overvalued Yahoo was the first time it hit 50. They were probably right at the time, but not in the face of the hype that was beginning to emerge. If they stuck to their beliefs holding short positions throughout the bubble and its collapse, adding to their short positions as the stock pushed up another 800%, they made a handsome profit. What is far more likely is that they got run over by the train of collective hype. Were they wrong or stupid or not as good at this as other market participants? We hear a lot of talk about level playing fields, and on the one hand Ms Berkery is appealing for a level playing field among her firm and others like it. She is joined by the others in a related appeal. Executives at other Wall Street firms also say they will also fight to allow bankers and analysts to pitch clients because they believe it allows the analysts to get better acquainted with the company. But this is not an argument for a level playing field at all. It is an argument for the status quo that permits the powerful to keep the field tilted in their favor. In my wildest dreams I can come up with some new policies that would probably be far more effective than any artificial separation of analysis and bankers within a firm. How about giving analysts the opportunity to look at everything the investment bankers see to assist in the evaluation of a companies prospects in the marketplace, subject to a restriction that no participating underwriter be permitted to disclose its findings or opinions to the public other than by prospectus, and an obligation to hold an equity interest at issue price for itself and preferred clients who are allocated a piece of the action for some reasonable amount of time. Then only the analysts with firms who have no underwriting interest in a company will be permitted to issue public opinion about the viability of the company, and the underwriters and their preferred clients would be at risk pending the outcome of their own forecasts. We could even give them an early way out by making prior public disclosure that they have changed their minds and intend to divest their interests. That would pretty much remove the incentive to hype garbage, and create a huge incentive for them to make an honest appraisal for their own use in establishing an issue price based on realistic expected valuation. If they are right, they are rewarded. If they are wrong they feel some pain, as they should. Instead of their profits depending on how many people they can fool into paying more for a company than it is worth, their income, as well as the capital raised for a company via a public offering, would then be coupled to the quality of products, services, management and business plans these people are supposed to know something about. I don't care how filthy rich they may get by doing that better than anyone else. To my mind, nothing could be a better defense of the financial firm's actions in this matter than to demonstrate that they put their (and preferred client's) money where their mouth was and lost because their opinions were simply "wrong". Dan