NEW YORK — They became icons of the Internet boom, analysts who went from the backrooms of Wall Street to television screens across the nation, doling out investment advice and becoming rich themselves.
Merrill Lynch's Henry Blodget, Salomon Smith Barney's Jack Grubman and some other top analysts made $12 million or more a year, in part by setting up deals and touting stocks of the companies that paid their firms huge fees for investment-banking services.
Now those stars may be as ephemeral as the Internet bubble.
In a deal Tuesday with New York state Attorney General Eliot Spitzer over conflict-of-interest allegations, Merrill agreed not to link the compensation of analysts to work they might do for investment-banking deals.
Because the agreement could serve as a model for other major investment banks, hundreds of Wall Street's top analysts could face significantly smaller paychecks, some industry specialists said.
"They deserve to be well paid, just not like Oprah," said Alexander Paris Jr., an analyst at Barrington Research.
John Coffee, a Columbia University law professor, said the agreement is a significant step toward ridding Wall Street of conflicts that became endemic in the 1990s, when many banks used name-brand analysts to draw in clients with implicit promises their stocks would receive favorable ratings.
Investment banks received huge fees during the Internet boom and often shared the largess with top analysts who brought in business or cemented deals. In 1998, Merrill received $1.7 billion in fees for underwriting services and almost $1.4 billion in 1999, according to Thomson Financial/First Call.
Coffee said that since the investment bankers can provide subsidies for research under the Merrill deal, the analysts won't be entirely independent. But a stricter agreement might have gutted the many research divisions that are no longer self-sustaining.
Some banks have taken measures similar to those announced in the Merrill settlement, including Prudential Securities and Salomon Smith Barney.
Prudential analyst Eric Coldwell said that until the firm changed its policies, he was often involved in investment-banking activities. There's no question investment banks influence what analysts got paid, he said.
Coldwell said he prefers the clarity of his role: "This is a night-and-day change for me. ... You say what you mean and you mean what you say."
>>Last Update: 12:05 AM ET May 23, 2002
SAN FRANCISCO (CBS.MW) - The new price target for escaping financial justice in this country has been set at $100 million.
Accordingly, we analysts here at Turnem, Churnem & Burnham Inc. are reinitiating coverage of Merrill Lynch (MER: news, chart, profile) with a "strong buy" rating, while downgrading our recommendation of New York Attorney General Eliot Spitzer from "accumulate" to "long-term underperformer."
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Merrill's agreement to settle its legal battle over analyst research with Spitzer by paying a $100 million fine and issuing a smarmy apology that boils down to "we're sorry we got caught" sets the stage for a fierce round of new settlements on Wall Street.
The fine amounts to less than a month's profit for the brokerage giant, or as The New York Times pointed out, less than a third of what it paid for pencils, paperclips and other office supplies last year. It comes only two months after Credit Suisse First Boston agreed to pay $100 million to escape charges that it extorted money from clients during the IPO boom in the late 1990s.
These fines are much less than the fines that the previous generation of Wall Street scoundrels were forced to pay for their misdeeds. Drexel Burnham Lambert paid $650 million in 1988 to distance itself from Michael Milken and his boys while Salomon Brothers paid $290 million in 1992 for rigging the U.S. Treasury bond market.
Neither of those fines stemmed from abuses that directly involved hoodwinking the small investor, as Merrill and CSFB supposedly did. But in the world of financial regulation these days apparently, it's headlines -- not investors -- that count.
We expect similar upgrades of other securities companies in the coming months as firms such as Goldman Sachs (GS: news, chart, profile), Morgan Stanley (MWD: news, chart, profile), and Lehman Bros. (LEH: news, chart, profile) race to send in their $100 million checks. "Tell you what Eliot, we'll make it $150 million if you withhold the incriminating e-mails."
Talk of civil lawsuits appears misguided, as Merrill never really admitted it did anything wrong. Rumors of harsher penalties down the line from the Securities and Exchange Commission don't hold water, given SEC rollover tendencies.
Also, look for heightened risk of merger activity as large, plodding global banks like HSBC Holdings and Deutsche Bank try to make hay of Merrill's shattered reputation to finally convince Chairman David Komansky to give up the independent ghost and do a deal.
As for the Merrill analysts themselves, it's hard to see what will change for them. Under the settlement guidelines, they won't get their seven-figure bonuses for helping attract investment banking clients unless they can now prove their work also benefited investors. That shouldn't be tough for a group of sales people.
Of course, Merrill must also appoint an adviser to assure that it is following all of Spitzer's new rules of compliance. Wonder what that means for the company's current compliance officer? Guess he won't be so busy anymore.
And as for Spitzer, well, he had his chance to make Wall Street history by leading the charge for the biggest structural changes since The Great Depression. Instead, he caved to the temptation of a quick deal, which may or may not benefit his political career, but will certainly speed the forces of "back to business" in financial services.
By the time the next big probe uncovers manipulation in the brokerage business, the Nasdaq will be back to 4,000 and few people will care. A whole new age of scams will already be set in motion.
So, given current spending comps, reduced visibility and relative valuation analysis as applicable to continued erosion of pricing margins, our long-term recommendation for average investors remains unchanged.
Buy a mutual fund.
David Callaway is executive editor of CBS.MarketWatch.com. |
