What London Suit May Teach Spitzer - or why scams are loved
By Matthew Lynn
London, July 8 (Bloomberg) -- Eliot Spitzer, the New York Attorney General who's been hounding Wall Street analysts, is a busy man, what with those Merrill Lynch & Co. e-mails and WorldCom Inc. buy notes. If he has time, though, he should cast his eyes across the Atlantic.
In London, two research analysts and a brokerage firm, Investec Holdings Ltd., are caught in a legal dispute that supports Spitzer's argument that analysts have strayed from their job -- giving investment advice based on painstaking analysis of company financial statements.
Louise Barton is suing Investec, claiming that a colleague, Matthew Horsman, a former journalist she helped hire from Britain's Independent newspaper, earned 2.1 million pounds ($3.2 million) over four years, more than she did.
She charges that the bank discriminated against her because she was a woman. It's more likely that they discriminated against her for being an analyst.
Now, there's nothing the City likes quite so much as a good punch-up between two of its own. But it's also instructive in proving Spitzer's case that analysts, like film stars, get paid for their ability to draw at the box office. Being right or wrong hasn't anything to do with it.
High Profile
A verdict in the tribunal is expected in September, and could go either way. In the meantime, the case for the defense is more illuminating than the case for the prosecution.
``Mr. Horsman had a very high profile in what came to be regarded as the new frontier of opportunities, the TV and new media sector,'' said Roy Lemon, representing the bank, according to the Mediaguardian.co.uk website. ``Although Ms. Barton was valued, she was not key in the sense that Mr. Horsman was.'' According to a Financial Times summary of the hearing, Barton said she did not like appearing on TV.
On the surface, Horsman looked to have been a poor hire. He was, Barton complained during the hearings, ``often absent from his desk for extraordinarily long periods, day in, day out.'' In 1999, he was allowed to work just two days a week while he updated a book he had written, and explored some TV projects. Not only was he allowed the time off -- he was given a pay raise as well. When he was in the office, she claimed, his work was erratic -- for example he recommended a new media company called Sportsworld when it was on the brink of going bust.
Smell the Coffee
Barton, by contrast, was evidently a model of analytical science. A string of admiring fund managers showed up at the hearing to say that she did the simple, old-fashioned things well: she researched companies, plowed through the accounts, talked to the management, and decided whether the shares were cheap or expensive.
``It is important that you have someone at a stock broking house who has the interests of the investors at heart,'' said Andrew Brough, a fund manager at Schroders. ``I felt Louise did that for us.''
Time to wake up and smell the coffee, Andrew. She may have been a good analyst, but it didn't matter. Investec's chairman Perry Crosthwaite told the court Horsman's ``profile was unrivalled and far exceeded Louise's.'' A book Horsman wrote on British Sky Broadcasting Plc had been ``invaluable in boosting Investec's profile.''
There is not much dialogue between these people. They are arguing, not about sexism, but about banking. And the next question should be, when Barton hired a journalist to become an analyst, what did she expect?
Priorities Clear
Journalists are good at some things like telling jokes and mixing cocktails, but not usually at analytic rigor. They aren't detail people. They are good at networking, making contacts, charming an audience, creating a noise, jumping on and off bandwagons, and most of all at playing the media. In Horsman, that's just what Investec got, a showman.
That's what Merrill Lynch got with another former journalist, Henry Blodget. Both men, like most journalists, were good at getting hold of a story and running with it.
Investec's priorities are apparent from its pay structure. It values the Horsmans of this world a lot more than the Bartons. Attracting publicity is what it wants its analysts to do. If they happen to be right about the shares they recommend that's nice, but not essential.
The banking business tilted during the bull market toward becoming part of the entertainment business. Making a noise was the best way to make money. So long as you grabbed enough attention, you brought in the clients and the deals, and all the bonuses could be paid for.
There are three reasons why bankers may regret turning themselves into entertainers.
Attracting Spitzer
One, by pretending to be objective analysts when in reality they are nothing but showmen, analysts and the banks they work for can attract the attention of Spitzer and other law enforcement officers.
Two, if you start paying analysts according to how much media attention they generate, they will respond by becoming ever more frantic to get themselves quoted. Their statements will become ever more preposterous, because of course wild predictions tend to get them on TV. That may also get them into trouble.
Three, investment advice that depends on a sober analysis of the facts of a company may be sometimes dull, but it's a more sustainable way to make a living. Banks that depend on show business, though they may have more fun, may find in the long run that it is rarely very lucrative.
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