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Pastimes : The Justa and Lars Honors Bob Brinker Investment Club Thread -- Ignore unavailable to you. Want to Upgrade?

To: Wally Mastroly who wrote (2095)	10/10/2002 10:47:17 AM
From: Wally Mastroly	Respond to of 10065

Retail Sales................ cbs.marketwatch.com;

To: Wally Mastroly who wrote (2095)	10/12/2002 10:27:04 AM
From: Wally Mastroly	Read Replies (2) \| Respond to of 10065

Economics of research blocks reform By Joshua Chaffin and Gary Silverman in New York Published: October 10 2002 19:37 Everyone seems ready for a "global" settlement that would cut through the knotty legal problems stemming from Wall Street's conflicts of interest. The duelling regulators - Harvey Pitt, chairman of the Securities and Exchange Commission and Eliot Spitzer, New York attorney general - have agreed to work together on reforming practice in research and initial public offering allocation. Investment banks have stopped complaining about the motivations of investigators and have begun shuttling executives to Washington to discuss a solution. But despite the emerging consensus, there may not be an easy solution. The settlement talks stem from competing investigations into the ways Wall Street firms recommend stocks to investors and allocate shares of sought-after IPOs. Regulators, spurred by Mr Spitzer, have accused some of Wall Street's largest firms of offering over-optimistic reports on companies and awarding their senior executives with lucrative IPOs as a way to win investment banking business. The most obvious obstacle to a solution is that some firms are desperate to strike a deal while others have yet to be brushed by scandal. Mr Spitzer is gathering evidence against Citigroup and Credit Suisse First Boston and has raised the possibility of criminal charges. The companies' differing business models also pose a problem. Regulators have united under the banner of consumer protection and are seeking ways to protect retail investors, notably from deceptive research. In this sense, the firms have different interests. Citigroup is a consumer finance giant and might sacrifice investment banking to preserve its retail franchise. Goldman Sachs, by contrast, has hardly any retail presence. "You have a situation where it's more or less in everyone's best interest to do something," said Tom Dewey, a lawyer at Dewey, Pegno & Kramarsky. "But all the firms have different agendas. I think it will be very complicated." The question of IPO allocations is easier to solve. Most banks appear willing to bar investment bankers from the allocation process. They are also likely to open the IPO machine to reveal which investors are awarded shares and whether they have banking relationships with the underwriters. But the analyst problem is tricky because of the economics of research. Analysts publish research to guide investors, but firms often pay for research through deal proceeds. When he joined Mr Pitt, Mr Spitzer is understood to have vowed he would accept nothing less than a meaningful separation of investment bankers and research analysts. That begs the question of what constitutes meaningful separation: spinning off research into separate companies, housing research in an internal subsidiary or shoring up the firewalls between analysts and bankers? None is entirely satisfactory. Strengthening the firewalls, as Mr Spitzer did in a settlement with Merrill Lynch in May, appears insufficient, particularly from the standpoint of reassuring the public. Separate subsidiaries pose similar public relations problems. Spinning off research into separate firms creates economic difficulties. Research shops would have trouble paying for themselves and such a solution could lead to many job losses. Further complicating the discussions is the problem of defining research. Analysts publish research for retail investors, they advise institutional investors and they also help their banks decide which companies to take public. A research "separation" could lead to the creation of different types of analysts - some advising retail investors and others working on deals or with institutions. Hank Paulson, chairman and chief executive of Goldman Sachs, recently hinted at such a development, raising the possibility firms could "keep some form of institutional investor-driven resarch, perhaps labeled Sales or Sales Research, within the investment bank". Two sets of research staffs, in turn, raises concerns about crafting a solution satisfactory to big and small banks. In particular, competitors worry that Citigroup, the biggest bank, could afford solutions others could not. "The fear was that you had Citigroup trying to negotiate a deal for the entire industry," one banker said. "That's not necessarily a good thing.