Newspaper article The Evening Standard (London, England)

The Analyst Conflict Lives on despite Merrill's Deal

Newspaper article The Evening Standard (London, England)

The Analyst Conflict Lives on despite Merrill's Deal

Article excerpt


I HOPE I am not alone in thinking that the deal Merrill Lynch struck yesterday with the local district attorney in New York does absolutely nothing to resolve the fundamental conflict of the role of analysts in the modern investment bank. It may prevent the worst attempts to mislead investors, at least until the next bull market. It does not address the fundamental problem.

The head of investment research at Merrill Lynch in London painstakingly explained to me 15 years ago how it was impossible to justify expensive research departments in investment banks, if the analysts' only role was to produce investment recommendations for clients.

At that time, commissions on share dealing on Wall Street had been forced down to just 0.2 cents a share, which meant the broker could expect to earn just two cents for each $100 trade. It was an economic-nonsense if that were all investment banks had to live on. It wasn't, of course. Indeed, offering broking services was effectively their loss leader.

Analysts were not wasting their time producing recommendations for investors because it was important they had a market nose, and it enhanced their credibility with the companies they were writing about, and made its directors willing to spend time with them.

But the real value they brought to the investment bank was the access they had to the corporate clients, the relationship they built up with them and their ability to come up with ideas on how these businesses and the sector in which they operated might be restructured. The analysts were there to open the door for the dealmaking investment bankers, and it was on those deals that the bank made its money.

This has not changed in the intervening years. Indeed, what has happened is that the American model has routed the British.

The City's traditional approach to investment banking was that the adviser knew how to structure deals and was familiar with all the arcane details of the yellow book, and could apply these skills to whatever deal came along. …

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