Bailey Morris-Eck - Restoring Trust on Wall Street

Financial News, June 30, 2002 | Go to article overview

Bailey Morris-Eck - Restoring Trust on Wall Street


Byline: Bailey Morris-Eck in Washington

Belatedly, the realisation is growing that Wall Street's fall from grace is going to be prolonged, difficult to correct and very expensive. The fact that normally taciturn investment bankers are speaking out publicly when they prefer anonymity and behind-the-scenes deals is proof enough of the high stakes involved.Henry Paulson, the intensely private chief executive of Goldman Sachs, surprised even his closest colleagues earlier this month when he gave a speech at the National Press Club in Washington describing the recurring revelations of market manipulation, conflicts and self-dealing as the greatest crisis facing American business in his lifetime. He exhorted his Wall Street colleagues and corporate executives to step forward and address the issues publicly, in the interest of restoring public confidence in a battered system. There is no mistaking how badly tales of greed and corruption have shattered the nearly religious public confidence in markets so evident in the 1990s, with last week's shocking revelations of accounting fraud at WorldCom dealing another devastating blow. Some large institutional investors have circulated studies attributing recent declines in markets back to their September 11 crisis levels not to economic factors, but to lack of public trust. A recent poll of new graduates pouring out of US colleges and universities revealed that the majority believes the system is rigged and they want no part of it. This is a generation graduating into a world of no jobs and disillusioned parents, whose 401K plans have lost nearly all the profits accrued during the bubble years. They are the ones cheering on Eliot Spitzer as he enters the second lap of his investment banking investigation and placing bets on the next big firm to be fingered by regulators.Paulson is right to want to engage in a public dialogue. Of course, the conundrum and the reason most of his colleagues have remained silent is that it is difficult to be seen as a crusader when Wall Street itself is under investigation for serious conflicts of interest.Philip Purcell, chairman of Morgan Stanley, believes the investment banking community needs to clean up its own house first before speaking out on needed reforms. John Mack, chief executive of Credit Suisse First Boston, echoed this view in a recent interview in which he stated that 'everyone is a little reluctant to be out front, but a lot of these issues really need to be discussed and probably argued about'.The problem with cleaning up first and talking later is that no one seems to have a magic formula for accomplishing these goals in a consistent, timely manner. Salomon Smith Barney recently revamped its stock research unit along the lines agreed by Merrill Lynch in its settlement with New York attorney general Spitzer. The key ingredients are now familiar: separate evaluation and compensation of analysts from investment banking and create a research review committee to oversee all.These are good and necessary steps. But inevitably questions arise. Salomon, for example, has long maintained that the compensation of its analysts is not directly linked to investment banking fees. …

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