» Monday, 12 April A.D. 2010
financial regulation
Eliot Spitzer on the need for government financial regulation:
When I was Attorney General of New York, we investigated what I refer to as the "analyst cases." The cases were about investment banking. To understand them, all you need to know about investment banking is that the business has two sides: you have supposed analysts, who recommend stocks for investors to buy, and you have underwriters, who sell IPOs, secondary offerings, and other things that raise capital for the companies. We argued that there is an inherent conflict of interest when you have people in the same business who are both recommending a stock to retail investors--saying, "this is a great stock, buy it"--and doing the underwriting. The more successful the underwriting, the more fees it will generate, and the more favorable the analysis, the more likely the underwriting will succeed.
This is clearly a conflict of interest. In fact, Jack Grubman, the telecom analyst banned from the securities industry in 2002, brilliantly encapsulated this whole era: what used to be viewed as a conflict of interest, he said, is now viewed as "synergy." Think about that. What used to be viewed as a conflict of interest--hence dangerous to people, something to warn them about--is turned into something that creates value. This was the way we masked the problem. In the analyst cases, we didn't discover the conflict of interest: everyone understood it and had accepted it for a long time. But at the attorney general's office, we called it what it was...
The lawyers for Merrill came into my office. Now, when you're a white-collar defense lawyer, you argue in the alternative. First you say the emails were taken out of context. Then you say: "you don't fully understand them." Then you say, "no, they were fabricated." Then you say the person doesn't really speak on behalf of the company. And then you check the limits on your insurance. I was a white-collar defense attorney for a number of years, so I know the drill.
They didn't make any of those arguments. They came to me and said, in essence, "Eliot, you're right. Absolutely right about the conflicts, the tensions, the problems. But we are not as bad as our competitors." That was their defense to the charge that they were defrauding their customers and the marketplace. When I asked to hear more about it, they said, "let me tell you about Goldman and Citi." I've turned defendants over the years, but these guys were the easiest flip I've ever done.
There is a very important point here: the people at Merrill Lynch understood that their business model was problematic. They understood that there was something wrong with recommending stocks that they didn't think were any good. But they had to choose between ethics and profits, and they made the choice that harmed individuals and undercut the integrity of the market. And then they said it wasn't up to them to enforce the rules of transparency. Somebody else should do it.
posted by Nate @ 3:36PM