Typically waffling comments from Fed Chairman Greenspan today. As the headline says, he is “optimistic, but on guard”. No, I have no idea what that means either, but I do know that worrying about pessimism, which he says he is doing, is the sort of magnificently circular construction of which only a central banker or an economist is capable.
Good piece in the Boston Globe this morning rightly pointing out that equity research is becoming more and more of a commodity. Despite all the settlement noise, the industry is past a cusp: fund managers are relying less and less on external equity research, especially of the brokerage-based sort. While that trend has been in place for more than a decade — it was happening when I was an analyst — there is, for obvious reasons, a big push now to complete the shift.
Scandal aside, the most over-the-top entertaining reading in the various brokerage documents is coming from documents related to Morgan Stanley’s Mary Meeker.
As you might have guessed, she comes across as a caricature: an abusive, humorless, wildly-competitive investment banker who sneaks up on companies disguised as an equity analyst. Even Meeker’s internal performance reports concede her equity picks are weak, and that she is a “dischordant” force — read: she shouts at people a lot — in the MS franchise.
Best part (so far) of the Mary reading is her self-styled annual report wherein she reports on herself for 1999. After battering the heck out of the rest of the company (insufficient resources, not enough tech focus, bad people, and on and on) and then extolling her own prowess as an investment banker, it is only mid-way down page three that she starts talking about how her stock picks went. Oh yeah, I’m an analyst!
There is good reading in the global brokerage settlement. In sorting through the email transcripts and assorted documentary flotsam and jetsam (at bottom of page) my favorite snippet (so far) is this from an “objectives for next year” note-to-self by a Goldman Sachs analyst: “1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue.”
Amusement aside, what is so scandalous about most of these documents is how little scandal there is. Yes, there are lots of examples of analysts whinging about being forced to stay postitive (or keep their mouths shut) about companies with whom firm i-bankers had business. We all knew that went on, however.
But where is the smoking gun? Where is an analyst with real insight into a doomed company being forced by to stay quiet? Sure, there is lots of chatter and textual a**-covering from worried analysts, all busily fretting that over-priced stocks would go down, but they had been fretting since the stocks started going up.
Move along folks. No scandal here.
Speaking with my ex-analyst hat on, the settlement announced today is a canard. How shall I count the ways?
Consider these four points:
- Telling brokerage execs that they can’t even implicitly consider investment banking revenues when paying analysts is like telling packaged good executives that they can’t even implicitly consider detergent sales when paying IT employees
- If analysts aren’t allowed to go on road shows with investment banking, who, exactly, among the motley crew is is going to tell the company’s story? The i-bankers? Yeesh
- Forcing firms to contract with “no fewer than three independent research firms” for the next five years is a full-employment act for boutiques (many of which are, of course, excellent and can use the exposure); but it is also heavy-handed interference in how brokerages are run
- Far from creating a “bright line” between analysts and investment banking, as NYSE Chair Dick Grasso suggests, the settlement creates an unnecessary and costly dark chasm
This thing will have unintended consequences galore, not least of which is that does investors few favors.
Apparently brokerage firm Morgan Stanley is mounting a rear-guard action to defend analyst Mary Meeker. Fine, but never allow your investment bankers to be quoted when doing that sort of thing. In this Washington Post article one promotes Mary’s “truly held beliefs” about companies. I imagine that is to be contrasted with her “investment-banking-fee-induced” beliefs.
Henry Blodget, the analyst who never met an equity he didn’t like, is facing $4mm in fines for his part in the Internet boom. As part of the settlement he isn’t, of course, admitting or denying anything, de rigeur for these sorts of things. But he is barred from future employment in the brokerage business.
You would think that latter stipulation wouldn’t be necessary. After all, the trouble with Henry is that he confused being an equity analyst with being a Howe Street promoter: he loved all of his companies, favoring them all with variants of Buy ratings for the duration of his tenure at Oppenheimer and, especially, Merrill Lynch. Who would want someone like that as an employee now that the days of equity miracles and wonder are gone?
Well, you’d be amazed how many people would. In the sundry circles of financial hell outside the blue-chip brokers there are oodles of financial outfits that would happily benefit from the halo that comes from having Henry hanging around. And rest assured, there would still be a halo, bizarre as that might sound.
So what has Henry had to say? No comment, so far. But should he be surprised at the development? No, of course not. Will he be? Now there is a puzzler.
When Blodgett left Merrill Lynch he made the bizarre pronouncement that he would write a book, which is par for the course on the U.S. path to redemption. But he also said, according to the New York Times, that he would then, perhaps, “seek a job at a hedge fund or money management firm”.
Oh Henry! It is delusional, but it is par for the course for this tirelessly optimistic ex-analyst. From equity picks to career hallucinations, Blodget is truly one of the most sunniest sorts anywhere.
Steve Levitt, an economist at the University of Chicago, is this year’s recipient of the John Bates Clark Medal. Awarded annually to the best economist under age 40, it is the field’s most prestigious award, right up there with the Nobel.
Levitt won for his work bridging economics and sociology. For example, a well-known Levitt paper is An Economic Analysis of a Drug-Selling Gang’s Finances. Colleagues call Levitt provocative and thought-provoking, two descriptors that most economists wouldn’t know if either mugged them in broad daylight.
Prior winners of the Clark include NY Times columnist (and sometime Princeton economist) Paul Krugman, as well as trade theorists Joe Sitglitz and Larry Summers, not to mention Milton Friedman.
I like Levitt’s stuff, it’s a kind of guilty pleasure, but there is something a little just-add-econometrics to it. With papers like “The Impact of Legalized Abortion on Crime,” as well as the aforementioned “An Economic Analysis of a Drug-Selling Gang’s Finances”, it sometimes seems as if Levitt picks a controversial topic from Column A, and a unit of analysis from Column B, and marches on, hoping for a mention on certain conservative editorial pages. (“An Economic Impact Analysis of Suicide Bombers”, etc.)
Sigh … well, better that, I suppose, than disappearing into the ether, like most never-mentioned economic studies.
The journey down a long, winding, and often silly path to a settlement in the suit by New York Attorney General Elliot Spitzer against the brokerage firms will end tomorrow in New York. The agreement will include around $1.4-billion in payments from a host of brokers, an avalanche of emails and other supporting documents, and much wagging of fingers on both sides.
Will it mean anything though? Likely not. This was as much a product of the times as of people who consciously ignored the rules. Analysts and investment bankers have more to worry about now — like their jobs — than trying to find ways to separate institutional and retail clients from their capital.
Estimates vary — that should be in the dictionary beside the word “economists” — but the general view is that the SARS debacle centering on Toronto, Canada, will cost Canada 1.5% in annualized GDP growth in the second quarter. While most think that the broader economy will quickly bounce back, it is fair to say that the effect on Toronto itself will be felt for some time.