The New York Times published an article yesterday by Andrew Ross Sorkin (“Analyzing Wall Street’s Research”) detailing Frank P. Quattrone’s statements at the AlwaysOn conference in California. At the conference, Quattrone offered his distaste for Eliot Spitzer’s Global Settlement, making the argument that it has hurt small cap business and dulled the competitiveness of these companies in the US financial markets.
In the end, Quattrone would like a repeal of the settlement but would still expect to see disclosure of banking / research conflict.
Quattrone’s argument is quite compelling (and self-serving). After all, it doesn’t really matter if research and investment banking sleep under the same roof – the key to keeping it rewarding to the industry is through disclosure. Even with the Global Settlement, we are not working in a conflict-free world, thus the purpose of the settlement remains terribly unresolved even though its aftermath is still being felt by the small cap. The fact remains that there is still enough space in the market for everyone – independent research providers continue to clearly add value.
Better disclosure at investment banks benefits the industry greatly, and might be the answer we’ve been looking for. In our opinion, if you want to distribute conflicted research, it should run with an asterisk that discloses that conflict. Certainly, this would be more conducive than putting asterisks next to Barry Bonds’ home run record. If you want to play ball, play by set of rules.
That would be fair, right? Investment banks should be held to such expectations. Disclose your conflict, play ball; in a park with rules where disclosure terms are fair, there’s enough room for all the players.
There will always be an audience for independent research. If the investment banks distribute research with proper disclosure, then Quattrone’s right – there’s no reason not to tear down the wall.