Thursday, August 7, 2008

Seems Like Old Times

It’s déjà vu all over again!

The Financial Times published an article on their website yesterday detailing the apparent plan by Citigroup to shift its equity research operations into its institutional securities division. The Global Research Settlement encouraged Citi to keep these two entities separate, but this news indicates that Citi is looking to cut costs and perhaps fold research back into banking.

Mom always said…

… If you don’t have anything nice to say, don’t say it at all. Ironically, that’s the problem.

The reality is that the research coming out of investment banks has never been conflict-free. No legislation imaginable could force Citi, or anyone, to write truly unfavorable recommendations for a given company. When such a high percentage of investment bank (IB) research is positive, it’s difficult to say that the insight is uncontaminated. Investment banks don’t want to make enemies.

Therein lies the problem. There is a significant difference between the research churned out by Wall Street and that which is delivered through alternative providers. No legislation could possibly curb the inherently lopsided predisposition of IB research. This new plan by Citigroup is just one indication that any concession made by the investment banks is probably on the way out the door. Seems like old times, indeed!

Making Sense

Citigroup wants to turn a cost center into a profit center; the only way to do it is to fold equity research back into institutional securities. It makes sense, but at what expense?

This is likely just the tip of the iceberg. There’s no real incentive for investment banks to continue dividing these segments of their business. The last decade was just a dream – we saw attempts to make research more unbiased, but the world where IB research is infallible never really existed.

But what will this mean for the future? Once the research settlement ends in 2009, there’s no telling what will happen. If the IBs go back to doing business the way they’ve always been, then independent research providers will be even more attractive. Conflict-free, unbiased research will always have a place in our market considering that the IBs will likely revert back to their old ways.