In 2003, Eliot Spitzer, worried about conflicts of interest, tore apart 10 major Wall Street Firms to separate their research wings from their investment banking divisions. It worked. The firms are now more accurate than they were previously, as downbeat predictions no longer pose a threat to an analyst's career.
"The industry has changed: you're not anathematized if you come out with a negative opinion," said Robert Stovall, whose work on Wall Street the past five decades included stints as a strategist at the securities unit of Newark, New Jersey-based Prudential Financial Inc. and research director at Nuveen Corp. in New York. "It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, 'I never want to see a bearish word on my stationery.'"
A bearish word on firm stationary could lead to fewer investments, and thus fewer commissions, for the other divisions. Now it leads to smarter investments among consumers, rather than enhanced corporate profits. As Kash Mansori says, "It's old news that government intervention can help remedy market failures. But the fact that this principle seems to hold true even on Wall Street - the emotional center of the laissez-faire economic world-view - is fascinating, and carries important implications for markets where market-failures are much more obvious."
