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Saturday, December 21, 2002

Unscrupulous Hucksterism

Commenting on the recent golbal settlement between Wall Street regulators and analysts, the New york Times, in an editorial, muses the adequacy of the agreed punishment to the acknowledged crime. Irrespective of your verdict on this one, it's impossible not to be struck by their conclusion that prosecutor Spitzer's determined efforts have at least served an educational purpose since "investors are now on notice that unscrupulous hucksterism is a part of any frenetic bull market". Unfortunately this, I fear, is to miss the point. During any bear market the "unscrupulous hucksterism" of the bull market is all too apparent, but it's during the bull market itself that it's hard to see. Any bull market bubble will have its attendent "irrational exuberance", that's what defines it as a bubble. The analysts were, after all, only telling the people what they wanted to hear, and if they had offered a different message it probably wouldn't have been heeded. Bottom line: any agreed regulations will work perfectly during the bear, but will be surprisingly ineffective next time we go up. Anyone who doesn't believe this should try asking house buyers in the UK, or here in Spain, what they think of the research reports which say property is currently greatly overvalued and warn that a correction is in the pipeline.

The cleanup crew showed up at the New York Stock Exchange yesterday to tackle the debris left over from Wall Street's dot-com binge — the tainted research, the rigged initial public offerings and all the rest of it. Marshaled by Eliot Spitzer, New York State's attorney general, a raft of regulators announced a global settlement with 10 major Wall Street firms that stand accused of duping investors. The firms will pay close to $1 billion in fines, and have agreed to alter their behavior.

The settlement should prove beneficial to investors. The firms agreed to insulate their research analysts from their investment-banking operations. No longer will analysts be permitted to help land underwriting deals, or to have their compensation tied to these efforts. Greater disclosure will be required of analysts' past performance, and firms will pay hundreds of millions of dollars, beyond their fines, to subsidize independent, third-party research that will be shared with their retail clients. Firms are also barred now from allocating I.P.O. shares to executives of client companies.

Critics who feel such sums are paltry compared with the billions that banks made peddling overvalued stocks can take comfort in the fact that a record of findings to be released next month as part of the settlement could prove valuable to the dozens of class-action lawsuits the banks still face.
Source: New York Times

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