Centre for Economic Policy Research

part of underwriting houses to provide differentiated research. By legally 
separating research and investment banking, the Spitzer solution further 
accelerates the chances that there will be a substantial decline in the 
commitment of underwriters to provide independent research.
86 Conflicts of Interest in the Financial Services Industry

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Benoît Coeuré 
Agence France Trésor, French Ministry of Finance
Benoît Coeuré noted that the Report deals mainly with the stock market and not
so much with other assets such as government bonds. Since information is the
essence of financial markets, conflicts of interest are unavoidable. The important
issue is not whether such conflicts exist, but the amount of price distortion that
is generated and whether investors are equipped to cope with such distortions. He
thought that the Report is very helpful in sorting out several sources of price 
distortions, and mentioned some additional ones such as market fragmentation,
badly functioning derivative markets and insufficient liquidity. Whether the 
distortions created by conflicts of interest are of first order of magnitude depends
on the kind of security under consideration and may even differ across countries.
The Report focuses on the United States, emphasizing conflicts of interest and
financial analysis whereas in Europe what matters most is market fragmentation
and insufficient integration.
A useful criterion to investigate the differences across markets is the type of
information that is embedded in the securities. In some markets information can
be very idiosyncratic while in others – such as in the foreign exchange, money
and to some extent government bond markets – aggregate information may 
matter much more. For instance, it is very difficult for an analyst to gain access to
private information on government bonds. On the other hand, where informa-
tion is largely private, conflicts of interest may develop and the quality of the 
analyst is crucial. This is an important issue per se. The market must be able to 
discriminate among analysts, which underscores their compensation structure
and calls for learning about their qualities. This has really nothing to do with 
conflicts of interest. The time horizon of financial markets must be long enough
for this process to take place.
Coeuré next focused on important differences across segments of a particular
market. For corporate bonds, the elasticity of the price with respect to 
recommendations is very high, the credit spread can move by large amounts in
reaction to an upgrading or a downgrading and, therefore, analysis remains very
important. For government bonds the situation is quite opposite and the key issue
is rather why the market reacts with such a low elasticity to information. At any
rate, the role of analysts remains very limited.
Things change over time. The Report focuses on a period characterized by a
bubble and changing productivity trends, when information is aggregate in
nature. What happened in the late 1990s was the result of both a collective 
mistake and disproportionate attention on sectors with a very high content of 
private information such as the IT sector or Internet companies. In the face of
such abnormal events, it is not clear that changes in the structure of the market
will make it more robust to sharp market reversals.
Hans-Jörg Rudloff 
Barclays Capital
As it takes its role very seriously, namely channelling savings into their most 
productive uses, the underwriting industry dogmatically believes that the market
is the best allocator of scarce resources. Many commentators would argue, 
however, that the latest period was characterized by a massive misallocation of
capital. Visibly, the industry and the intermediaries have failed. Rudloff pointed
out that no more than 20 firms in the world carry out the underwriting 
business. These firms are organized in such a way that there is always a 
sponsorship and credit committee, which decide whether to underwrite and 
Discussion and Roundtables 87

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sponsor a public offering. Management is part of this committee and the analysts
do not represent a problem for new issuances. In fact, new issuances require the
publication of a prospectus that contains all the necessary information. Moreover,
breaching legal obligations and responsibilities can be highly costly. In the end, it
is the management who decides and takes the responsibility for the accuracy of
the information provided to the investors and the markets. Then, intermediaries
deal with the selling. It is difficult to see the impact of analysts on this situation
and to point out conflicts of interest. The situation is quite different in the United
States where investment banks sell directly to their customers.
Although reputation is key in financial markets, that period of euphoria over
the last three years was characterized by corruption and market manipulation. We
are now back to normal times and it has become much harder to raise money.
There must be sanctions and these must be hard. The focus should really be on
the management, not on the analysts. If the former is not able to control the 
latter, the managers should be sanctioned. Indeed, analysts’ compensation is 
really in the hands of managers. The basics are good management and control,
which enhance reputation. There is too much focus on players who are only
instruments in a firm.