Centre for Economic Policy Research

Discussion and Roundtables
Session 1: Analysts and underwriters
Hans-Jörg Rudloff 
Barclays Capital
Hans-Jörg Rudloff opened the session by observing that thinking about conflicts
of interest as an issue regarding ‘analysts and underwriting’ is a narrow approach.
The extent of conflict during the last few years remains exceptional both in 
magnitude and frequency, it is much larger and more complex than specific 
conflicts of interest. The role of analysts has been minor relative to that of 
syndicate managers, traders and to outright market manipulation. In a big bear
market there is usually a hunt for culprits and finger-pointing becomes the rule.
Since the handling of the problem in the press has been rather primitive, Rudloff
expressed the hope that the forthcoming discussions would allow us to advance 
further into the understanding of the fundamental causes of conflicts of interest.
John Lipsky 
JP Morgan Chase
John Lipsky congratulated the authors for their work on a widely debated topic.
He noted, however, that substantial changes in the role of analysts, the outcome
of regulatory and legal decisions, are not fully discussed in the Report and yet
have had an important impact on the profession. More generally, he argued that
conflicts of interest must be seen in the broad context that have resulted from the
securitization of markets and the changing role of intermediaries. These factors
will continue to have a substantial structural impact on the role of research in
financial markets. He outlined six main points:
1. There is a potential and inherent conflict of interest between the primary 
and secondary sides of the market. It is, however, in the interest of the 
securities’ firms to control this type of conflict because reputation is critical.
Difficulties arise when there is a perception of a failure there, and the recent
past has provided some severe lessons. 
2. The Glass-Steagall Act followed the burst of a bubble that led to the Great 
Depression. The current situation is different. The end of a so-called ‘new 
era’ and the burst of a bubble have not resulted in a serious decline in 
economic activity. In fact, it may well be the case that productivity has 
permanently increased, at least in the United States. Investors are not 
convinced that the new economy was just an illusion. Misvaluation was 
mostly concentrated in the Nasdaq market, it has primarily affected a 
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limited number of entrepreneurs, the ‘Nasdaq billionaires’, who owned the 
bulk of the stocks of their own companies.
3. In practice, most of those guilty of conflicts of interest are less than evil; 
mostly they did not really know what they were talking about. The serious
and most visible exceptions concern analysts who failed to disclose 
personal interests in the firms they were reporting on. Such interests should 
be disclosed and firms should control potential conflicts within their own 
staff and, in fact, most firms require their employees to do so.
4. In the old days, equity analysts were particularly powerful. They were 
implicit purveyors of what otherwise might be called insider information. 
They enjoyed privileged access to corporate management, which would 
provide them with hints and specific information that were not available to 
others. Recent press commentaries still emphasize the role of the analyst as 
an industry visionary, but this view does not survive even the most casual 
examination. To a certain degree, analysts are being held up in public 
commentaries to a standard to which no institutional investor would ever
have subscribed. The Spitzer criteria for judging industry analysts is 
unconvincing. Do we really believe that the value of the analysts lies in the
accuracy of their buy and sell recommendations? Analysts cannot judge 
according to the accuracy of their forecasts which depend on assumptions 
about the broader economic situation. They are usually not directly 
responsible for such assumptions. Any investigation of the analysts’ 
performance must be more subtle than is currently the case.
5. Most discussions in the Report focus on equity, but many underwriting 
firms have both corporate credit analysts – fixed-income research groups 
dealing with the credit quality of companies – and equity analysts. Both an 
equity analyst and a fixed-income analyst may be assessing the same firm 
and there is no obligation for their judgements to be identical.
6. Finally, the Report does not discuss the FD (‘Fair Distribution’) regulation in 
the United States. This regulation prevents corporate management from 
providing differential access to information. If, by law or regulation, 
management must provide the same information to everybody, the ability
for research to differentiate itself in a way that was traditionally considered
to be the heart of the business disappears. The Spitzer solution will have 
dramatic effects for the differential value of independent research on 
specific firms. There is already a substantial disinvestment in company 
research. Equity and company analysts are becoming providers of basic 
research. Moreover, the securitization process has already changed the 
nature of research as intermediaries become investors and have no more 
responsibility for providing credit analysis than do ‘end investors’. The 
responsibility for research is switching to ‘end investors’. Index funds have 
no interest in research. Hedge funds and private equity funds are only 
interested in proprietary research. To do better than the market, 
institutional investors need differentiated information. In a nutshell, the 
Spitzer solution already belongs to the past. It treats a problem that is not 
well defined and complicates an existing tendency of disinvestment on the