Guide to Analysing Companies

THE CHANGING FACE OF MARKETS
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its own interests with those of its clients – but the blatant way
in which the abuses had occurred.
The revelations cast doubt not just on the legitimacy of
Chinese walls, the ability of investment banks to separate one
function from another and therefore the interests of different
clients, but also on the role of the securities analyst, the individ-
ual whose job it is to analyse the businesses of individual com-
panies and to put a value on their shares. For years investors
had taken what analysts write with a pinch of salt because,
after all, they are often part of investment-banking teams that
advise companies on (lucrative) acquisitions, mergers and the
like. But the degree to which investment research had become
the handmaiden of investment banking shocked many of them.
Investors were also surprised by the extent to which the direc-
tors of big companies had been handed perks (often by giving
them priority in share issues that they could later sell at a hefty
profit) in return for investment-banking mandates and other ad-
visory work.
Litigation between the banks, investors and bodies such as
the National Association of Securities Dealers, the regulator of
nasdaq, is likely to rumble on for years. However, the com-
bined fine of nearly $1 billion that Spitzer levied on a group of
Wall Street’s largest investment banks, together with $500m or
so to sponsor independent research and to educate investors,
should encourage higher standards of integrity and profession-
alism among investment bankers.
Some investment banks have taken the precaution of casting
off their research staff into separate companies with their own
management. But research on its own rarely pays, at least not
well enough to cover the multimillion-dollar bonuses that star
analysts came to expect during the boom years. Many observers
believe that what is needed is a change of culture, not just a
change in the rules. This will be hard to bring about. There are
dangers, too, in trying to reverse the deregulation that has oc-
curred, particularly the separation again of trading in equities,
bonds and derivatives from the advisory work that, during good
years, accounts for the lion’s share of investment banks’ profits.
That could change the nature of financial markets and, poss-
ibly, make them less liquid. Trading volumes could decline and,
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