KUHN CAPITAL Saturday, February 24, 2018
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Wall Street Journal Shocked by Analyst’s Pay

The Wall Street Journal ran an article yesterday in which it trumpeted its investigation into how investment banks pay their analysts. The Journal’s investigators found contracts by Donaldson, Lufkin & Jenrette and Credit Suisse First Boston in which they offered analysts compensation based in part on their role in delivering investment banking fees.

These developments will no doubt fuel New York Attorney General Elliott Spitzer’s ambitions to skewer investment banks in furtherance of his political ambitions, much as Guiliani propelled his mayoral career by prosecuting junk bond king Milken, Ivan Bosky and – infamously – Princeton Securities. (The results of Guliani’s widely-publicized efforts were de minimus: Princeton was found blameless, though not until after it had been driven out of business, Milken was slapped on the wrist with a grab-bag of minor technical offenses, and Bosky got off by turning Milken in.)

So The Journal was shocked to find this intimate connection between analyst recommendations and analyst compensation. For our part, we’re shocked that the Journal is shocked. With the exception of uninitiated private investors (who don’t usually have access to analysts’ reports anyway), most institutional investors already discount analysts’ stock recommendations knowing these reports are financed by bankers who have been hired to promote the companies in question.

The real problem lies in the economics of the analyst business. Traditionally, their high salaries and bonuses are supported two ways: by the relationship between the investment bank and its clients, and through “soft money” trades in which analyst access is handed out to big investors, also in exchange for their promises to use various investment banking services or products.

If this model is crippled or outlawed, the question becomes, who’s going to pay those fancy salaries? Not the Internet, which regards information as “wanting to be free”. The dotcom bubble’s wreckage is littered with failed attempts to extract revenue from advertisers and subscribers.

Indeed, what may evolve from these latest attacks on the investment bank-analyst relationship is the sort of circumstance democracy abhors – only those rich enough to pay for careful investment investigations benefit from them. That’s one implication; others are the emergence of independent analyst boutiques, and a lot less employed analysts.

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