« Should government encourage open-source software development? | Home | Will Dawkins succeed where Gould failed? »
May 22, 2002
Spitzer or the market?
Will the market or the Eliot Spitzers (New York's Attorney General who negotiated the Merrill Lynch settlement) of the world address the conflict of interest issue with todays investment banks. Today's Wall Street Journal touches on the subject:"Wall Street should want its analysis to have credibility; sacrificing consumer (that is, its client's) trust to drum up short-term investment banking fees was always a dumb strategy. As rich as traditional Wall Street is, the real business opportunity of recent decades has been grabbed by Fidelity, Vanguard and their ilk. Just last week Charles Schwab announced a new ad campaign pitching its financial advice squarely at customers upset by the Street's conflicts of interest.
In other words, the marketplace will do a lot more to solve Wall Street's credibility problem than anything in Eliot Spitzer's Merrill settlement.
While over the long term I would agree that market forces should provide the "carrot" needed to entice large brokerage firms to construct a meaningful wall between their research and investment banking arms, I also think that a regulatory "stick" is, at times, necessary. If nothing else, Spitzer's actions focused public (i.e. media) attention on the issue (always a good thing), and forced banks to act faster than they otherwise would have. Also, let's not forget what was going on here - many brokerage customers were paying ongoing account fees for advice that they acted on to their detriment, and that advice was tainted by the fact that the banks wanted to keep lucrative investment banking relationships. This might not be outright fraud, but at the very least it is bad faith, and it deserves to be punished.