|
 |
| 2002 News and Press Releases |
|
|
HEADLINE ARCHIVED:
Beyond The Zeroes
By: Steven Syre
The Boston Globe. December 22, 2002
_________________________________________________________________________
EXCERPT: Regulators and Wall Street have finally settled, putting an end to an investigation that revealed people running the engine of capitalism as a petty, conflicted, and corrupted lot. But what did the regulators accomplish beyond a punitive damage award with lots of zeroes? The assignment was much greater than a simple charge to punish the guilty. The regulatory challenge to investigating disaster is to understand how similar events can be prevented from recurring. The results in this case are mixed. Start with the money. The $1.4 billion total is a lot of money in most neighborhoods, but on Wall Street it's not as much as it might seem. That pile of cash includes $900 million in penalties, $450 million to support independent research, and another $85 million for "investor education." The biggest slug of the total is coming from Citigroup, which must cough up $400 million. Merrill Lynch and Credit Suisse First Boston are each on the hook for $200 million. Consider my way of measuring these settlements. Citi will pay an amount that equals slightly more than five weeks' profits from its capital markets and banking group. Those are earnings measured by profitability in the current, down-in-the-dumps stock market, not the go-go days. Merrill's tab works out to about four weeks' worth of earnings. Here's another way: Domestic pretax profits for broker-dealers reached a peak of $21 billion in 2000, about 15 times the settlement announced last week. One last method: The stock market value of the companies involved in the agreement appreciated by a total of $12 billion after the news was out on Friday. The hundreds of millions of dollars of penalties and commitments are certainly big numbers worth extracting, but their scale doesn't amount to a lot of deterrence. Regulators made a great deal out of an agreement to ban the practice of "spinning," the distribution of hot initial public offering shares to executives of other companies that use the same investment banking firms. What a yawn. Spinning was certainly an abuse, but the idea that all kinds of preferred customers get better access to products at securities firms is nothing new. Company executives had much more powerful incentives to play along with the bubble stock market, none more than the huge option deals they received from their own boards. Spinning was a bad idea, but far down the list of sins that caused real damage. The separation of investment banking and research functions at securities firms is a more interesting element of the settlement. Strong-arming brokerages to buy independent research is not. In either case, the problem with quality research is that investors have to be willing to pay for it.
|
|
|
