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The Evolution of the Equity Analyst: Excesses and Recommendations

This article discusses the evolution of the equity analyst role, the excesses in the industry, and recommendations for improvement. It highlights the shift from industry expertise to marketing, the impact of investment banking interests, and unethical behavior. The need for accountability, increased disclosure, and separating compensation from investment banking transactions are emphasized.

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The Evolution of the Equity Analyst: Excesses and Recommendations

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  1. Federal Reserve Bank of Atlanta Wall Street Against the Wall April 17, 2004

  2. OVERVIEW • My Background • The Evolution of the Equity Analyst • The Excesses • Recommendation

  3. MY BACKGROUND • 1980 - 83 Kemper Financial Services • 1983 – 98 Smith Barney, PaineWebber, DLJ • 1998 – 00 Tiger Management • 2000 - Second Curve Capital

  4. SECOND CURVE CAPITAL • Founded in January, 2000 • Hedge fund focused on the financial services industry with $400 million in capital; 60% from companies in the industry • Operate a free financial services website; bankstocks.com

  5. MY BACKGROUND • 1990 Comments led to First Union stopping doing business with PaineWebber • 1997 Comments led to First Union stopping doing business with DLJ • 1998 Fired by DLJ • 2001 Work with NY Attorney General on Wall Street investigation

  6. CONCLUSIONS • Wall Street research became a slave to investment banking interests in the 1990s • The causes were the economics of the business, personal greed and the equities bull market • The problem was SERIOUS!

  7. THE EVOLUTION OF THE EQUITY ANALYST • Pre – 1982; Analyst was an industry expert

  8. THE EVOLUTION OF THE EQUITY ANALYST • Pre – 1982; Analyst was an industry expert • 1980s; Analyst had to become a marketer • Explosion in commissions due to the bull market and increased trading activities • Service clients with phone calls and action oriented recommendations • Less time to develop industry expertise

  9. THE EVOLUTION OF THE EQUITY ANALYST • Pre – 1982; Analyst was an industry expert • 1980s; Analyst had to become a marketer • 1990s; Analyst became driven by investment banking interests • Tool to get underwriting and advisory assignments • Tool to support engagements • Compensation changed to support • Even less time to develop industry expertise

  10. THE EXCESSES • Analysts no longer experts and the success of investment opinions no longer critical to success • Unethical behavior encouraged and rewarded • Exaggerations and outright lies • Published research opinions different from verbal opinions

  11. RECOMMENDATIONS • Individuals must hold each other accountable for ethical behavior • Increased disclosure • No direct compensation for investment banking transactions

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