A great article in the Financial Times called The slow death of the investment bank analyst explains how regulations, in their efforts to clean up corruption, are squeezing out analysts from investment banks. While not a tragedy, per se, this reality shines a light on just how bad conflicts of interests were in the days of Henry Blodget, and how the resulting actions are killing the research divisions of investment banks entirely.
For those unaware, Henry Blodget is a former Merrill Lynch researcher who, during the dot-com era, talked up stocks for financial gain. He was ultimately charged for civil securities fraud, fined $2 million, and banned permanently from the securities industry. This didn’t maim Blodget as much as you’d think: today, he is the CEO and founder of Business Insider. But the point remains. Thanks to the actions of Blodget and his ilk, regulation has, in its efforts to keep research clean, squeezed the life out of the industry.
The proof is in the numbers. New research indicates that at the world’s top 12 investment banks, the ranks of research analysts is falling steadily, by one tenth since 2012. This is, in part, because banks are being forced to publicly disclose their research budget to investors, which degrades the business case for funding them. Thus, job loss, and alternative means of acquiring research.
The argument, here, is that when investment banks fund their own research, they run the risk of Blodget-ing: falsely representing information to attract investors. So instead, analysts are cropping up the buy-side, with fund managers setting up their own research divisions or paying for customized, independent analysis.
What does this mean for investors? It’s not all bad: they are, after all, less likely to be scammed than they were during the dotcom bubble. But the Financial Times insists that the amount of quality research that is publically and freely available will decrease as a result of regulations, lending advantage to larger investment institutions that can afford to buy it. Retail investors, will be hurt as a result, because, as the article concludes, “The price of more transparency, it would seem, will be a lot less democracy.”
This does seem to be the case, which just goes to show that no matter what, investing is a convoluted pursuit. Essentially, you’re damned if you do regulate, and damned if you don’t.