Eliot Spitzer and research

Another of the causes associated with Spitzer during his A-G days was the clamp-down on sell-side research.

Investment banks and brokerage firms have research departments that sell reports into the market. Sometimes the price of these reports comes bundled into brokerage commissions. In other words, a broker says to a stock trader/buyer, "pay my commissions and you get access to my institution's reports/analyses for free."

Of course, it isn't for free. TANSTAAFL. But it is included. This bundling is also known as "softing," or the use of "soft dollars."

At any rate, there is an obvious danger of conflict of interest present in institutional mingling of research and the business of selling stock. Is the researcher writing a true analysis, or an advertisement that's supposed to look like an analysis?

During the late 1990s dotcom and telecomm boom, a Solomon Smith Barney analyst, Jack Grubman, became notorious for his cheerleaderish ways. He actually attended meetings of the board of directors of WorldCom, a Smith Barney client, obviously a big no-no according to traditional ideas of arms-length analysis.

Of course his reports on the value of WorldCom's stock were enthusiastic. He told investors they should "load up the truck" with the stuff.

Investors who believed him kept loading up until that truck drove off a cliff.

Grubman was the most notorious such "analyst," but there were clearly others, and in reaction to such stories, Spitzer pressed for and got a "global settlement" from industry that chganged the way research is done.

There's something to be said for Spitzer's work in this line.

One ought to note, though, that the real problem is the boom-bust cycle itself, and a national monetary policy that encourages the cycle. At the top of a boom, there is always a lot of "irrational enthusiasm," and Grubmans will appear in some form or other. To attack the particular form in which the latest Grubman appeared will, for the most part, simply cause a change in the formalities, until the United States as a country can work toward an evenly-rotating economy, one without the bipolar affect.

These last three days have been enough on the subject of Governor Spitzer's present and his past. I'll be back with another entry here Sunday, and I hope then to return to the core concern of this blog -- proxy fights, and the folks who wage them.