Investment banks' future role

IT IS widely believed that American investment banking giant Goldman Sachs gave serious thought to shutting down its equity research department in Britain last year at the time of the row with New York Attorney General Elliot Spitzer.

It was decided then to make no change, but it is still a live issue, and there are some who firmly believe that before the end of this year Goldman, or one of the other US banks, will indeed pull out.

This week's news from Paris, where a French court found for LVMH against Morgan Stanley and fined the latter for issuing a research note critical of the luxury goods company, adds a further ingredient to the pot.

The report was alleged to be biased because Morgan Stanley had rival luxury goods firm Gucci as a client.

The judgment may or may not be overturned on appeal, The bank is predictably furious at the verdict, but the truth is that the court could never have reached such a decision if the potential for conflict of interest did not exist.

That is the root of the investment banks' problem. They have far too many other businesses ever to be credible providers of objective research.

No matter how much they protest that their activities are kept separate, people will not really believe them. Nor should they be surprised. They behaved very badly in the dotcom boom, and their efforts to rebuild trust have not been helped by their obvious lack of contrition for those excesses.

Although abandoning research sounds an astonishing suggestion, it could make a lot of sense. Analysts are extremely costly to employ and there is no money to be made from agency broking, so even if an institution does act on a recommendation from an analyst, the commission is too low to make a difference. Getting rid of them in these markets would probably improve the bottom line.

Currently, the investment banks are being Darwinist and adjusting to the new climate in which they have to live. There is no prospect of a serious bull market in equities, and little chance of a significant increase in mergers and acquisitions. So the banks have to make their money instead from proprietary trading in various financial instruments - behaving rather like giant hedge funds, but for their own account. There is no place for research in that mix - other than for their own internal purposes.

It would, in fact, be a benefit if they did get out. The ideal would be for all investment analysis to be conducted by independent research houses, such as the admirable Smithers & Co, and sold commercially to those who want to use it.

Fund managers who did not want to pay could generate their own in-house research, as is already done by Fidelity and Investec (in America, but not here).

It is the way the tide is running - but it is astonishing that so many investment management people, whose business relies on successfully anticipating future trends, cannot see it.

Resigning issue

NEWS that highly respected Italian industrialist Paulo Scaroni wanted to leave the board of BAE Systems only emerged after a Press leak.

It then took another week and another leak before it was confirmed he had written several letters to fellow board members, copied to BAE chairman Sir Richard Evans, voicing serious reservations about the company's direction and policies.

Lloyds TSB did slightly better yesterday with its formal announcement that Philip Hampton, its finance director and formerly of British Gas and British Telecom, was leaving - a mere 18 months after the fanfare and eulogies that marked his arrival.

The announcement of his exit was more low key, but the rumour mill filled the vacuum. It says Hampton wanted to reduce the hefty dividend paid out by Lloyds TSB, but chief executive Eric Daniels refused, so Hampton quit. No such juicy detail was confirmed, denied or even mentioned in the official announcement. That might even be because it is not true, although that is not the way to bet. People seldom resign for no reason.

The companies would have us believe these two departures of seriously heavy boardroom hitters are of no consequence and should not trouble us, but it is not right in this day and age that investors should have to take that at face value.

A recent innovation in the corporate governance code says that when directors are leaving in circumstances that might raise concerns, they should publish a personal statement.

Well, investors are concerned even if the individuals' boardroom colleagues are not, but where are the statements? And where are the corporate governance police who should be demanding them?

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