Eliot Spitzer and his band of regulators required that the ten large cartel firms would have to fund some independent research scheme to the tune of $450 million. There were some superb points about the “repentance” part of the settlement brought to light by Emily Lambert and Michael Freedman from Forbes Magazine, which needs to be addressed.
The first point deals with independence. The global settlement requires each brokerage firm to contract with at least three “independent” research firms and provide their equity reports to retail customers. One obvious problem is that many independent firms already have their own financial products and carry with them some of the conflicts and unwanted “baggage” the cartel firms do. For example, old independent firms like Sanford C. Bernstein are now owned by Alliance Capital, a $397 billion so-called money manager. Readers of the Markowski Monthly or members of our Watchdog on Wall Street audience are aware that Alliance was one of the largest holders of WorldCom and Enron. Alliance Capital like many other “independent” fund companies was grossly conflicted in their decision-making destroying their shareholders equity. Even independent institutions like Value Line sell their own funds. The bottom line is there are not many truly independent outfits around, plus the good ones are very expensive, and rightfully so. Some of the top independent research firms are very expensive and have already balked at being involved. What this leaves behind is nothing but fly-by-night outfits with questionable track records or none at all. Even worse, we could end up with ex-analysts like Henry Blodget or Jack Grubman.
The settlement calls for a “bureaucratesque” character for each firm to approve the oversight of the independent firms. This is where the entire settlement starts reminding me of the United Nations. Maybe we could get Hans Blix or Kofi to come to Wall Street. They are going to love it and feel right at home. There is nothing like a cushy, lucrative job where you owe patronage to the individuals that bestowed upon you all of your power and influence. I have a few questions that need to be addressed: Is the position of independent research appointee similar to a government job, whereas for life? Can the brokerage firm fire the firm for lack of performance? Wouldn’t that be interference? Is this whole thing a big “Catch 22”? This aspect of the global settlement is another example of the overall futility and worthlessness of the entire plan.
We called the global settlement a sell out in the last issue of the Markowski Monthly. The more I look into the entire plan the more I realize that it is not just a sell-out but a hazard that will eventually cause more harm to individual investors than good.