Analysts Under Fire

The escalating scrutiny on stock analysts at large investment banks stems from the investigation being pursued by New York State Attorney General Eliot Spitzer, Business Week reports.

"(Spitzer) is pushing for a far greater degree of separation between analysts and investment bankers than the NYSE and NASD have proposed. He doesn't want analysts to get a dime from any investment banking deals. The SROs [self-regulating organization...NYSE and NASD] just want to stop bonuses for specific transactions. "

Likewise, the SROs would allow bankers and analysts to discuss the accuracy of research reports — provided they are monitored by lawyers. Spitzer could propose that communications between bankers and analysts be banned extensively.

The SRO's proposal that analysts be allowed to talk to bankers if supervised by lawyers is rubbish. Need I even say "Enron" to illustrate why?

Lawyers, bankers and analysts have fundamentally the same interest in any deal they would be discussing — namely, winning investment banking deals — and thus relying on them to correct each other will not work out in the long term. Spitzer's reforms, if they are to succeed, must be of a form that aligns self-interested parties to the needs of the common good.

We don't want excessive regulation to come out of the reform of the securities industry; we just want to end the situation whereby the parties with all the information — lawyers, bankers, analysts, and the companies themselves — are all conspiring to deceive the investing public.

Another tidbit from the Business Week story:

"They also want the SEC to encourage analysts to stick to their guns by adopting a rule that forbids companies from retaliating against analysts who criticize them."

If anyone doubts that companies retaliate against banks and analysts that are unfavorable to them, consider the recent scandal surrounding Hewlett Packard CEO Carly Fiorina's voicemail threatening "something extraordinary" against Deutsche Bank if the firm didn't vote its shares in Fiorina's favor on the HP-Compaq deal.

Sure, this incident involves the money management side of Wall Street, but it clearly shows that executives expect highly deferential treatment from all divisions of the firms they hire to do their investment banking work.

Meanwhile, Matthew Yglesias speculates that there might be some political motivation behind the newly activist New York State AG's office. There is, after all, political precedent for such a move: one Rudy Giuliani made his career prosecuting insider trading at a time when Wall Street was considered even more morally bankrupt than it is today.

If I were the AG, after I got done with Merrill Lynch and Jack Grubman at Salomon Smith Barney, I'd focus my attention on the biggest culprit of them all, Mary Meeker of Morgan Stanley.

PR Panic

Washington Post columnist Howard Kurtz, in a column otherwise about blogs, notices the media's general willingness to believe whatever they're told by PR people.

For example, in the publicity documents sent to the press in connection with the movie Panic Room, the flacks suggest that reporters might consider "doing a feature on local panic rooms," adding, "It seems to be a growing trend nationwide."

The only growing trend seems to be the plethora of articles and features about panic rooms, despite the fact that virtually nobody owns one. Reporters these days seem to have forgotten the virtue of skepticism and will believe whatever the PR flacks tell them. Why else would they be reporting on a trend that doesn't exist?

Book-Gate?

The Authors Guild has called for its member writers to remove links from their web sites to Amazon.com, claiming that Amazon's promotion of its used-book business undercuts author's profits.

The move prompted Amazon CEO Jeff Bezos to issue a response in the form of a letter to used booksellers.

When someone buys a book, they are also buying the right to resell that book, to loan it out, or to even give it away if they want. Everyone understands this.

Bezos has hit the nail on the head here. The Authors Guild protest is not about lost revenue; it's about control over information. All owners of intellectual property have a fundamental interest in controlling the dissemination of their property, and as the last five years have taught us, they will fight long and hard to protect their control over their intellectual property. Of course, the Authors Guild claims that it is not against used book sales.

We're not opposed to the sale of used books, online or off. We have, however, advocated that Amazon not market used books on pages otherwise dedicated to new books. Frequently, "used" books appear for sale as soon as a book is released. Many of these aren't used at all, but are review copies for which authors and publishers have never received payment. Amazon, however, collects a payment on each and every sale. 

I see three problems with this argument. First, the total number of review copies in circulation is miniscule in comparison to the total print run of a book, except for the most niche and small-run titles. If Amazon sells a few dozen copies of a book that the publishers never got revenue for, big deal. It's their fault for printing and sending out so many review copies in the first place.

Not long ago, I was a book review editor for a political journal. I received many, many unsolicited books, the majority of which were of substandard quality and unfit for review in my publication.

Second, advocating the separation of new and used book sales makes very little sense. Just because the book retailing industry has historically been divided into new book stores and used book stores does not mean that that is the only way to sell books. After all, albums and movies, the other great consumer intellectual property businesses, have long been sold both new and used by the same retailer.

For the Authors Guild to protest this practice by a bookseller is nothing more than turf defense.

Third, and drawing on Bezos' point above, consumers must have the right to resell products that they have bought, regardless of whether the creators of those products would like them to.

If Amazon were to segregate used book sales to a different part of its web site, it would represent an architectural and usability change that would directly undermine used book sales (which I believe is exactly what the Authors Guild wants.)

From there, it is not too difficult to imagine the end of book sales entirely, replaced instead by the kind of content licensing favored by other intellectual property owners.

Alex Rubalcava, a senior studying government at Harvard, is the business and technology columnist for the Harvard Crimson and blogs at Alex Rubalcava.com. After graduating in June, Alex will begin work this summer for a west coast venture capital firm.

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