Submitted by An Industry Observer, Mar 18, 2008 11:30

It is unfortunate that this article perpetuates the myth that investment banking bias in research was and remains a pervasive and serious problem. Biased research of any kind is a self-correcting problem because anyone (whether a firm or an individual analyst) dumb enough to produce deliberately bad research will quickly destroy its brand and go out of business because soon no one will pay for its research or buy its deals.

The ultimate, huge but unquantifiable cost of Spitzer's "reforms" is reduced market efficiency, which means greater volatility and a higher cost of capital for US companies, which in turn means that US companies are less competitive in world markets, and that US financial markets themselves are less competitive in world markets. Efficiency is reduced because the market is not as well informed and liquid as it would have been without the "reforms." Thus, it cannot adjust as quickly and accurately to the stream of developments that constantly change the prospects for and risk characteristics of individual companies and the overall economy. The market is unable to adjust as quickly and accurately because of the decline in the quantity and quality of sell-side research since there are now fewer analysts, lower quality analysts, less effective research departments, fewer companies under coverage, and less information in the public domain about expectations for earnings and stock price performance.

In short, the quality of the amorphous but critically important intellectual framework within which market participants collectively and constantly re-price capital assets has been degraded by Spitzer's overzealous demands to restructure the investment banking industry rather than simply punishing those few who were actually guilty of stupidity and misconduct.

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