Mr. Quattrone, dressed in his West Coast uniform — a blue blazer over a polo shirt and a pair of khakis — was almost finished with his presentation when, in response to a question from the audience, he shared his views about the state of Wall Street research, a topic that was once all the rage but now often goes overlooked.
“I do think the industry should petition to remove the Spitzer initiatives because ultimately they hurt the competitiveness of our country by denying small companies the access to research analysts,” he said, throwing a proverbial grenade into the auditorium.
Mr. Quattrone was referring, of course, to the former New York attorney general Eliot Spitzer’s landmark settlement in 2002, which forced the separation of investment banking from research. The settlement followed an investigation into whether some Wall Street analysts were providing misleading ratings of the companies they covered to bolster their firms’ investment banking business. Henry Blodget of Merrill Lynch and Jack Grubman of Citigroup were barred from the securities industry and others took their licks. (As an aside, Mr. Spitzer was not behind Mr. Quattrone’s prosecution.)
As a result, banks are no longer allowed to pay their analysts from any revenue derived from investment banking, only from trading operations. Beyond that, an investment banker can’t even call a research analyst at the same firm without a lawyer chaperoning the conversation.
At the time, the new rules had a certain undeniable appeal. Because research analysts so depended on investment banking work for their own bonuses — working on initial public offerings and mergers — they faced unquestionable conflicts.
Mr. Spitzer’s efforts may have been noble, but five years later it is clear that the effort to eliminate those conflicts created its own set of unintended consequences.
If Mr. Quattrone had his way, he would turn the clock back entirely. “I am not denying that there is the potential for conflict — always has been, always will be. I’m just questioning the best means of managing the conflict,” he told me after his presentation. “If the principles of what constitutes ethical and unethical behavior are spelled out clearly, such as disclosing the firms’ investment banking relationships and ownership interests in the covered security, as well as not publishing favorable reports on companies in which you do not believe — and violators are punished — the conflicts will be managed.”