Tuesday, July 24, 2007

Happening to a nicer guy

Yesterday afternoon it was announced that the office of New York Governor Eliot Spitzer was under investigation for improperly or illegally using the NY State Police to dig up negative information about Spitzer's rival, State Senate head Joseph Bruno. The NY Times article stated that Spitzer "came into office less than seven months ago with a reputation for integrity...". That statement would come as news to many in the financial services industry who dealt with Spitzer's self promoting attacks in his stint as Attorney General. It is ironic that now, as Governor, Spitzer is meeting his match against someone with a similar level of "integrity".

As was widely reported, Spitzer forced a significant realignment of the brokerage industry research function, as well as levying huge fines. While there was definitely room for improvement in the functioning of and independence of the security analysts' roles, Spitzer's approach was to demonize the entire industry, keep himself on the front pages, spread information that was priviliged, and propagate rumors and innuendo. He was able to do this by staying on the attack against an industry that he regulated and an industry, financial services, that must always protect their reputations. He had a rival that for the most part couldn't fight back.

It is now known, and was eventually known at the time, that some of the Wall Street Journal's many scoops and comments from "sources close to the investigation" came directly from Spitzer. In fact, some say that he regularly met with the lead WSJ reporter at the time, Charles Gasparino, while jogging around the reservoir at Central Park. Gasparino and Spitzer would both presumably be energized by the exchange and morning after morning the securities firms would deal with these "authoritative" attacks in print.

In Bruno, Spitzer is now dealing with a veteran of the notoriously corrupt Long Island Republican machine, once run by Al D'Amato. It's a different playing field in Albany and he doesn't have the same leverage.

It should be noted that the Spitzer "reforms" of the research function on Wall Street have had mixed results at best. While the barrier between research and the bankers has possibly been strengthened, research has to some extent been neutered. The research department is now seen as a stepping stone to a career at a hedge fund or in investment banking, not as a long term career itself. There are a number of analysts still who have a veteran's perspective on the industry they cover as their salary levels were somehow "grandfathered" at the time of the changes. That experience will diminish over time. The many so-called independent research firms that were established and funded by the settlements are out there but it seems that few if any have been embraced by the institutional investment community as being credible. Individual investors can see their opinions on analyst summaries, but can have no insight into their stature because they have none to speak of. Perhaps some will develop track records over time that make them meaningful contributors to the market, but will that happen before their free ride runs out. So what has happened has been an acceleration of a process that had been underway for many years. Pension funds increase their investments in hedge funds not only to get their investment performance but also to get access to their opinions. Mutual fund complexes beef up their own research departments. The individual investors that Spitzer championed are left with less resources, but Spitzer defenders would counter that there's less chance that those limited resources are biased.

The main winner in all of this was Spitzer, who rode the issue to Albany. At some point he may wish that he had burned a few less bridges to get there.

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