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The bloomberg coverage gives a bit of background on the analyst. Even though there is supposed to be a "Chinese wall" between analysts and the investment banki

The bloomberg coverage gives a bit of background on the analyst. Even though there is supposed to be a "Chinese wall" between analysts and the investment banking side there always has been, and continues to be, politics involved in what an analyst can say. This is illustrated from this quote from the linked article: > Despite those concerns, the agency said, he maintained his “buy” rating and told colleagues on an internal call that “we just had them in town, so it’s not kosher to downgrade on the heels of something like that.” The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues. Its very hard to convince a company to use your services while ignoring an negative rating by an analyst. Unfortunately this leads to getting a lot of double speak form analysts where they might say one thing public ally but another thing privately to the buy side, after all its usually the end game of a good analyst is usually to get a job on the buy side. And you do that by creating a track record of being able to pick alpha long and shorts. http://www.bloomberg.com/news/articles/2016-02-17/ex-deutsche-bank-analyst-banned-over-rating-at-odds-with-opinion http://www.bloomberg.com/news/articles/2016-02-17/ex-deutsch... TL/DR Don't trust written reports by analysts. Trust slightly more what they tell you over the phone. Trust completely what they tell you in a job interview.

RobertoG 11y ago
"The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues." I don't see the difficulty. It's very easy, you avoid the conflict by don't pretending to be objective in an issue where the company that pay your salary have "skin in the game". It's what people and companies do in the real world. You don't ask divorce advice to your layer if he is also your brother in law. You call an external audit for your finances, don't allow the accounting department do the auditing (and even that doesn't work). You don't ask investment advice about a company to the guys that receive periodically money from that company.
- hguant 11y ago
  Oh! I know about this one! So the reason why this doesn't happen the way it should - analysts being completely divorced from the "skin in the game" folks - is because there's a ton of money involved and the buy side people tend to baby deals along. My 1000 foot understanding is that companies are structured (on paper any way) such that a broker/sales guy sets up a deal, then passes it off to underwriters who take a good hard look at what's going on - basically making sure the deal is a) on the up and up and b) will preform as predicted. They rely on data from analysts. The problem is that many large banks own all the pieces - it's cheaper to have it all in house. This means the sales guy can cook something up, and follow it all the way through the pipes threatening, cajoling, and generally pushing it through. All these finance guys are rewarded for success, everyone is already biased to see the rosy side of things, and when you've got someone talking it up, it's a lot easier to ignore the bad numbers and only see the good.
wtvanhest 11y ago
Public company management teams consistently meet with sell-side analysts (that is the analyst's job in this case) and with mutual fund managers. When he said "we just had them in town" he very, very likely meant that management met with him and his other sell-side analysts. That has nothing to do with investment banking relationships or the "Chinese wall". If a sell-side analyst throws a management team under a bus publicly, often times the management team won't visit the analyst. That makes it hard for the analyst to do his or her job since they cannot ask questions about the company. It is a big issue, but not the issue you bring up.
viraptor 11y ago
> Even though there is supposed to be a "Chinese wall" between analysts and the investment banking side Is that a SEC rule? I haven't heard of it and I'm interested in the details.
- olympus 11y ago
  I'm pretty sure it's the same rule that outlaws insider trading. If the analysts and investment bankers talked to each other they could potentially cook up some crazy schemes: "Hey Joe, I just invested someone's money in company X. Can you upgrade them to a BUY rating?" "Sure thing Bill, what's my cut?" "10% of the increase?" "Sure, sounds fair." Or another scheme: "Hey Joe, GM is a big client and is starting to get a little worried about TESLA. Can you downgrade them?" "Sure thing Bill, let's put Elon in his place and keep our big clients happy."
- RockyMcNuts 11y ago
  https://en.wikipedia.org/wiki/Chinese_wall#Usage_in_specific_industries https://en.wikipedia.org/wiki/Chinese_wall#Usage_in_specific... For instance, the investment banker who gives merger advice to a company and is privy to their deal plans can't turn around and give info to the bank's traders...the research analyst primarily serves sales and trading and is client-facing to the buy side so is on the other side of the wall from investment banking.
gadders 11y ago
I thought this was all fixed in 2002? I was at Citi when these issues first came up. We had to work like DOGS to get the necessary conflict of interest disclaimers added to all reports.

RobertoG 11y ago

"The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues." I don't see the difficulty. It's very easy, you avoid the conflict by don't pretending to be objective in an issue where the company that pay your salary have "skin in the game". It's what people and companies do in the real world. You don't ask divorce advice to your layer if he is also your brother in law. You call an external audit for your finances, don't allow the accounting department do the auditing (and even that doesn't work). You don't ask investment advice about a company to the guys that receive periodically money from that company.

hguant 11y ago
Oh! I know about this one! So the reason why this doesn't happen the way it should - analysts being completely divorced from the "skin in the game" folks - is because there's a ton of money involved and the buy side people tend to baby deals along. My 1000 foot understanding is that companies are structured (on paper any way) such that a broker/sales guy sets up a deal, then passes it off to underwriters who take a good hard look at what's going on - basically making sure the deal is a) on the up and up and b) will preform as predicted. They rely on data from analysts. The problem is that many large banks own all the pieces - it's cheaper to have it all in house. This means the sales guy can cook something up, and follow it all the way through the pipes threatening, cajoling, and generally pushing it through. All these finance guys are rewarded for success, everyone is already biased to see the rosy side of things, and when you've got someone talking it up, it's a lot easier to ignore the bad numbers and only see the good.

wtvanhest 11y ago

Public company management teams consistently meet with sell-side analysts (that is the analyst's job in this case) and with mutual fund managers. When he said "we just had them in town" he very, very likely meant that management met with him and his other sell-side analysts. That has nothing to do with investment banking relationships or the "Chinese wall". If a sell-side analyst throws a management team under a bus publicly, often times the management team won't visit the analyst. That makes it hard for the analyst to do his or her job since they cannot ask questions about the company. It is a big issue, but not the issue you bring up.

viraptor 11y ago

> Even though there is supposed to be a "Chinese wall" between analysts and the investment banking side Is that a SEC rule? I haven't heard of it and I'm interested in the details.

olympus 11y ago
I'm pretty sure it's the same rule that outlaws insider trading. If the analysts and investment bankers talked to each other they could potentially cook up some crazy schemes: "Hey Joe, I just invested someone's money in company X. Can you upgrade them to a BUY rating?" "Sure thing Bill, what's my cut?" "10% of the increase?" "Sure, sounds fair." Or another scheme: "Hey Joe, GM is a big client and is starting to get a little worried about TESLA. Can you downgrade them?" "Sure thing Bill, let's put Elon in his place and keep our big clients happy."
RockyMcNuts 11y ago
https://en.wikipedia.org/wiki/Chinese_wall#Usage_in_specific_industries https://en.wikipedia.org/wiki/Chinese_wall#Usage_in_specific... For instance, the investment banker who gives merger advice to a company and is privy to their deal plans can't turn around and give info to the bank's traders...the research analyst primarily serves sales and trading and is client-facing to the buy side so is on the other side of the wall from investment banking.

gadders 11y ago

I thought this was all fixed in 2002? I was at Citi when these issues first came up. We had to work like DOGS to get the necessary conflict of interest disclaimers added to all reports.