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Authors: Dan Reingold
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myself, and surprisingly, I didn’t dislike it as much as I’d anticipated. But for the most part, I was free to pursue research, to write my honest opinion without the interference of bankers or anyone else, and to do the job the way I’d envisioned it.
It was a rare period in Wall Street history. People were on their best behavior, in part because of the spate of insider-trading cases that had rocked the world just a few years earlier. Ivan Boesky had recently been convicted of insider trading, using inside information to profit on deals that hadn’t yet been announced. That inside information had been leaked to Boesky by some investment bankers. In this context, few people wanted to push the envelope. And the market was puttering along as well. The operative word of the day was steady. And steady was a concept I felt very comfortable with.
Although the mere mention of insider trading was enough to strike fearinto any Wall Streeter’s heart at the time, no one got too up in arms over the interaction between research analysts employed by investment banks and the banking business itself. In part, that was because analysts exist thanks to the banking business; they don’t generate enough profit to support themselves. In effect, analysts are loss leaders for banks. Their work is funded by the fees brought in by bankers and the commissions brought in by salespeople and brokers.
That’s why there were and are strict rules governing the interaction between the two. At Morgan Stanley, a written policy given to me upon my arrival at the firm officially and emphatically declared the independence of the research division from pressures by the investment bankers.
“Morgan Stanley’s research is totally separate from the investment banking of [ sic ] and merger and acquisition activities of the Firm,” it read. “Rigid rules ensure the separation of association and information. A basic tenet of our philosophy is that research must have integrity and therefore requires absolute and impartial freedom of judgment.” 2
In practice, however, it was slowly becoming a different story. Although I had not experienced any overt pressures, some sordid stuff was beginning to swirl around the firm.
One of these was the Clay Rohrbach memo. Clayton J. Rohrbach, III, was the head of stock capital markets, in other words, a big-shot banker. The way I remember the story of Clay’s memo, a young guy named Sandy Cohen was Morgan Stanley’s utility analyst at the time. Like me, Sandy had been mentored by Ed Greenberg and had developed a habit of speaking his mind, even if it angered the companies he covered. He had developed a special methodology for rating his companies, a very technical one that spit a lot of components into a formula and came out with an opinion.
One of the criteria he plugged into his model was the quality of management. Some of the people who ran companies were true dolts, while others were real strategic thinkers. Anyway, Sandy ranked one of his utilities low in the management department, and Clay, as the keeper of the flame, or that “special relationship” with the company, apparently got an earful about it. From Clay’s perspective, research must have seemed like something of a waste of time. It didn’t make any money—and was, in part, paid for by the fees generated by bankers like him. So wasn’t it logical that an analyst, whose salary and bonus inevitably came from the money earned on deals, shouldn’t do anything that could jeopardize that deal flow? Ticked off by Sandy’s conclusions, Clay wrote a memo in September 1990 that shockedall of us on the 20th floor, which was where Morgan Stanley’s research analysts worked.
“As we are all too aware,” it said, “there have been too many instances where our Research Analysts have been the source of negative comments about clients of the Firm…. Our objective is to have a zero failure rate on this subject and to adopt a policy, fully understood by
It was a rare period in Wall Street history. People were on their best behavior, in part because of the spate of insider-trading cases that had rocked the world just a few years earlier. Ivan Boesky had recently been convicted of insider trading, using inside information to profit on deals that hadn’t yet been announced. That inside information had been leaked to Boesky by some investment bankers. In this context, few people wanted to push the envelope. And the market was puttering along as well. The operative word of the day was steady. And steady was a concept I felt very comfortable with.
Although the mere mention of insider trading was enough to strike fearinto any Wall Streeter’s heart at the time, no one got too up in arms over the interaction between research analysts employed by investment banks and the banking business itself. In part, that was because analysts exist thanks to the banking business; they don’t generate enough profit to support themselves. In effect, analysts are loss leaders for banks. Their work is funded by the fees brought in by bankers and the commissions brought in by salespeople and brokers.
That’s why there were and are strict rules governing the interaction between the two. At Morgan Stanley, a written policy given to me upon my arrival at the firm officially and emphatically declared the independence of the research division from pressures by the investment bankers.
“Morgan Stanley’s research is totally separate from the investment banking of [ sic ] and merger and acquisition activities of the Firm,” it read. “Rigid rules ensure the separation of association and information. A basic tenet of our philosophy is that research must have integrity and therefore requires absolute and impartial freedom of judgment.” 2
In practice, however, it was slowly becoming a different story. Although I had not experienced any overt pressures, some sordid stuff was beginning to swirl around the firm.
One of these was the Clay Rohrbach memo. Clayton J. Rohrbach, III, was the head of stock capital markets, in other words, a big-shot banker. The way I remember the story of Clay’s memo, a young guy named Sandy Cohen was Morgan Stanley’s utility analyst at the time. Like me, Sandy had been mentored by Ed Greenberg and had developed a habit of speaking his mind, even if it angered the companies he covered. He had developed a special methodology for rating his companies, a very technical one that spit a lot of components into a formula and came out with an opinion.
One of the criteria he plugged into his model was the quality of management. Some of the people who ran companies were true dolts, while others were real strategic thinkers. Anyway, Sandy ranked one of his utilities low in the management department, and Clay, as the keeper of the flame, or that “special relationship” with the company, apparently got an earful about it. From Clay’s perspective, research must have seemed like something of a waste of time. It didn’t make any money—and was, in part, paid for by the fees generated by bankers like him. So wasn’t it logical that an analyst, whose salary and bonus inevitably came from the money earned on deals, shouldn’t do anything that could jeopardize that deal flow? Ticked off by Sandy’s conclusions, Clay wrote a memo in September 1990 that shockedall of us on the 20th floor, which was where Morgan Stanley’s research analysts worked.
“As we are all too aware,” it said, “there have been too many instances where our Research Analysts have been the source of negative comments about clients of the Firm…. Our objective is to have a zero failure rate on this subject and to adopt a policy, fully understood by
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