Michael Lewis created a huge stir last week when he published a story in Vanity Fair on the Irish bank collapse.Embedded in the story was an anecdote about a Merrill Lynch analyst who made an early negative call on some of the big Irish banks, only to have his research report quickly retracted and sanitised when the Irish banks (Merrill Lynch banking clients) exploded in rage.
The analyst Philip Ingram, was later fired.
After Lewis told this story last week, on Yahoo TechTicker, CNBC, and elsewhere, the conclusion everyone naturally jumped to was that the analyst had been muzzled and then fired for pissing off Merrill’s banking clients. In other words, that nothing had changed on Wall Street and that analysts who dare to say anything negative will be summarily dismissed.
Well, for obvious reasons, I took a personal interest in this story, having been an analyst at Merrill Lynch in the late 1990s, having experienced the Wall Street banking and other conflicts firsthand, and having later been accused of fraud by Eliot Spitzer for writing research that allegedly did not reflect my “true opinions” about the stocks I was covering.
(For example, in an email, I once referred to a stock that Merrill rated “Buy” as a “piece of junk.” Spitzer said this proved that I did not think investors should buy the stock. In my week of testimony at Spitzer’s office, I explained my side of this story–that when I wrote the email I was reacting to inaccurate negative information that I had just been given about the company, that the stock had already fallen 90% from its high and therefore was probably fairly described as a piece of junk regardless of what one thought the stock might do in the future, that stock ratings are an opinion about a stock’s “appreciation potential over the next 12 months,” not assessments of a company’s quality, a summary of past performance, or an action recommendation for all investors, and, perhaps most persuasively, at least to me, that I wasn’t actually covering the stock at the time. But these explanations had fallen on deaf ears.)In any event…
I have now read not only Michael Lewis’s article but the research reports in question–the original one and the sanitised one. I have also talked to a source familiar with Merrill Lynch’s view of the events. So I now think I have a pretty good idea of what happened.
What happened, in a nutshell, is this:
In March of 2008, six months before the financial crisis, Merrill’s UK bank analyst, Philip Ingram, published a report that contained some startling views of the lending practices of Irish banks. The report was based on a survey Ingram had done of experts in the commercial real-estate industry–the recipients of loans from Irish banks–and it contained actual survey responses, some of which were vivid and harsh.
The report became an instant hit in the financial community, as any startling report that involves real primary research usually does. The Irish banks read the report, freaked out, and started screaming at their Merrill Lynch bankers. The Merrill Lynch bankers started screaming at the Merrill Lynch research people. Some of the survey responses in the report apparently became viewed as Ingram’s own opinions about the Irish banks. (Which, after the survey, they probably were.)Merrill Lynch’s lawyers and research managers retracted Ingram’s report and reissued a sanitised version, one that, in at least one respect (but not others) de-emphasised the conclusion about the riskiness of the Irish banks. The sanitised report was also stripped of the colourful survey responses.
In the months thereafter, Philip Ingram continued publishing research at Merrill and became ever more negative on the Irish banks. Eventually, he cut some of their ratings to “Underperform.” Michael Lewis reports (and I have no reason to believe otherwise) that Ingram’s reports were heavily scrutinized and sanitised after the initial hullabaloo, though the ratings were negative.
Merrill Lynch’s bankers were eventually hired again by the Irish banks and paid huge advisory fees for offering opinions on how the Irish banks might deal with the crisis (the main recommendation, according to Michael Lewis: get bailed out).
Nine months after the survey report was published, after the financial crisis had begun and the merger of Merrill Lynch and Bank of America had been consummated, when the two firms’ research departments were being consolidated and the combined firm decided it did not need TWO analysts covering the same demolished UK banking sector, Ingram was dismissed.
That’s what happened.
Michael Lewis’s version of events, in other words, is accurate. And so is Merrill Lynch’s view of events, at least as our source relays it.
What did not happen was this:
* Merrill Lynch’s lawyers did not “muzzle” Ingram or change his opinion about the Irish banks. They did sanitize his original report to make it less vivid and startling and to bury his conclusion. But this sanitization did not alter the fundamental conclusion of Ingram’s survey–which still said that the Irish banks had very risky lending practices.
* Merrill Lynch did not fire Ingram because he published this one negative research report. It’s possible that Ingram’s role in this saga played a part in his eventually losing out to his Bank of America competitor when the research departments were combined. But this termination took place nine months later, at the end of 2008.
So what’s the moral of the story?
The moral of the story, at least for me, is that conflicts of interest on Wall Street are alive and well.
And of course they are: Brokerage firms sit between corporate and government clients who want to raise capital at the lowest possible price and investor clients who want to buy securities at the lowest possible price. In every single transaction–every single one–one brokerage firm client or the other will make out a bit better than the client on the other side of the trade.
And both of these clients might at any moment start screaming. And of course they might. Because there are millions of dollars at stake.
Photo: Sugar pond via Flickr
Brokerage firms sit between these clients and try to do well by both–if not in every one individual transaction, over the long term. But every day, these and other conflicts of interest–including self-interest–pull the brokerage firms in multiple directions.I’ll never forget the scathing things that were said to me by companies and investors when I was a Wall Street research analyst. I’ll never forget the scathing things that companies and investors said to my bankers and bosses about me when I was a research analyst. I’ll never forget the emergency calls and emails I got when one company or investor or another was infuriated by something I had said, nor the threats and insults that went with them.
By comparison, the things that my firms’ bankers and lawyers and bosses said to me, when trying to resolve these conflicts, were the height of politeness. Which isn’t to say they weren’t also filled with honest frustration, anger, and tension.
(And of course they were: When the job is predicting the future, there are no right answers, at least not in the present. And everyone is entitled to his or her opinion).
Such is life on Wall Street, especially in bull markets, when people are making money hand over fist and any whisper of scepticism or caution threatens to spoil the party.
And so it will always be.
Below, for those who are interested, are the front pages of the two versions of the research report that Merrill Lynch issued in March 2008.
The substance is the same. The order of the summary bullets has been changed, however, and some of the more colourful and inflammatory language has been stripped out. A table ranking the relative riskiness of the banks–with the Irish banks at the top–has also been removed from the cover. A similar table, which also has the Irish banks at the top, appears inside the report.
THE ORIGINAL REPORT
THE sanitised REPORT
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