Download Second Curve Capital - Federal Reserve Bank of Atlanta

Federal Reserve Bank of Atlanta
Wall Street Against the Wall
April 17, 2004
OVERVIEW
 My Background
 The Evolution of the Equity Analyst
 The Excesses
 Recommendation
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MY BACKGROUND
 1980 - 83 Kemper Financial Services
 1983 – 98 Smith Barney, PaineWebber, DLJ
 1998 – 00 Tiger Management
 2000 - Second Curve Capital
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SECOND CURVE CAPITAL
 Founded in January, 2000
 Hedge fund focused on the financial
services industry with $400 million in
capital; 60% from companies in the
industry
 Operate a free financial services website;
bankstocks.com
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MY BACKGROUND
 1990 Comments led to First Union stopping
doing business with PaineWebber
 1997 Comments led to First Union stopping
doing business with DLJ
 1998 Fired by DLJ
 2001 Work with NY Attorney General on Wall
Street investigation
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CONCLUSIONS
 Wall Street research became a slave to
investment banking interests in the
1990s
 The causes were the economics of the
business, personal greed and the
equities bull market
 The problem was SERIOUS!
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THE EVOLUTION OF THE EQUITY ANALYST
 Pre – 1982; Analyst was an industry
expert
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THE EVOLUTION OF THE EQUITY ANALYST
 Pre – 1982; Analyst was an industry expert
 1980s; Analyst had to become a
marketer
 Explosion in commissions due to the bull
market and increased trading activities
 Service clients with phone calls and action
oriented recommendations
 Less time to develop industry expertise
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THE EVOLUTION OF THE EQUITY ANALYST
 Pre – 1982; Analyst was an industry expert
 1980s; Analyst had to become a marketer
 1990s; Analyst became driven by investment
banking interests
 Tool to get underwriting and advisory
assignments
 Tool to support engagements
 Compensation changed to support
 Even less time to develop industry expertise
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THE EXCESSES
 Analysts no longer experts and the
success of investment opinions no longer
critical to success
 Unethical behavior encouraged and
rewarded
 Exaggerations and outright lies
 Published research opinions different from
verbal opinions
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RECOMMENDATIONS
 Individuals must hold each other
accountable for ethical behavior
 Increased disclosure
 No direct compensation for investment
banking transactions
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