They really can’t help it, can they? Like alcoholics in a liquor store, the investment banks cannot resist an illicit swig whenever they think nobody is looking. That is the conclusion from the fines imposed on 10 US investment banks last week for breaking the rules designed to manage conflicts of interest in initial public offerings.
The shock is that the event in question occurred in 2010, a mere seven years after rules were passed to clean up the IPO market in the wake of the dotcom crash. Back then Eliot Spitzer, then New York State attorney-general, had led an investigation that showed how investment banks’ analysts had been puffing new issues. It was a scandal that blew Wall Street’s claim to be a trusted adviser out of the water. Ten investment banks paid $1.4bn to settle the matter and signed up to new rules restricting analysts’ involvement in IPOs.
This seemed to have cleaned up the mess. After the settlement, lawyers attended banks’ pitch meetings to police good behaviour; and investment bankers were no longer allowed to influence research. Analysts working on house stocks complained that they could not go to the lavatory except in the presence of a compliance officer; and senior management assured anyone who asked that the IPO market had been reformed.
And that was what we believed until last week,when the US Financial Industry Regulatory Authority (Finra) fined 10 firms a total of $43.5m for allowing their equity research analysts to solicit investment banking business, and for offering favourable research coverage in connection with the 2010 planned IPO of Toys R Us, the American chain store. The fines are not big in the context of the $100bn-plus paid so far to cover the post-2008 banking crisis scandals but this is still a very damaging episode for the industry.
It is the seven years that jars: just seven years from the industry making what was at the time a record payment to restore its badly tarnished reputation to, it would appear, blatantly dodging the new rules.
Furthermore, this was not a single rogue bank going off the rails. The 10 firms fined by Finra included many signatories to the 2003 settlement and nine of the top 10 banks for US equity offerings in 2010. It was only a single deal but the involvement of so many big-league firms suggests that the industry was already back to its old tricks well before the time frame suggested by the regulators’ rule of thumb that reckons on good behaviour prevailing for a working generation after a scandal.
Post-crisis regulation is at a crucial point right now. The banks are complaining that the tide of regulation is choking capital markets in a bureaucratic tangle and impairing their ability to provide capital for the real economy. Their lobbyists focus their considerable resources on lawmakers and regulators, and it must be tempting for the authorities to give some ground.
But the short period it took for the investment banks to game the post-Spitzer settlement provides a little look at how the land will lie in, say, 2020, by which time new bankers will be in charge and the temptation to game the latest rules might once more prove irresistible. This would bring the post-2008 regulations into the line of fire. Far from lightening up, the regulators would be well advised to remain focused on the investment banks and their business model.
In mitigation, the investment banks might argue that 2010 is not 2014 and that finally after the Libor and currency benchmark scandals the message has hit home. But we heard all that in the liquor store, too. So like a repentant alcoholic, banks should just come clean and admit: “I am an investment banker and I can never be cured. Please save me from myself.”