What accounts for the credit crunch can be reduced to a single word. Not “greed”, which also exists in stable markets. The word is “information”. The continuing absence of information about the true value of underlying securities means no one knows when the market has hit a new normal for the important purpose of rebuilding.
Why did so many smart people at so many top firms make dodgy investments? One explanation is the absence of warnings from the professionals whose job it is to identify risks at companies such as financial services firms: the much-maligned research analysts. For decades, the large Wall Street brokerages had armies of analysts who, when they did their jobs right, asked the hard questions and issued tough reports that often alerted both company executives and public investors to market-moving issues.
There are now about half as many Wall Street analysts as in 2000. Some brokerages had mixed analysis with investment banking during the dot-com boom, but regulatory overkill undermined this source of analysis. Last year, Brad Hintz, who covers brokerages for Sanford C. Bernstein, told Barron’s, “Research analysts have gone the way of high-button shoes and buggy whips.”
Alas, unknown risks have not. The now-former senior executives at Bear Stearns, Lehman and Merrill must wish they had been able to retain all their star banking analysts. Some of those analysts just might have waved enough red flags — in public or even in the hallways of the banks themselves — to alert management to risks in their portfolios.
As it happens, quite a few of those analysts left these Wall Street firms for the “buy side”, such as hedge funds, which keep their research proprietary, for their own trading. Predictably, it was well-informed short-sellers at these firms who first alerted the market to the true value of credit derivatives and other mispriced instruments by driving down shares of firms such as Lehman.
At a time when real understanding is at a premium, we’re increasingly in a world of information haves and have-nots. The consolidation of the financial services industry will mean more hollowing out of Wall Street analysis, further reducing the flow of information. A corollary: Proprietary information will be more valuable than ever, giving well-informed traders an even bigger edge.
What’s the solution? Part of the answer came in news earlier this month that Credit Suisse will make macroeconomic research from its analysts available to noninvestor clients of Gerson Lehrman Group, a powerful force in the world of independent research such as for hedge funds. Equity researchers from Credit Suisse joined the some 200,000 expert consultants that Gerson Lehrman has attracted to its network. These are former executives, practicing lawyers and academics with expertise in the details of particular companies and industries. Clients of Gerson Lehrman pay hefty fees to tap this deep knowledge through one-on-one phone calls and meetings.
When Gerson Lehrman launched a decade ago, it was to serve the deep information needs of investors in highly technical areas such as health and biotechnology. As Wall Street analysts began to leave the scene, it brought on experts in virtually every industry globally, with 150 research managers to help clients conduct more than 10,000 consultations monthly. These are often on arcane topics, such as the likely growth in salmon farming in Norway, or the odds of success for a particular drug trial.
By recruiting a huge number of experts and using online social-media tools to connect them to clients, firms such as Gerson Lehrman can bring information, knowledge and insights to the people who most need it.
The Wall Street Journal
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