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Does Wall Street Have Its Thumb on the Scale?

Citigroup was in the news for a couple of reasons Friday. Neither seems likely to have a particularly large impact on the company's stock, but both illustrate the divide between Wall Street and Main Street investors.

In one story, Citi fired analyst Mark Mahaney and a junior analyst after a Massachusetts regulator fined the company $2 million for failing to properly supervise the pair. Mahaney and the junior analyst improperly published confidential information about Facebook (FB) ahead of its IPO and also unpublished revenue estimates for Google (GOOG) unit YouTube.

The complaints allege that Mahaney shared nonpublic information with journalists, but one wonders why it is an acceptable practice for analysts at big banks to have access to nonpublic information at all? There are rules that are supposed to prohibit analysts from sharing what they know with the firms' trading arms or customers until research notes are officially published, but if Mahaney, who had been a top-rated analyst, was sharing his information, how many other people are analysts talking to?

At issue is not only the handling of unpublished information, but the role of analysts in the rest of an investment bank's business. The Wall Street Journal's Deal Journal blog has a post discussing not only Mahaney's top rating, but also how his presence at Citi helped the company attract business, including roles in the IPO's of Zillow (Z), Bankrate (RATE) and Active Network (ACTV).

The job of an analyst is ostensibly to research companies and publish opinions about how well they are doing. Upgrades or downgrades from analysts can absolutely have an impact on the stock, so whether you believe what a given analyst writes or not, it could have an impact on your portfolio. That companies would choose Citi to help underwrite their IPO based on being covered by Mahaney suggests that they are expecting Mahaney to write mostly nice things about them.

Writing nice things about the companies they cover is not supposed to be the job of an analyst, but if you take a look at the analysts' ratings on almost any stock, you'll see more bullish opinions than bearish ones. This isn't an issue specific to Mahaney, or Citigroup, it is an issue that is industry wide. Investment banks publish supposedly objective research about companies, while at the same time using that research to solicit business from those same companies. Individual analysts may not have any specific conflict of interest, but obviously a company looking to hold an offering is more likely to choose an underwriter than is going to have nice things to say about its stock.

The other item that has Citi in the news today, is a long article in the New York Times detailing the events leading up to former-CEO Vikram Pandit's recent departure from the bank. What is interesting about this story, is that it goes into great detail about a campaign by Michael O'Neill, the chairman of the company's board, to oust Pandit that dates back to April.

The problem with this is that Citigroup's official version of the story is that the decision to leave was Pandit's. The Times' version of the story is that Pandit was given three options, resign now, resign at the end of the year or be fired. That Pandit took the option to leave immediately provides some support for the company's version of the story, but saying Pandit decided to step down on his own is clearly untrue.

This is a problem because, as Henry Blodget of Business Insider points out, Citi has an obligation to keep its shareholders informed about what is happening with the company. Clearly that's not what happened with Pandit.

Both of these issues are essentially about a Wall Street bank playing by a different set of rules than the mom and pop investors that they invest alongside. That stories like this cause no real controversy or outrage shows just how little the public expects in terms of integrity from Wall Street. It's no wonder then that we've seen investors increasingly moving their money out of a stock market that many view as rigged against them.

 

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com.

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.