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New York State Attorney General Eliot Spitzer took investment bank Merrill Lynch to task earlier this year for positive research reports on companies that analysts reviled in private. The investigation resulted in a hardly crippling $100 million fine, but it has sparked a push for industrywide reform.
Now, Spitzer is going after Citigroup (C
), its investment bank, Salomon Smith Barney, and its CEO Sandy Weill. At issue, controversial former SSB analyst Jack Grubman, who changed his recommendation on AT&T in November, 1999, from neutral to buy. Citigroup won a $10.6 billion deal to underwrite AT&T's tracking stock in April, 2000, and Grubman lowered his rating months later.
Weill has been drawn into the controversy because he sat on AT&T's board at the time. AT&T was subpoenaed on Aug. 23 concerning the investigation.
Although he balked at discussing details of the Citigroup investigation, Spitzer spoke with BusinessWeek Banking Editor Heather Timmons about financial conglomerates and the conflicts they've created. Edited excerpts of their conversation follow:
Q: Did the late '90s trend of putting together all aspects of financial services under one roof cause some of the problems we've seen in Corporate America?
A: I don't think there's any question that bringing many elements of financial services together has created more complex relationships that need to be properly controlled. Many of the conflicts that we're trying to unravel predate the [repeal] of Glass-Steagall. [The Glass-Steagall laws that kept banking, insurance, and securities businesses separate were passed in 1933 and repealed in 1999.]
These conflicts come from the notion that the concentration of financial services would be a good and healthy thing for the economy. I don't think anyone is now saying we need to revert to the earlier structure of little companies and dramatic regulation, but there are issues that need to be thought through.
Q: Can you elaborate on the investigation at Citi?
A: No, except to say we have an ongoing investigation.
Q: By looking at everyone from senior management down, what kind of message are you trying to send?
A: I don't think its fair to say I'm sending a message at this point. We're investigating. If there is a message to be learned from the Merrill Lynch settlement and our ongoing investigations, it's that the financial-services industry did not properly address the conflicts that have been present in the system over the past few years. These abuses may have benefited certain players, but they have not benefited the economy as a whole.
Q: Ultimately, Merrill seems to have gotten off with little more than a small fine. That's what analysts speculate will happen with Citi, too.
A: It's too early to say, but keep in mind the $100 million that Merrill is paying is only a fraction of what they will pay in [lawsuit] settlements in the next few years. The market cap took a huge hit.
And some of the conflicts that have been revealed have had a real negative effect on the balance sheets of these financial-services firms. One of the consequences [of the conflicts] may have been misguided loans made to investment-banking clients.
Q: You can't help but wonder where the bank regulators were in all this. Though bank balance sheets are healthy, the banks certainly took on some serious reputational risks.
A: There have been several lapses at least. The internal compliance departments at the firms have been absent, the regulators from the SEC to the OCC [Office of the Comptroller of the Currency] to others have not been visible. [We need to rethink] how we examine the banking system.
Q: Any suggestions?
A: No, I'm going to stick with what I know here.
Q: One could infer from the Merrill settlement that disgorgement -- getting investors' money back, by, for example, establishing restitution pools that companies must pay into -- isn't one of your priorities.
A: I'd say stay tuned.
Edited by Patricia O'Connell
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Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
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