If Wall Street chiefs are facing growing accusations of conflicts of interest, they have only themselves to blame, writes William Cohan, a former banker and author of the book, “The Last Tycoons: the Secret History of Lazard Frères”, in an FT comment article.
Mr Cohan cites a recent remark by Rob Kindler, a vice-chairman of investment banking at Morgan Stanley, who told an annual gathering of deal-makers at Tulane Law School in New Orleans: “We are totally conflicted… get used to it.”
Mr Kindler was “dead right,” says Mr Cohan, noting: “Investment banking is awash with potentially unhealthy and unmanageable conflicts of interest. The situation is getting worse as the dollar values involved get larger.”
Mr Cohan gives examples include the long-standing conflict where a banker is asked to give a “fairness opinion” to bless a deal on behalf of a company’s shareholders, noting that, “he gets a multimillion-dollar fee only if the deal goes through.”
Then there is so-called “staple financing”, says Mr Cohan, “when banks advising the seller in a deal provide financing to the buyer, resulting in a glorious double-dipping of fees”. Opportunities are rife during the private equity bonanza for a banker to favour a buyer who is willing to use the staple financing over a buyer who is not, he points out.
“Such a charge has been levied in the battle for the Tribune company by the losing bidders against bankers at Merrill Lynch and Citigroup, which together provided billions in staple financing to Sam Zell for his winning bid while advising Tribune; Merrill provided a ‘fairness opinion’ to the Tribune board. Merrill has also been Mr Zell’s long-standing banker and adviser and provided advice (for $30m) to him on last year’s $39bn sale of his Equity Office Properties to the Blackstone group,” Mr Cohan says.
Then there is News Corp’s $5bn bid for Dow Jones, which, Mr Cohan believes, “raises new questions” about potential conflicts for investment bankers. “Rupert Murdoch knew that convincing the Bancroft family to sell would be difficult. So he turned for strategic advice to Nancy Peretsman, a managing director at Allen & Co… A decade ago Ms Peretsman advised some dissident younger members of the Bancroft clan. Uniquely among Wall Street advisers, she had insight into the family’s dynamics.”
On the other side, “Richard Zannino, Dow Jones chief executive, hired Goldman Sachs to advise him and the board, even though Goldman had never worked for the company. Goldman would have insight into Mr Murdoch’s thinking. It had advised Mr Murdoch for a long time and John Thornton, former Goldman president, has been on the News Corp board, including its compensation committee, since June 2004,” writes Mr Cohan.
“Goldman’s most recent work for News Corp – culminating in a $20m fee – came in December 2006 in the $11bn stock swap with Liberty Media,” he notes, quoting Andrew Ross Sorkin of the New York Times asking: ‘How hard do you really think Goldman is going to push News Corp, considering that if a deal is ever struck, Goldman will want to make Mr Murdoch’s company a client again?’.”
So while Mr Kindler is right — “most Wall Street firms are hopelessly conflicted” — he is “also wrong”, says Mr Cohan: “We do not have to get used to it, or accept it”.
“Investment banks have committees whose job is to prevent bankers from taking on assignments where another client’s confidential information could be compromised or where there is even an appearance of impropriety. Why are they not doing their job? Are the fees simply too big for these committees to have any internal clout? Is it crazy to think bankers can police themselves?,” he asks.
Clearly Mr Cohan thinks it is an entirely sane suggestion, for he concludes that it’s high time for Wall Street chief executives to “show real leadership and put an end to practices that raise questions about conflicts of interest”.