Debt analysts shouldn't be pitching bonds to investors

The Insider

Your Money

May 23, 2004|By BILL BARNHART

BY NOW, stock market investors should realize the conflicts between their broker's stock analysts and investment bankers.

But individual bond investors have been out of the loop.

"A lot of people put corporate bonds in their 401(k), and municipal bonds are heavily retail," said Richard A. Ciccarone, chief research officer at McDonnell Investment Management.

This month, Citigroup agreed to pay $2.65 billion to settle a lawsuit over its dealings with telephone giant WorldCom.

Allegations included evidence that Jack B. Grubman, Citigroup's former star telecommunications analyst, touted WorldCom while posing as an independent stock analyst.

The lawsuit, by public pension funds, also claimed that Citigroup fixed-income analyst Robert Waldman had improper dealings with WorldCom.

Waldman, who is still employed by Citigroup, was not named as a defendant. He could not be reached for comment.

But the message was clear.

"The equity thing happened. It doesn't take a rocket scientist to realize that some of the same questions are going to be asked of bond analysts," said Micah S. Green, president of the Bond Market Association.

Last week, Green's organization published a 75-page document, "Guiding Principles to Promote the Integrity of Fixed Income Research."

The document gives investors, probably for the first time, a look at the nether world of bond research.

Like equity analysts, fixed-income analysts who study corporate bonds, municipal bonds and other debt securities at brokerages can't escape pressures to say nice things about the debt issuers doing business with their firm.

Bonds are different from stocks. An analyst's view on a bond rarely makes headlines, said Carol Levenson of Gimme Credit, an independent research firm.

Nonetheless, brokerages have used research analysts in soliciting debt-offering deals.

"Research analysts should not participate in any `pitches' to current or prospective clients for investment banking," such as underwriting bond issues, the Bond Market Association guidelines state.

For some state and local governments, the new rectitude on Wall Street creates problems.

"In some respects, it's a little unfortunate," said John J. Hallacy III, managing director in municipal research at Merrill Lynch & Co. Inc.

"There have been cases where issuers have requested research analysts to come to pitches to talk about potential new credits and how those credits may be viewed by rating agencies, bond insurers and investors. Now, we cannot do that anymore," Hallacy said.

The association's guidelines are an attempt to rein in an additional conflict, arising from the fact that trading in debt securities is far less liquid than equities trading.

Trading desks, with their contacts among institutional investors, exercise control over the sale of debt securities. Opinions that are generated by dealers who are attempting to sell bonds may conflict with the firm's research analysis.

"Dealer research may be biased by the fact that they may have inventory positions in the bonds," Ciccarone said.

"The opportunity for conflict is worse, perhaps, because of the interaction with bond trading desks," Levenson said.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at

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