Monday, June 18, 2007

Rectifying Market Failures

This is interesting. It seems to be a case where government regulation has actually caused the market (in this case, the market in investment advice) to operate more efficiently.
Wall Street Analysts Proving More Bearish Than Ever

June 18 (Bloomberg) -- Never in the history of Wall Street have analysts been so bearish. The good news is they're also getting it right more often, helping make investors richer by betting against corporate America.

Thank the regulatory hammer of former New York Attorney General Eliot Spitzer. In 2003 he forced 10 big firms to separate investment banking from research to avoid the conflicts of interest that tempted analysts to keep their reports upbeat.

"The industry has changed: you're not anathematized if you come out with a negative opinion," said Robert Stovall, whose work on Wall Street the past five decades included stints as a strategist at the securities unit of Newark, New Jersey-based Prudential Financial Inc. and research director at Nuveen Corp. in New York. "It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, 'I never want to see a bearish word on my stationery.'"

That transformation has helped investors following analysts' advice to beat the market. Nine of those 10 firms have been accurate the past two years, according to Investars, which tracks analysts' performance.
It's old news that government intervention can help remedy market failures. But the fact that this principle seems to hold true even on Wall Street - the emotional center of the laissez-faire economic world-view - is fascinating, and carries important implications for markets where market-failures are much more obvious.

Oh, and in case you were wondering: Yes, I'm thinking about health care.

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