Conflict of Interest

A monumental securities investigation came to end in 2002, forever altering the way investment banks do business. In December 2002, 10 of Wall Street's largest investment firms agreed to pay $1.4 billion to settle research and advisory conflicts-of-interest violations. The settlement closed an investigation that was initially opened by New York State Attorney General Eliot Spitzer, which began in early 2002 with an investigation into research practices at banking behemoth Merrill Lynch. Spitzer alleged that research analysts there allowed potential investment banking fees to influence the ratings given to companies covered by the firm.

Market commentary

Analysts usually cover a particular (small) universe of stocks, but some analysts, called market strategists, survey and report on market conditions as a whole. Most large banks publish market commentary reports on a daily basis (sometimes even several within a day), augmented with weekly, monthly and quarterly reviews. Included in such reports is information on the performance of stocks in major market indices in the U.S., major markets worldwide, and in various sectors - such as transportation, technology and energy - in the U.S. Some of these commentaries offer forecasts for the markets or for particular sectors. Naturally, economic data is paramount to stock market performance overall and thus pervades market commentaries.

Economic commentary

Similar to a market commentary, economic reports are also published periodically and cover economic indicators and trends. These reports are often stuffed with graphs of macroeconomic factors such as GDP, inflation, interest rates, consumer spending, new home sales, import/export data, etc. They provide useful information regarding government fiscal and monetary policy, and often link to fixed income reports. Often the same market strategist writes both the economic commentaries and the market commentaries for a firm.

Fixed income commentary

Analysts covering the fixed income markets publish periodic reports on the debt markets. Often tied to the economic commentaries, fixed income

Research market reports comment on the performance of various fixed income instruments including U.S. government securities, mortgages, corporate bonds, commodity prices and other specialized fixed income securities. The three-point scale for rating stocks has become ubiquitous in banking (since the conflicts-of-interest settlement), but the definitions that banks refer to do not accurately measure what the analyst believes. The following scale reflects the general consensus on stock ratings, but keep in mind that these vary by firm.

Rating Published Definition Actual Meaning


STRONG BUY. The company's stock is a strong buy, and will outperform the market over the next 18 months.

The stock is a worthy buy. Or, if the investment bank writing the research just completed a transaction for the company, the analyst may simply believe it is a decent company that will perform as well as the market in the next 18 months.


MARKET PERFORM. The stock will perform approximately as well as the market over the next 18 months.

Be wary about buying this stock. It is either richly valued or has potential problems which will inhibit the firm's growth over the next 18 months.

The stock will perform below the market over the next 18 months

Dump this stock as soon as possible. An underperform rating issued by an analyst means the company is not moving in the right direction.

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