A global settlement of multiple conflict-of-interest inquiries into Wall Street’s biggest banks and brokerage firms seemed imminent as recently as last week. Now players on all sides seem resigned to a delay that could push a final deal well into January, if not beyond.
Part of the problem is money. A handful of firms that have avoided the embarrassing public release of internal e-mails showing unseemly business practices feel they should pay less than the $60 million to $75 million fines regulators requested last month.
This group includes Morgan Stanley, UBS Warburg, Lehman Brothers Holdings Inc., Bear Stearns & Co., U.S. Bancorp Piper Jaffray Inc. and Deutsche Bank AG.
Regulators have come back to these firms with the proposal that each pay a $50 million fine. In addition, each would be required to contribute $50 million a year for at least five years to a fund that would buy independent research produced by firms that do no investment-banking work.
This $50 million per-year assessment would apparently apply to all firms involved in the talks, industry sources said. Each firm would be required to distribute the independent reports to brokerage clients along with reports produced by their own analysts. Regulators and spokesmen for the firms declined to comment.
The “50/50 proposal,” as it is being called, is still too high for some. “It’s just not reflective of any behavior that’s been discovered,” an official at one of the six reluctant firms said today. However, an executive at another one of the firms said regulators were getting closer to an acceptable deal.
Meanwhile, California regulators, who have been investigating Deutsche Bank and Thomas Weisel Partners LLC, continue to think that the fines being proposed are too low, particularly for Deutsche Bank. Andre Pineda, deputy commissioner in the state’s corporations department, said he was unaware of the 50/50 proposal. “If the final settlement comes in too low, we won’t sign on,” he said.
Meanwhile, several other firms, including Credit Suisse First Boston Corp., the Salomon Smith Barney unit of Citigroup Inc., Goldman Sachs and J.P. Morgan Chase & Co., continue to be eager to pay a fine and move on.
Even so, some are negotiating somewhat smaller payments than originally proposed. Regulators say they fully expected such bargaining. Sources say regulators originally proposed a fine of $250 million for Credit Suisse, which may be willing to pay around $150 million. Salomon, which was asked to pay $500 million, may pay around $350 million.
Another possible cause for delay is turnover at the Securities and Exchange Commission, said sources involved in the talks. Some parties feel no deal will be reached until William H. Donaldson is sworn in as chairman. Others say SEC enforcement chief Stephen M. Cutler is fully empowered to sign off on a deal.
Thorny issues also remain regarding how the structural reforms that regulators say are crucial to the settlement will work. For instance, regulators and firms continue to struggle over precisely what kind of independent research firms will be required to distribute.
One person briefed on the talks said it remains unclear if technical research performed by analysts who have little or no interaction with companies they cover will be sufficient or whether firms will have to buy more expensive research from firms whose analysts visit companies and have access to executives.
In addition, there is still no agreement on what “touch points” will be allowed between investment bankers and analysts. Participants in the talks are discussing whether an official from a firm’s legal-compliance department should be present anytime a banker interacts with an analyst.
At the heart of the probes have been allegations that Wall Street analysts put inflated ratings on stocks in order to please lucrative investment-banking clients.