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9781898128793

Conflicts of Interest in the Financial Services Industry

by ; ; ;
  • ISBN13:

    9781898128793

  • ISBN10:

    1898128790

  • Format: Paperback
  • Copyright: 2004-06-01
  • Publisher: Centre for Economic Policy research
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Summary

In the recent stock market collapse, confidence in the financial industry was shaken by numerous scandals. Beginning with Enron in 2001, scandals brought about the demise of prominent financial figures, damaged the reputation of premiere firms and destroyed the global accounting giant Arthur Andersen. Central to this crisis was the exploitation of conflicts of interest. Research analysts at investment banks were found to be distorting information at the behest of underwriting departments eager to promote new issues. Auditors appeared to sanction misleading accounting in order to gain business for the consulting side of their firms. Policy response in the United States was quick. Large fines were levied and regulators compelled the separation of financial activity by function, constraining financial conglomerates.

Author Biography

Andrew Crockett: Former General Manager, Bank for International Settlements, Basel Trevor Harris: Morgan Stanley, New York Frederic S Mishkin: Graduate School of Business, Columbia University, New York Eugene N White: Rutgers University, New Jersey

Table of Contents

List of Conference Participants ix
List of Figures xiii
Acknowledgements xv
Foreword xvii
Executive Summary xix
1 What Are the Issues? 1(12)
1.1 Introduction
1(1)
1.2 Information and financial markets
2(1)
1.3 The role of financial institutions in financial markets
3(2)
1.4 What are conflicts of interest?
5(1)
1.5 Why conflicts of interest are important
5(1)
1.6 A framework for evaluating policies to remedy conflicts of interest
6(3)
1.7 The types of conflicts of interest studied in this Report
9(2)
1.8 Plan of the study
11(2)
2 Investment Banking: Conflicts of Interest in Underwriting and Research 13(14)
2.1 Information synergies and conflicts of interest
13(1)
2.2 The problem of analysts' compensation
14(2)
2.3 The IPO boom of the 1990's
16(1)
2.4 Analysts 'excessive' optimism
17(4)
2.5 Evidence of increasing conflicts in the 1990's
21(3)
2.6 Remedies for the underwriter/analyst conflict of interest
24(3)
3 Accounting: Conflicts of Interest in Auditing and Consulting 27(14)
3.1 Introduction
27(1)
3.2 The evolution of auditing, standards and regulation
27(2)
3.3 The value of the audit opinion
29(2)
3.4 Conflicts of interest
31(4)
3.5 Separation of auditing and related services
35(1)
3.6 The multi-product audit firm and auditor independence
35(2)
3.7 Litigation risk and rules-based audits
37(2)
3.8 Remedies
39(2)
4 Rating Agencies: Conflicts of Interest in Credit Assessment and Consulting 41(14)
4.1 Introduction
41(1)
4.2 The role of rating agencies
42(1)
4.3 Beneficiaries of an effective rating mechanism
43(1)
4.4 The evolution of the rating industry
44(2)
4.5 Do rating agencies add value?
46(2)
4.6 Vulnerability to conflicts of interest
48(2)
4.7 Remedies to conflicts of interest
50(4)
4.8 Conclusion
54(1)
5 Conflicts of Interest In Universal Banking 55(22)
5.1 Introduction
55(1)
5.2 American universal banking before Glass-Steagall
56(1)
5.3 Investments banking and insurance
57(2)
5.4 Commercial and investment banking
59(6)
5.5 Testing the myths
65(3)
5.6 Contemporary universal banking in the United States
68(1)
5.7 Universal banking and conflicts of interest outside the United States
69(2)
5.8 Remedies for conflicts of interest
71(6)
6 Overview and Conclusions 77(10)
6.1 When are conflicts of interest a serious problem?
77(2)
6.2 Evaluating remedies
79(2)
6.3 Recommendations
81(6)
Discussion and Roundtable 87(1)
Session 1: Analysts and underwriters 87(4)
Session 2: Auditors and rating agencies 91(5)
Session 3: Universal banking 96(5)
Session 4: Remedies 101(8)
Endnotes 109(6)
References 115

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