Henry Blodget, BusinessInsider aggregator-in-chief, disgraced Merrill Lynch analyst and the pundit who spent the weeks leading up to the Facebook IPO hammering on what were at face incongruous themes—overpriced Facebook stock was “muppet-bait” and Mark Zuckerberg was the greatest—is out with a new Facebook trope that’s Internet fantastic:
The ongoing controversy over a Morgan Stanley research analyst who cut his earnings guidance for Facebook in the days ahead of the company’s IPO is really about…Henry Blodget?
That’s right. In the days leading up to Facebook’s IPO, a Morgan Stanley tech analyst cut revenue guidance for the company, which would have been routine, except—Morgan Stanley was the lead underwriter on the offering, and the research was available to the investment bank’s institution clients, but not retail investors.
Outrage ensued, and that’s where Mr. Blodget came in—not just because Mr. Blodget was among the most outraged.
Morgan Stanley’s explanation was that so-called Chinese walls separated the bankers who underwrote the offering from those who provide sell-side investment advice. And those Chinese walls were built after the tech bubble burst to protect investors from banking analysts. If only we knew an infamous banking analyst…
“I was one of the top-ranked Wall Street Internet analysts during the dotcom bubble,” Mr. Blodget wrote in his column today.
The top analysts were said to have to “wear two hats,” banker and analyst, and have to help investors while also maintaining great relationships with companies. At some firms, analysts were even paid directly for banking deals, though that wasn’t the case at my firm (Merrill Lynch).
After the market crashed, a new New York Attorney General named Eliot Spitzerdecided to look into the research-banking conflict. And, thanks to my visibility, he started with me.
After extending his investigation to many other firms, Spitzer forced an industry-wide settlement in which the involvement of research analysts in IPOs was pared back and the “Chinese Wall” between research and banking was strengthened.
The research reforms that Spitzer’s settlement brought about restricted the already limited level of communication between analysts and individual investors on IPOs. Because, after the dotcom bubble, it apparently never occurred to anyone that analysts would have anything negative to say.
So, in other words, we’ve just seen another vicious example of the Law of Unintended Consequences.