The Wall Street Journal has a must-read story that lays out in detail why brokerage research must not be relied upon. Brokers are first and foremost in the business of distributing securities. As you will read here, the research departments are a part of the package of gaining underwriting business. The more favorable the opinion on an issuer the more money business for the bank.
On the Sunday after Donald Trump won the U.S. presidential election, sparking turmoil in emerging markets, J.P. Morgan Chase & Co. downgraded Indonesia’s stock market. The move set off a chain reaction that resulted in the New York bank losing Indonesia as a client.
J.P. Morgan tried to smooth relations with Indonesia, as it had done several times in the past. At stake for the bank was a lucrative and decades-long partnership. Bank executives spoke with officials through back channels, pushed for meetings and pointed to subsequent reports with more-positive views on Indonesia’s economy, said several people familiar with the efforts.
Analysts turned over to the finance ministry past market-research reports, and higher-level managers began to sign off on Indonesia research, according to one of the people. In January, the bank’s analysts partly reversed their Indonesia equities call, bumping their recommendation up to “neutral” from “underweight.”
But Indonesian officials were unmoved. They insisted that banks like J.P. Morgan, which were primary dealers for government-bond sales, have a responsibility to support the interests of the Southeast Asian nation. They were open to criticism, the officials said, but they felt J.P. Morgan’s report wasn’t accurate or credible. Indonesia’s finance ministry declined to comment for this article.
Investments banks have long weathered complaints that their research departments, which make calls on stocks, bonds and other assets, aren’t truly independent from their investment-banking operations, which pitch deals to companies and governments.
Read more here.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Amazon Suffers Internal Battle over Search Result Manipulation - September 17, 2019
- Attacks on Saudi Oil More Likely to Hurt China than the U.S. - September 16, 2019
- Is Sheltering in Munis a Safe Bet for Investors Bitten by SALT Caps? - September 13, 2019