Deutsche Bank has retracted statements it made in a recent research report on WorldCom Inc. In an April 12 high-grade weekly research report, Deutsche Bank stated "we believe the company is either headed for bankruptcy or a merger." Only five days later, it came out with a high-grade daily report that reads, "our comments regarding WorldCom, Inc. appeared in error due to an editorial mistake. We regret any misunderstandings that this may have caused." The move has several members of the fixed-income community questioning whether the firm's research group is autonomous from its investment banking operations. Deutsche Bank has not acted as lead underwriter in any of the company's debt sales within the past several years.
Several buy-siders speculated that the retraction may have been the result of pressure from investment bankers who were worried about losing potential underwriting business. Christoper Mahoney, head investment-grade portfolio manager at J & W Seligman, says, "it suggests analysts write opinions they don't necessarily hold to. Maybe somebody came down and said, 'What do you think you're doing?'" Potential conflicts of interest between research and investment banking are currently the subject of separate investigations by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission.
Charlie von Arentschildt, Deutsche Bank's head of global markets for the Americas, says John Tierney, the analyst who published the research, "is a quantitative and strategic analyst and is not supposed to be making company-specific calls. It fell under the editorial radar screen and was retracted," he says. Regarding the conflict of interest issue, von Arentschildt says, "I look at it much more as an equity research issue than a credit research issue." Tierney was on vacation last week.
"The decision was made internally without input from our origination group or WorldCom," adds Ted Meyer, a firm spokesman. Susan Mayer, WorldCom's treasurer, referred calls to Claire Hassett, a company spokeswoman, who declined to comment.
The provenance of the report not withstanding, both the market and the rating agency clearly share some of Tierney's concerns, as the company's benchmark 7.5% bonds of '11 slid over 20 points the last two weeks to 58.5.
While fixed-income analysts are rarely credited with winning investment-banking business, they can certainly be blamed for losing it, says David Hendler, an analyst who spent 18 years on the sell-side and now works for Creditsights, an independent research firm. "When the deal gets done, it's: 'He can have a sip of champagne, but who is he again?' When the deal doesn't get done, you gang up on the wimp, and the wimp is the corporate bond analyst," he says.