Credit Suisse First Boston and Morgan Stanley are looking into hiring non-publishing "desk" analysts for their corporate bond departments, according to senior sell-side officials close to those firms. Such moves could be a precursor to firms ceasing to publish fixed-income research altogether, as they continue to steer clear of conflicts that could attract regulatory attention.
A unit head at one of the two shops says the hires would be a response to the juiced up regulatory environment. He says the analysts would work with the trading desk to help them understand the credits they trade. He declines to say whether they would have client contact. John Gallagher, spokesman for CSFB, says the firm has made no decision about any such hires. Diana Quintero, a Morgan Stanley spokeswoman, says the firm is not adding desk analysts. She declined to respond to further questions.
There is potential for a conflict between research and trading, according to Peter Petas, co-founder of CreditSights and a former sell-side research chief. "To the extent that credit analysts discuss their ideas with traders before the research is actually published, it creates a front-running problem that could be perceived as a conflict," he says.
The moves by CSFB and Morgan Stanley could be a precursor to firms ceasing to publish research altogether as they decide it creates more trouble that it is worth, according to one analyst at CSFB. "Where I add value as an analyst is by making money for the desk. I don't have to publish anything in order to do that," he says. The unit head who says he is considering the hires also sees a larger role for independent shops such as CreditSights and Gimme Credit, but would not explain what he meant by the comment.
At least one major investor says he would not be surprised to see published research phased out, though he still believes it has value. "I think it's useful, especially when firms underwrite a deal: We feel they have to have someone publishing and visible so people have someone to go to. It enhances liquidity," says Steve Peacher, high-yield portfolio manager at Putnam Investments, before adding, "It's easy for me to say. It doesn't cost us anything."
Cutting out publishing would not remove potentials for conflict, however. "If you're talking to clients and advising your own trading desk that's some level of conflict. Whether you're talking or publishing I wouldn't view it as a big distinction," says Carol Levenson, director of research at Gimme Credit. "It's like that line from Glengarry Glenross [a drama about real estate salesmen]: 'Are we actually talking about this or are we just speaking about this?'"
Other firms have taken pre-emptive steps to avoid conflicts regarding analysts' communications. UBS Warburg and Bear Stearns have lately moved to separate investment banking and bond research (BW, 4/13, 6/8).