Agency problem

Analyst Scandals
Wall Street stock analysts regularly publish research reports on a wide range of firms along with buy or sell recommendations.  yet, only the smallest fraction of firms were assigned sell recommendation and many firms given buy recommendations were privately called dogs by these market analysts.

conflicts of interest and distorted incentives--agency problems--played a role in the scandals. analyst were commonly compensated not for the accuracy or insightfulness of their analysis, but for their role in garnering investment banking business. and the payoffs could be huge. in the year after Merrill Lynch analyst henry blodeget participated in 52 investment banking deals, his compensation reportedly increased from $3 million to 12 million.

IPO
The investment bankers assess demand for the IPO offering and allocate shares to interested investors. Becuase IPO typically provide excellent initial returns, these allocations are highly conveted. some investment banking firms that managed IPO made a practise of rewarding allocations to favored clients in what resembled kick-back schemes. for example, CSFB allocated shares with the expectation that recipients would direct stcok trading business to its brokerage arm. other allocations were apparently granted to corporated executives in return for their promise of invsetment banking business.

these episodes indicates that many investment bankers were more focused on short-term profits than long-term reputations. in the boom years, there was considerable temptations to focus on the short term; investment bankers earned about $10 billion in fees by issuing $245 billion in new securities. for the most part, they are focused on re-aligning incentives, for example by servering the link between stock market analyst compensations and investment banking businesses, by makeing executives and board meembers personally responsible for the accuracy of financial reports, by mandating a greater role for disinterested outsiders on the board of directors, by beefing up the budget of the SEC.