Wall Street Conflicts Reach Beyond Banking

Everybody talks about potential conflicts of interest between research analysts and investment bankers at Wall Street firms. But what about conflicts between the analysts and the trading desk?

New York Attorney General Eliot Spitzer has cast the spotlight firmly on the sometimes too-cozy relationship between investment bankers and research analysts. Spitzer said a 10-month investigation of Merrill Lynch (MER Quote) revealed that its Internet group, led by former analyst Henry Blodget, often slagged stocks in internal emails that they professed to love in their published research. A spokesman says the attorney general's office hopes to be "a catalyst" for reforms that effectively separate investment banking interests from those of analysts.

Now, big Wall Street firms including Morgan Stanley (MWD Quote), Goldman Sachs (GS Quote), Lehman Brothers (LEH Quote), Bear Stearns (BSC Quote), Credit Suisse First Boston and Citigroup's (C Quote) Salomon Smith Barney are reportedly in Spitzer's cross hairs.

But even if you separate the investment-banking interests from research departments and shore up the Chinese walls, you're still going to have conflicts, observers say. While investment banking is a high-margin business on Wall Street, let's not forget another big source of income: the buying and selling of stocks. And the whole purpose of firms' equity research departments, the whole reason that they exist, is to facilitate the buying and selling of stocks. Stock research is something you get as an incentive to trade through a particular firm. ...