Key Concepts
1. Describe the main functions of securities firms.
2. Explain how securities firms facilitate corporate acquisitions.
3. Explain how securities firms may be exposed to systemic risk, and discuss the pros and cons of the
Federal Reserve rescuing Bear Stearns during the credit crisis.
POINT/COUNTER-POINT:
Should Analysts be Separated from Securities Firms to Ensure No Conflicts of
Interest?
POINT: No. Securities firms are known for their ability to analyze companies and value them. Investors
may be more comfortable when analysts work within the securities firms, because they have access to
substantial information.
COUNTER-POINT: Yes. Analysts have a conflict of interests, because they may be unwilling to offer
negative views about a company that is a client of their securities firm.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: Most students are well aware of the conflicts of interest, and therefore have some strong
opinions about this issue. The conflicts of interest were highly publicized in 2002 and 2003. New
regulations were imposed to prevent the conflict of interests in the future. For example, analysts have to
report whether they have a personal investment in the company they are rating. However, there is some
question as to whether the rules will change analyst behavior. Even if the analysts were separated from
securities firms, consider the potential conflict of interests that would still occur. A securities firm may
need to pay an analyst to conduct an analysis of a firm for it recently underwrote the initial public
offering. The analyst knows that the securities firm is hoping for a very favorable assessment over time,
as that assessment may create more demand for the stock and ensure that the stock price remains high.
Thus, even if analysts are not employed by the securities firm, they still have an interest in offering an
opinion that will please the securities firms, so that that they receive future business from the securities
firm.