- Investment bankers wanted to win underwriting business.
- They realized that having their research analysts shout “BUY BUY BUY!” about every company they underwrote would help to win this business.
- So they went to their analysts and were all “do that.”
- The analysts, for cost-center and spinelessness reasons, did.
- But in classic passive-aggressive fashion they sent each other emails to the effect of “oh, man, my fingers were totally crossed when I issued that Buy recommendation, that company is dogshit.”1
- It was dogshit, and investors lost money buying those Buys.
This problem was solved via a Global Research Settlement among a bunch of banks, a bunch of state attorneys general, and the SEC. The settlement had various technical provisions around who could talk to whom about what when, but the gist of it was “yo, bankers, stop telling your analysts to talk up shitty stocks.”
You can understand why Morgan Stanley banker Michael Grimes2 would not think that he violated this settlement when he (1) learned that the Facebook underwriting syndicate’s research analysts (including Morgan Stanley’s) had estimates for Facebook’s 2Q2012 revenue were higher than what Facebook expected, (2) told Facebook something to the effect of “hey, it would look really bad if you did an IPO based on misleadingly high revenue estimates, you should guide the analysts lower,” and (3) sat with Facebook’s Treasurer in a hotel room while she did that.