The record $1.4 billion settlement between state and federal securities regulators and 10 of the largest Wall Street firms promises to restore a measure of integrity to the financial markets that is sorely lacking. But it may take some time for the Street to regain its credibility. The internal e-mails and memos released as part of the deal show a callous disdain for individual investors that goes beyond anything revealed to date. Those who said that Wall Street's problems stemmed from just a few bad apples are now confronted with proof that the corruption of the financial system was systemic and did serious harm to America's equity culture.
We now know that the half-truths and full lies of analysts such as Merrill Lynch & Co.'s (MER ) Henry Blodget and Salomon Smith Barney's (C ) Jack Grubman did not go unnoticed within their firms. Many retail brokers protested that the analysts' reports on telecom and dot-com companies were deliberately misleading their clients and causing them to lose large amounts of money. In e-mails, these brokers complained that their small investor clients were being sacrificed to investment banking. These protests went to senior managers who chose to ignore them. They're proof that alarms did, in fact, go off on the Street -- but managers chose to ignore them.
Financial firms, like many other businesses, are sometimes built on conflicts of interest that must be properly managed. It is clear that during the tech bubble, they weren't. Indeed, they were exploited to maximize profits in investment banking at the expense of retail customers. The commingling of investment banking, research, and retail brokerage demanded professional, self-regulatory oversight and didn't receive it.
The settlement reached by New York State Attorney General Eliot Spitzer, other states' attorneys general, and the Securities & Exchange Commission takes major steps to put distance between research and investment banking and to provide independent research to individual investors. But the deal keeps research and investment banking within the same financial institution, thus maintaining structural conflicts of interest. These conflicts must still be supervised fairly and properly. Yet many who failed at this task were not held accountable in the settlement and remain in charge. It's now up to the SEC to follow up and ensure that Wall Street is led by people with integrity. It's the only way to restore confidence in a system that clearly betrayed investors.