Incentives, Independence and Conflicts of Interest: Follow the Money

Recently, I was watching a June 2, 2010 hearing conducted by the Financial Crisis Inquiry Commission (FCIC) which has been published in the C-SPAN video library.

In the hearing Warren Buffett provided testimony and answered questions of FCIC commissioners. One of the commissioners, Heather Murren,* asked Mr. Buffett a question about the business model of the Nationally Recognized Statistical Rating Organizations (NRSRO’s) and if, in his opinion, the structure of the NRSRO’s business model might have influenced their ratings.  

As someone who is personally interested in independently produced investment research, institutional ‘third party’ agency brokerage, and institutional soft dollar commissions - used as payment for independent research - I found Mrs. Murren’s follow-up (to Mr. Buffett’s answer) very interesting. Her follow-up:

I would hate to differ with you. If you look at, for example, equity research, there are a number of boutique shops that are specifically known for the quality of their research. And, they do not engage in investment banking activities, so they don’t have as much of a stake in the origination process. And, to me, there’s some parallel between this area of research and some others. So, I guess my question really is, if you change the way people get paid, do you end-up getting a different outcome? So, that was really the nature of where I was headed with this.

* In April 2002, Mrs. Murren retired as a managing director, Global Securities Research and Economics, of Merrill Lynch where she was group head for the Global Consumer Products Equity Research effort. Also noteworthy, Mrs. Murren is married to James Murren, who before becoming the CEO of the MGM Grand, Inc., was a managing director and director of U.S. Equity Research at Deutsche Bank. Both Heather Murren and James Murren are Chartered Financial Analysts. (Heather Murren and James Murren both have biographical information published at Wikipedia).


I’m wondering if the Murren’s activities working for large full-service investment banking brokerage firms, which produce proprietary investment research, may have influenced Heather Murren’s positive comments about the quality of independently produced research produced by some independent investment research boutiques.

If you would like to watch a video-clip of the portion of the FCIC hearing with Ms. Murren’s comment you can do so by following this hyperlink: