by Matthew R. Simmons
Chairman and CEO
Simmons & Company International

Major reform is urgently needed on how investment banking equity research is conducted and communicated. The system is broken and badly in need of a fix.

The root cause of the disintegration of the equity research process was the elimination of fixed commissions from trading in 1975. Soon thereafter, equity research started becoming increasingly shallow. This decay process accelerated as the 1990s bull market grew and research became increasingly associated with investment banking fees.

With the benefit of hindsight, it appears that the skin-deep research that became the norm was a prime factor in creating illusions of great companies for countless investors. As the market collapsed, shocking discoveries – ranging from misleading reporting to outright fraud, missed by one "star" analyst after another – led to the loss of trillions of dollars of wealth. Worse still, this awful research began to create a deep distrust of the entire capitalist free-market system.

The lost money is history. Nothing can be done to recapture the wealth destroyed by fraud in businesses like WorldCom, Enron and Global Crossing. However, restoring trust in the equity markets is vital to the long-term well-being of our economy.

Even if genuine reform begins immediately, it might take a generation to remedy the situation. Unfortunately, it is not clear whether many of the people who are currently heavily involved in creating a new structure for equity research really understand the cause of the problem.

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