These double standards are nothing new

THE reaction of fund managers was striking. Last week's news of the investigation into Merrill Lynch's New York internet investment operation was astonishing. It painted a damning picture of an investment bank paying internet analysts to be publicly bullish about companies they were recommending to investors while privately swapping withering opinions about those same companies with their colleagues.

Yet were fund managers shocked? Not at all. Their reaction was consistent: 'What's new? It has always gone on.' In truth, one should perhaps feel a twinge of sympathy for Merrill.

It is the first bank to hit the headlines, the first to have its cyber-laundry washed in public as Eliot Spitzer - a driven man if ever there was one - detailed e-mails from analysts voicing private disdain about internet stocks while telling investors to buy, buy, buy.

Merrill may be the first to be subjected to the New York state Attorney General's unforgiving scrutiny. But it will not be the last. The suspicion that analysts tweak published forecasts of companies' prospects to keep directors of those companies sweet - and thus help colleagues in banks' corporate finance departments to win business - is well-founded.

Anyone who believes that investment analysts are ruthlessly objective in scrutinising companies is a fool. The principal source of bias is the natural tendency of analysts to become fond of the companies they are looking at.

There's nothing particularly sinister in this. It's simply that analysts, like the rest of us, are prone to sentimentality. Hence, at any one time, there are roughly twice as many analysts' notes to investors suggesting that a share is worth buying than there are suggesting that shareholders should sell.

But the double standards revealed by Spitzer's inquiry reveals something far darker, far more cynical.

Dark and cynical, yes. But unnervingly common, too. Take an example from London in the mid-Nineties. A large media concern was about to be floated. The corporate finance department of every investment bank wanted a slice of the action.

The head media analyst at a big City firm - a small man with a foghorn voice - was asked to write a report on the company. He did a first draft over a weekend and on the Monday morning he said to one of his bosses that he was having problems making the numbers add up.

What did he mean by that? He was having difficulty constructing a model for the company's finances that yielded a projected profit figure as big as some of the more bullish estimates doing the rounds.

The boss gave a sly grin and replied: 'Then try harder.' His message was easy to decipher: 'We want this business and I expect you to come up with the sort of forecasts that will win us the mandate.'

I witnessed this exchange with my own eyes (and ears). And, frankly, nobody seemed too bothered or surprised that an analyst was expected to take a less-than-independent line on a company to help his firm win advisory work.

There are two questions here. First: should a firm giving advice to a company also be allowed to advise investors on whether that company's shares look cheap or expensive? If the answer to that is no, then we are looking at a truly seismic upheaval in the capital markets, the break-up of the integrated investment banks that have come to dominate the global scene.

Second: what if we do not demand quite so radical a solution? Then surely at least investors should have the right to know that a bank is acting for a company or is trying to do so.

As evinced by the British example above, it is very often efforts to win new banking business that will put analysts under most pressure to bend their opinions.

Investors should receive advice that is independent. And if it isn't independent, they should at least be told.