Goldman independent research arm dies

Hudson Street8217;s failure is the latest sign of how difficult it is for smaller research houses to thrive in a market where everyone from the big Wall Street banks to major mutual fund firms are seeking to cut costs.

It is also a sign that major investors may no longer be prepared to pay for a diversity of opinion about the markets.

It wasn8217;t always that way. Independent research was all the rage on Wall Street after a 1.4 billion settlement in 2003 between Wall Street banks and regulators led by then-New York Attorney General Eliot Spitzer concerning allegedly tainted research.

It was like a big gold rush when everybody wanted to be an independent research provider,said Sanford Bragg,Chief Executive of Integrity Research,which tracks the independent research industry. But all the hoopla around independent research in 2003-2004 has died down.

The settlement followed accusations by Spitzer and other regulators that securities analysts at some major banks were glorified shills for companies8217; shares,instead of providing the objective advice they claimed to offer.

Analysts often got bigger bonuses if their positive ratings,or help on sales calls,allowed a bank to win investment banking business.

As part of the agreement,a dozen banks had to spend 460 million to furnish clients with independent research for a five-year period that ended in 2009 for most banks.

As that requirement fell away,independent firms had less revenue to rely on. Spending on such research will be down 24 percent this year compared with 2008,according to Integrity Research.

Hudson Street was not created to comply with the settlement8217;s independent-research requirement,but because of industry trends that were sparked by the settlement.

In the end,customers did not want to buy what Goldman was selling. Research firms said they gained just a handful of clients from the platform.

In a statement for this article,Goldman said,Hudson Street no longer exists for the simple reason that weak demand from our clients did not warrant continuing the effort.

The settlement forced Wall Street banks to restructure their research departments. Banks could no longer pay analysts more for winning investment banking revenue,so analysts8217; pay dropped.

Many responded by leaving banks and setting up their own independent research firms. Investors,after learning more tawdry details about how banks8217; investment research was made,grew increasingly willing to work with independent analysts.

Goldman Sachs began looking for ways to profit from the new world of research,and Hudson Street was a central pillar of that strategy.

The unit was the brainchild of two then-Goldman executives: Thomas Conigliaro,who was hired from Merrill Lynch in 2003 to develop Goldman8217;s independent research business,and J. Michael Sanders,a Goldman veteran who was a managing director and co-head of its U.S. institutional sales operation.

The two men decided the platform should sell research from independent analysts to Goldman8217;s vast array of institutional clients,including mutual funds,hedge funds and pensions. For every sale Hudson Street made,it received a commission. Goldman also made minority investments in the firms whose research it was selling.

Conigliaro and Sanders spent a year working with Goldman8217;s principal strategic investments group 8211; the bank8217;s internal private equity arm 8211; and an outside consultant to figure out which research firms to distribute. They sifted through more than 300 firms,and ended up with 11 that met their standards. They named the business Hudson Street for a street near Goldman8217;s headquarters in Lower Manhattan.

Once Goldman invested in the firms and set up commission agreements,its sales force went to work introducing Hudson Street to important institutional clients,first in the United States and then globally. The bank set up 500 client meetings related to Hudson Street in 2007 alone,a source said.

The head of one research firm said Goldman told him he could double or even quadruple revenue,because the bank knows nearly every major investor globally and has a legendary sales force.

That growth never materialized.

The distribution arrangement was a disappointment,in the sense that it didn8217;t lead to the jump in sales that we expected,said Paul Warme,the chief executive of Lusight Ltd,an emerging-markets research firm that had been part of Hudson Street until 2009.

Hudson Street8217;s failure is a modest setback for Goldman as it tries to reinvent itself in a post-financial crisis world. Investors have some faith that whatever happens,Goldman will find a way to build a profitable business. Its shares are still trading at among the highest valuations for banks with big investment banking businesses.

Even though the business itself performed poorly,Goldman managed to make a profit on Hudson Street by selling off the stakes it bought.