Expert view: They haven't heard the last of Spitzer

The security guard eyed me suspiciously as I stood in the Manhattan rain outside the 92nd Street Y. I just had to see it. The nannies dropping off their well-heeled charges testified to the establishment's exclusivity. But it was still hard to believe that this little nursery school had cost the mightiest on Wall Street $1.4bn.

This was the sum 10 leading investment banks agreed to pay on Tuesday to end Eliot Spitzer's two-year investigation into their practices (or rather malpractices), in a long-awaited "settlement". The investigation also sought to reduce analysts' conflicts of interest. Disclosure of client relationships will be beefed up, and when a research analyst terminates coverage, he or she will have to write a report explaining why. The banks will fund independent research houses and put $80m towards "investor education".

Investor education? Presumably, that's if the seven trillion dollars they lost in the tech wreck hasn't yet done that. This column has already discussed the emails sent by a Merrill Lynch analyst, Henry Blodget, describing corporate client stocks that had buy recommendations as, in reality, a "POS" (or piece of shit). What was also revealed recently was that Morgan Stanley got an "independent" research house to publish "independent research" on stocks it was trying to float, by paying them millions of dollars. When their CEO denied the seriousness of this on Monday, he got a very public rebuke from the SEC.

And then there was the 92nd Street Y. In flirtatious emails to a favourite client, Jack Grubman, Citigroup Salomon's star analyst, revealed the background to his recommendations on AT&T. Apparently, Grubman implied that his ultimate boss, Sandy Weill, had requested an upgrade to get the support of the AT&T chairman, Michael Armstrong, who also sat on the Citigroup board. As a return favour, Grubman alleged he had asked Weill to help get his two kids into the exclusive 92nd Street Y pre-school. Weill apparently gave the school a $1m dollar corporate donation soon afterwards.

In the light of all this, are the terms of "the settlement" really enough? The financial penalties are considerable, but in the case of the highest fine, Citigroup Salomon's $400m, it is a fraction of the $10.5bn the group made in investment banking between 1999 and 2001, let alone its total revenues of $92bn.

More importantly, the attempt to concrete over the investment bankers' Chinese walls goes against the commercial logic that patched the integrated houses together in the first place. The new declaration analysts will make ("no part of my compensation was, is, or will be directly or indirectly related to specific recommendations or views expressed in this research report") frankly beggars belief.

Companies selling themselves need investment bankers. If they in turn employ analysts who then give investment opinions to clients on those same companies, there is an obvious conflict of interest. We must seriously ask whether the time has not come for a mandatory separation of the companies-hired banking hotshots from the guardians of investors' money.

A few blocks down Madison Avenue from the 92nd Street Y, the cream of Wall Street showed little sign of losing their sangfroid, as they crowded into Nello's and downed thimbles of Bellini at $20 a shot. Understandably they, and their employers, made a lot of money from the bubble. So far, no one has gone to jail. But celebrations to mark the end of Spitzer's witchhunt may prove premature. His settlement could spawn a hydra of lawsuits from ordinary investors who paid for this jamboree. It may take the death of the integrated house to assuage them.

christopher.walker@tiscali.co.uk