April 07, 2005
Two Words That Give Me Flashbacks -- Due Diligence
Posted by Christine Hurt

The two words that give former corporate associates night sweats appear in a WSJ story today -- due diligence.  The gist of the story is that now that underwriters are finding themselves on the hook for bond offerings gone bad, perhaps underwriters should engage in more thorough due diligence instead of just relying on the other two gatekeepers, accountants and issuer's counsel, to find problems. 

That suggestion is obviously not a bad idea for underwriters, but the entire inquiry assumes that investors rely on the underwriter's thorough diligence.  The market knows that an underwriter has conflicts -- the investment bank is paid by the issuer and receives commissions from the buyers.  The market discounts the underwriter's stamp of approval and sees the underwriter as a salesman, not as a gatekeeper.

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