Outlook: Merrill's humiliation provides the City with a wake-up call

Marks & Spencer

Something important happened in the capital markets yesterday, and no, it wasn't the Chamberlin & Hill annual results, important though they no doubt are. Merrill Lynch's agreement to pay a $100m fine, apologise for the "inappropriate" way it conducted business at the height of the technology bubble, and reform the way it compensates its analysts in settlement of the prosecution being brought against it by the New York Attorney General, Eliot Spitzer, is a humiliation of unparalleled proportions for the self self proclaimed Thundering Herd of Wall Street. Merrill has stopped short of admitting liability, as it would have to given the 28 different class actions being pursued against it for mis-selling of technology stocks at the top of the boom, but that's not going to make little difference to the way yesterday's events will be seen by the public at large. Most will believe Merrill to be guilty as charged.

Merrill wasn't alone in the way it puffed stocks in order to generate fat investment banking fees as the technology bubble reached its zenith. It may not even have been the worst offender. Mr Spitzer is inviting the rest of Wall Street's finest to "review their e-mails and internal documents and then come and have a conversation with us so that we can find a way forward and clean up this industry". But as the first bulge bracket firm to settle and as a company synonymous with stock market brokerage the world over, yesterday's events hold a special significance. The technology bubble prompted an explosion of greed unprecedented in the modern age, and there at its centre were the chief cheer leaders of the capital markets – Wall Street's investment bankers. For them the bubble generated vast fortunes. As ever, it was mainly the little guy who paid the price, through his naive pursuit of Henry Blodget's fork tongued share tips and now the shrinking value of his pension and other saving plans.

What took place was a sophisticated form of theft. Much of the New Economy research produced by Wall Street as the technology mania spiralled out of control was there not to serve the interests of investors, but of corporate clients and the fees they paid to investment bankers. Mr Bodget admits to having spent 80 per cent of his time pursuing investment banking opportunities and then puffing them through his research. He may be the most notorious case, but he was hardly unique.

Mr Spitzer, an ambitious career politician, saw the opportunity for popular acclaim and seized it, unlike the Securities and Exchange Commission, which has been acutely embarrassed by Mr Spitzer's success in pursuing matters the SEC for reasons still not entirely clear chose to ignore. Harvey Pitt, the SEC's chairman has been duly roasted by the US media for his failure to act, and questions have been raised about his bona fide as chairman given his former incarnation as a lawyer for some of Wall Street's biggest firms. Some of what happened on Wall Street was replicated in the City, though probably not to the same degree. The rules dealing with conflict of interest were tougher here, and the market more dominated by wholesale investors, who in theory are better capable of looking after themselves. That didn't stop them losing their shirts on the TMT bubble along with everyone else, but perhaps because Britain is a less litigious place than the US, there hasn't been the same high volume of complaint as on Wall Street.

All the same, it shouldn't stop the Financial Services Authority pursuing the iniquities of the bubble with equal vigour. Mr Spitzer has been accused of political grandstanding and of deliberately undermining an industry vital to the wealth of New York. His crusade is none the less a legitimate one which the FSA would be ill advised to ignore. The SEC has been caught with its trousers down. The FSA wouldn't want the same thing.

Many of the reforms about to be introduced on Wall Street will get repeated, voluntarily, in the City. The link between analysts' pay and their ability to generate investment banking business will be broken and in future bonuses made wholly dependent on successful stock tipping. For the investment banking industry this is a major change. If investment bankers didn't know it already, they know it now. The days of easy money are gone and a more difficult suspicious world awaits.

In Britain, the Government has given the City two years to set its house in order on broking fees or face a Competition Commission investigation. So far there has been very little evidence of reform, despite the threat. Perhaps Merrill's humiliation will act as a wake up call.

Marks & Spencer

After three years of hell, Marks & Spencer deserved some luck. The continuing consumer boom has delivered it in spades. With house prices soaring and interest rates at rock bottom, shoppers are spending like there's no tomorrow. So we've had a Bhs miracle, an Arcadia comeback and, finally, The Great Marks & Spencer Recovery. Even old smoothie Luc Vandevelde was prepared to utter the "R" word yesterday. And why not? The slick Belgian has delivered on his pledge to produce a turnaround of this beached whale of a group within two years. It's been touch and go, but he deserves to keep his bonus this time.

So why were the shares down yesterday? The key question in the City is where M&S goes from here. Sure, the management team led by Mr Vandevelde and Roger Holmes, has done well to get M&S this far. The reshaping has been done, with the overseas interests gone and the balance sheet regeared. In the core business the new management realised that with an unrivalled high street brand you only had to get the product right and the public would flock back. So sales are up, profits are up and market share is edging higher again.

But can the recovery be sustained in a less benign high street environment? Yesterday's presentation included a worrying page called "Guidance 2002/03 – UK sales and margins". This explained that clothing sales comparisons start to get tougher as the year progresses, while the food business will also see less flattering comparisons because of the timing of Easter. Costs are set to rise in staffing (ahead of inflation), rents (an extra £25m) and with the head office relocation (£10m). Additional capital expenditure includes the £35m cost of the financial services pilot scheme.

M&S may simply be trying to prevent market expectations running ahead of themselves. But it really ought to be able to do better than this. Sales compared with two or three years ago are still down by unspeakable amounts. For the recovery to run out of puff after a good six months would be grim indeed. The good news is that Smooth Hand Luc is seeking growth in sensible areas like food, home furnishings and financial services. The idea is that these will provide the earnings growth in two to three years time while the group presses on with improving clothing sales. If Mr Vandevelde plays by the rules, he'll soon be splitting the roles of chairman and chief executive, as poor old Roger Holmes has been waiting for his promotion for a while now. Unless, of course, the plucky Belgian fancies grabbing all the glory for himself.

jeremy.warner@independent.co.uk