Investment Banks and Private Equity

In an article by Landon Thomas Jr. in today's New York Times ("Goldman Finds Investing for Itself Rewarding"), Mr. Thomas discussed the conflicts faced by investment banks that also act as private equity investors.  As a private equity investor an investment bank can compete with some clients for deals, other private equity investors that the banks service, and be on the other side of deals with other clients, blue-chip companies that the banks service.  The bank must "walk a thin line", not upsetting other clients of its investment banking services (underwriting and consulting).  The news story misses the big issue.  Clients of an investment bank can take care of themselves, either waiving conflicts or not; they are fully capable of protecting their own interests. 

There is an interest group that cannot protect its own interests easily, however, and that is affected by a bank's multiple roles -- public shareholders.  When an investment bank that advises a publicly traded company sides with the company's executives against the public shareholders, as Merrill is doing in the HCA deal, then there is an affected party in the conflict that cannot protect itself -- the public shareholders.