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Congress Analyzes the Analysts
By Peter Ramjug
WASHINGTON, June 14 (Reuters) - Wall Street defended itself before Congress on Thursday against charges that the analysis it offers seldom warns investors to sell stocks and paints a rosy picture of companies to attract lucrative investment banking business.
Facing a panel of skeptical lawmakers, Securities Industry Association (SIA) President Marc Lackritz said mistakes were made but analysts as a group performed "pretty well" and critics had only become vocal after recent market falls.
Data showing 71 percent of recommendations were "buys" or "strong buys," seemed appropriate considering that from 1988 through 1999 the Dow Jones Industrial average and the Standard & Poors 500 index both posted an average gain of 16 percent a year, Lackritz said.
"Critics of analysts were much less vocal then," he told the House capital markets subcommittee.
But critics wondered where were the "sell" recommendations, particularly when the Internet stock bubble burst last year.
Pennsylvania Democrat Rep. Paul Kanjorski, citing data from Thomson Financial/First Call that tracks analyst advice, said less than 1 percent of 28,000 recommendations issued by brokerage analysts during late 1999 and most of 2000 called for investors to sell stocks.
New York Democrat Rep. John LaFalce said he believed the pressures on analysts to attract and keep existing company business led many analysts to issue "valuations beyond any relationship to company fundamentals."
Defending the industry, Lackritz said that there was a big difference between making a wrong projection and analysts being influenced by their firm's other business.
"To be wrong in projecting the performance of a company or a security is very different from failing to try their hardest to serve the interests of investors," Lackritz said.
Gregg Hymowitz of EnTrust Capital Inc., an investment advisory firm, said a lot of "buy" recommendations failed to explain the Internet stock mania as Old Economy shares in railroads and food companies "would have gone to the moon" too.
And financial journalist James Glassman, author of "Dow 36,000," told lawmakers that the lack of sell recommendations was not indicative of a scandal.
"Smart investors buy stocks and they keep them, they don't sell," Glassman said. "If I could change anything that analysts do it would be to encourage them to tell us the best stocks to own unchangingly for the next 5 to 10 years, not the next 5 to 10 weeks."
LEGISLATION NEEDED?
Unlike other lawmakers on the panel who are wary of analyst regulation or legislation, LaFalce thinks Congress or the Securities and Exchange Commission should get involved.
Laura Unger, the interim SEC chairman, said in an April speech that brokerage firms need to deal with analysts' conflicts by disclosing their relationships.
She also said the New York Stock Exchange and the National Association of Securities Dealers may need to update their rules that address disclosure in research reports.
The SIA earlier this week issued new "best practice" recommendations accepted by the 14 biggest U.S. investment banks to deflect criticism that securities research is skewed.
Those guidelines included prohibitions on linking analyst pay to lucrative investment banking deals and a ban on analysts trading against their own recommendations -- meaning they could not sell a stock when they had issued a "buy" recommendation.
Rep. Richard Baker, the Louisiana Republican who chairs the subcommittee, said the guidelines fell short, and that he was more interested in whether the guidelines would be used and whether violators would be held accountable.
MORE HEARINGS
Baker said he expected further hearings with regulators and representatives of the financial media on the issue of analyst independence but played down the idea that Congress would pass laws to change the industry.
"I don't think anyone today is suggesting legislation on the matter. This is an opportunity to share thoughts and hopefully see some positive results without legislation," he said. The SIA guidelines were "recognition of a problem."
Lackritz urged Congress, the SEC and self-regulatory organizations to give the SIA guidelines a chance to work.
Investors should also not solely rely on analysts who will often disagree over the same company, and urged people to seek a second opinion.
"Just as you would check out the reputation of your doctor, check on the securities analyst," he said.
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