Analysts Face Scrutiny Over Enron Ratings
By Ben White
Washington Post Staff Writer
Wednesday, February 27, 2002; Page E01
Wall Street stock analysts who have been widely criticized for remaining bullish on Enron Corp. until the bitter end will face unfriendly questions this morning at a hearing before the Senate Governmental Affairs Committee.
Senators are expected to grill four analysts about why they declined to downgrade Enron before the energy trading company's stock lost much of its value, crushing the retirement accounts of company employees and putting a dent in many investors' portfolios.
"What were the analysts' motives?" Sen. Joseph I. Lieberman (D-Conn.), the committee chairman, is expected to ask, according to a committee spokeswoman. "Why were they blind to the company's decline, and how can we prevent similar failures in the future?"
The opening panel will include four analysts who covered Enron for major Wall Street firms: Anatol Feygin, from J.P. Morgan Chase; Richard Gross, Lehman Brothers Holdings Inc.; Curt Launer, Credit Suisse First Boston (CSFB); and Raymond Niles, from the Salomon Smith Barney unit of Citigroup Inc. The panel will also include Howard Schilit, an independent analyst and president of the Center for Financial Research and Analysis in Rockville.
A spokeswoman for Lieberman said the Wall Street analysts were chosen because they were among the slowest to downgrade Enron. All four declined to comment yesterday or did not return phone calls.
An official at J.P. Morgan noted that Feygin downgraded Enron to "long-term buy," the firm's second-lowest rating, on Oct. 24, making him "one of the first on the Street" to drop Enron. The official also noted that when Enron hired J.P. Morgan on Nov. 9 to help with its planned merger with Dynegy Inc., Feygin was forbidden from making further changes to his Enron rating.
By the time Feygin downgraded Enron on Oct. 24, the company's stock was trading at $19, down from an August 2000 high of $90. A week before the downgrade, Enron had announced $1 billion in third-quarter losses.
Salomon Smith Barney downgraded Enron from "buy" to "market perform," a neutral rating, on Oct. 26, when Enron was trading at $16, according to Investars, a firm that tracks analyst ratings. CSFB maintained a "strong buy" on Enron until Nov. 29, just days before the company filed for federal bankruptcy protection, its stock trading at 47 cents a share. Lehman Brothers never dropped its "strong buy" rating of Enron, according to Investars. A Lehman spokesman noted that the firm was working for Dynegy in the proposed merger and so had no incentive to ignore damaging information about Enron.
Lieberman spokeswoman Leslie Phillips said questions would also cover whether any of the analysts felt pressured by the investment banking arms of their firms to maintain positive ratings on Enron in order to win business from the Houston company; whether the analysts' compensation depends on helping to generate investment banking business; what kinds of personal relationships the analysts have with executives at companies they cover; and what "red flags" they may have missed -- or chose to ignore -- concerning Enron's financial condition.
A second panel will include Robert Glauber, chairman and chief executive of the National Association of Securities Dealers; Thomas Bowman, president of the Association of Investment Management and Research; Charles L. Hill, director of research at Thompson Financial/First Call; and Frank Torres, legislative counsel for Consumers Union.
In addition to the Governmental Affairs Committee, the House Energy and Commerce Committee is considering hearings to examine the role investment bankers played in helping design and market some of the complex off-balance-sheet partnerships that helped cloak Enron's true financial picture. The Senate Commerce Committee is also considering hearings. And the Senate Permanent Subcommittee on Investigations is poring through hundreds of boxes of documents that include papers detailing Enron's relationship with Wall Street.
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