Wall Street's 'Big Lie'
Washington Post
Thursday, April 11, 2002; Page A28
ONE OF the Enron scandal's many tentacles is wrapped around stock analysts, who recommended buying the firm's shares until shortly before it went bust. Anybody familiar with the internal workings of big investment banks could guess the cause of this mad boosterism: Stock analysts tend toward optimism because they get paid more that way. Though their formal job is to advise investors on which shares to buy, analysts also advise companies selling shares -- and those companies will be more inclined to hire them if they've boosted their stocks. Analysts at big banks stand to get half or more of their compensation from advising sellers rather than buyers. Naturally, they want to keep that. Naturally, they rate most stocks "buy" or "accumulate" and almost none "sell."
The full extent of Wall Street's corruption is newly apparent in this week's extraordinary revelations about Merrill Lynch. Eliot Spitzer, the New York state attorney general, has publicized e-mail messages that circulated among Merrill's stock analysts, suggesting that the analysts privately doubted the stocks they publicly recommended to clients. Stocks that Merrill rated as "buys" were described internally as "a piece of junk" and "a piece of crap." One analyst, Kirsten Campbell, wrote to a colleague that the pressure to bring in investment-banking fees was distorting stock ratings. "We are losing people money, and I don't like it," she said. "The whole idea that we are independent from banking is a big lie."
The big lie is further suggested by Mr. Spitzer's evidence on the compensation of Henry Blodget, Merrill's star Internet analyst. In the fall of 2000, Merrill asked its analysts what they had done to help with investment banking deals. Mr. Blodget and his group replied that they had been involved in 52 deals that generated $115 million in fees. The fact that the firm even solicited this information suggests that the "Chinese wall" separating analysts from banking is porous. The fact that Mr. Blodget's compensation subsequently jumped from $3 million in 1999 to $12 million in 2001 underlines the huge incentive that analysts have to deceive investors.
Stock exchange regulators and lawmakers have proposed some remedies to this problem, such as a ban on direct payments to analysts from their supposedly separate banking colleagues and limits on recommending stocks that banking colleagues are selling. But investors need to ask themselves tough questions. Given that Wall Street analysts are housed in the same firms that tout new share offerings, they are always likely to be conflicted. Why pay for their services? Why not seek advice instead from research firms with no investment banking links? |
