Analysts get downgraded
Reputations crash, pay plummets; say goodbye to TV, hello to obscurity
By Stephen Gandel
Crains NY
HAVEN'T I SEEN YOU SOMEPLACE? Henry Blodget has taken his stock-picking star turns, but TV no longer beckons, investors and Eliot Spitzer have turned up the heat, and many of his peers want out.
Jeffrey Evans, president of the New York Society of Security Analysts, has seen the future, and frankly, it worries him.
"The era of the
celebrity analyst is over," says Mr. Evans. "The economics of research post-Enron and post-Spitzer is that fewer firms will be providing stock
analysis."
The settlement reached last week between Merrill Lynch & Co. and New York state Attorney General Eliot Spitzer has delivered the final
blow to research analysts. By driving a wedge between investment banking revenues and research pay, the deal will effectively slice through the last bulwark
supporting towering salaries.
Coming on top of the bear market, massive miss-calls on dot-coms, and "buy" ratings on nearly-bankrupt telecoms,
the settlement marks the end of the salad days for Wall Street's analysts, who had enjoyed seven- and eight-digit wages, frequent TV appearances and rock-star
status.
Without the huge fees they formerly earned from helping investment bankers land deals, says Alan Johnson, a top Wall Street compensation
consultant, analysts' pay could "drop like a stone."
For the analyst community, the damage reaches far beyond a mere handful of erstwhile stars
whose standing-and income-have taken a terrific beating. The Spitzer-forced restrictions will add fresh impetus to an already vicious downward spiral. Mr.
Johnson estimates that pay for top Wall Street stock pickers last year fell to an average of $800,000. That is less than half the $2 million average of the year
before.
The new rules-such as barring analysts from being paid more for bringing in investment banking deals-could push salaries as low as $400,000,
according to Mr. Johnson. That's not exactly penury, but it may make it mighty tough to keep up payments on all those Park Avenue duplexes and McMansions
in the Hamptons.
Analysts' reputations have already hit skid row. They now find themselves all but shunned by a once-fawning media. "We are using
far fewer analysts than we used to," says Ellen Egeth, a senior news editor at CNBC. "We're much less likely to peg a story on an analyst upgrade or
downgrade now."
It gets worse. CNBC's morning show lampoons analysts as mindless, hapless creatures. Its regular reports of yet another analyst's
stock pick gone awry are accompanied by footage of penguins following each other in a neat row as they lumber from land to icy water.
"I don't think
analysts will ever have the same high-profile roles with the public," says Roger Coffin, who heads the securities industry regulatory practice at
PricewaterhouseCoopers. "I doubt we will see that cult of personality again."
Nothing better illustrates that sea change than the fate of Wall
Street's erstwhile superstars. Before the 1990s, few investors could name a single brokerage firm analyst. Then came the Internet bubble. As technology stocks
took off, so, too, did the reputations of wildly bullish, putative stock seers such as Henry Blodget, Jack Grubman and Mary Meeker.
Sudden
fame
When the shares they touted doubled and redoubled, the once-lowly researchers found themselves transformed into household names, and into
highly prized and paid assets of their investment banks. That's because their employers quickly realized they could grab huge underwriting fees by promising
corporate clients coverage-often positive-by their high-profile researchers.
In 1999, Merrill Lynch hired away Henry Blodget from CIBC Oppenheimer to be
the linchpin of its effort to boost its technology banking effort. Corporate clients, as large as AOL and Time Warner, flocked to Morgan Stanley in part to win the
blessing of Mary Meeker for their deals.
In 1999, analyst Jack Grubman drew so many telecoms into Salomon Smith Barney's investment banking fold that
the bank rewarded him with total pay of $25 million, making him one of their best-rewarded executives.
Instead of bringing in business these days, though,
star analysts have become magnets for woe in the messy and hugely costly form of shareholder suits, as well as regulator investigations.
The
recommendations of Mr. Blodget, who left Merrill Lynch late last year, became the basis of Mr. Spitzer's case against the firm. An investor who followed the
advice of Mr. Grubman is seeking $10 million in damages against Salomon Smith Barney.
Never again
"I don't think the firms are going
to be as comfortable with particular analysts becoming celebrities again," says Mr. Coffin.
Faced with setbacks on all fronts, many analysts have begun
to flee the profession. Even the NYSSA's Mr. Evans is considering a new career path.
Last month, the stock analyst lost his job at Advest Inc. Instead of
applying at other brokerage firms, Mr. Evans is canvassing fund firms which employ traditionally anonymous, so-called buy-side analysts to size up stocks that
they may want to add to their holdings.
"It's hard to be proud of being a securities analyst these days," says Debra Brown, a recruiter at Russell
Reynolds who specializes in placing investment professionals. "More than ever, I am being told by sell-side analysts that they don't want to do this
anymore." |
