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June 9, 2002
As Companies Neared Bankruptcy, Analysts Still Cried "Buy"
Sarah Gordon
The parade of high profile bankruptcies this year did not translate into more sell ratings from research analysts, who continued to recommend ailing companies. A new report from Weiss Ratings calculates that 47 of the 50 brokerage firms covering now-bankrupt companies continued to issue buy and hold ratings, even as these companies filed for Chapter 11. Among the greatest shills of failing companies were Lehman Brothers, which maintained six buy ratings on these companies, Salomon Smith Barney with eight hold ratings, Bank of America Securities, Bear Stearns, CIBC World Markets, Dresdner Kleinwort Wasserstein, Goldman Sachs and Prudential Securities, according to the study.
"Even with clear signs that these companies were going bankrupt, brokerage firms refused to issue a sell rating," said Roderick Powell, a senior equity analyst at Weiss Ratings. In compiling the results for the study, Powell said he came across clear cut signs of imminent disaster within information made publicly available. In most cases, these warning signs appeared at least six months in advance of bankruptcy filings, he added.
Part of the reason for the overwhelmingly positive ratings on dying companies is a practice New York Attorney General Eliot Spitzer dubbed "walk away" ratings, said Powell. "When a company is about to go bankrupt, an analyst just stops covering it rather than issue a sell rating. The brokerage firm never explains why they've stopped covering the stock. It's very disingenuous." So an analyst's final word on companies such as Enron Corp. or Kmart remains a buy.
Ratings Issued by the 50 Brokerage Firms on Companies Filing Chapter 11
Ratings Issued: On Date of Bankruptcy Filing # of Ratings 6 Months Before Bankruptcy Filing % # of Ratings %
"Buy" or equivalent 38 31.40% 67 55.40%
"Hold" or equivalent 72 59.50% 49 40.50%
"Sell" or equivalent 11 9.10% 5 4.10%
Total 121 100.00% 121 100.00% |
