Put analysts in stocks - real ones
Enron denials laughable, but who is really to blame?
By David Callaway, CBS.MarketWatch.com
Last Update: 12:10 AM ET Feb. 28, 2002
SAN FRANCISCO - When it came to public embarrassment, no one could touch the Puritans.
If they wanted to put you in stocks, you got the hard wooden ones, with holes for your ankles, wrists and neck.
But the Senate Government Affairs Committee in Washington came pretty close Wednesday in its effort to publicly humiliate four Wall Street analysts for failing to warn about Enron (ENRNQ: news, chart, profile) as its shares cascaded toward oblivion last October and November.
The four came from Credit Suisse First Boston (CSR: news, chart, profile), Citigroup (C: news, chart, profile), Lehman Bros. (LEH: news, chart, profile), and J.P. Morgan Chase (JPM: news, chart, profile), representing a portion of the 11 out of 16 analysts who had "buy" or "strong buy" recommendations on Enron shares as late as the beginning of November.
By then, federal regulators were already saying they were investigating the company's finances, and its shares had fallen into the single digits, from $70 each only eight months before and from $35 only a few weeks before.
The four analysts sputtered out their defenses as best they could, but it was clear they had little argument. Their claim that they couldn't do their jobs because Enron was not disclosing the right information holds little water, especially when the stock was falling right in front of their eyes for more than 10 days in a row at one point. They had blown it. Now Congress was going to put their ignorance on display.
It would have been easier just to put them in wooden stocks outside the Capitol for the day, and let the investing public pelt them with eggs and rotten fruit. Or even better, force them to each wear a scarlet letter "A" - for analyst - on their Armani suits when they return to Wall Street, branded for all to see.
With hindsight, just about anybody can be made to look stupid.
But as we have our laugh, or our outraged scream, shouldn't we also be looking at the suckers who believed them - us.
The fact that analysts are fronts for sales organizations is not a New Economy phenomenon. That's why they're called the "sell side." Analysts are hired to find stocks that brokers can push. That's why there are more "buy" recommendations than "sell" ones.
That these young mortals became heroes in the eyes of the investing public during the Internet boom only illustrates the blinding nature that greed had on investors then, as well as the crucial lack of more critical coverage by the media. Hell, I even had some kind words for Enron in a column last spring.
Enron was a case where everyone missed the boat: the analysts, the journalists, the accountants, the regulators, and the politicians. Its story of wealth, political power, and a mandate to show how free markets can change the world proved an irresistible tonic at a time when money was easy and the public wanted to believe.
Yes, there were warning signs; questions by some enterprising analysts, and journalists about the company's finances. There were also critical questions asked during the Internet boom. Problem was, nobody was willing to listen. Just as pessimistic market analysts were drowned out by Internet bulls, Enron executives and their entourages drowned out anyone that would question their authority to draw a new world order.
Those investors who sold their Enron shares after Jeff Skilling resigned as chief executive in August can crow now, just as Donald Trump crowed after going to cash in August 1987, two months before the great stock market crash that year. Nice move.
But for those left behind to pick up the pieces, it always seems easier to look for scapegoats than to examine the fundamental reasons why they got scammed.
Despite all the hysteria around Enron, Global Crossing (GBLXQ: news, chart, profile), and Tyco (TYC: news, chart, profile), investors continue to chase analyst recommendations with an unrelenting enthusiasm.
Outrage at the bad calls quickly switches to curiosity and greed as the next call hits the trading floor, and a stock takes off. That's OK. It's human nature. And lots of people will make money following good analyst research this year. Just keep in mind that the research is just one or two people's opinion, nothing more.
And remember the guy out there in the wooden stocks right now once thought he was just as smart as you.
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David Callaway is executive editor of CBS.MarketWatch.com. |
