HERE’S A NEWS FLASH that shouldn’t startle anyone: Stock analysts are not to be trusted. It seems they have a bad habit of touting stocks that they personally own.
The source of this intelligence is the Securities & Exchange Commission, which has just issued a report on the care and feeding of analysts. The business press, of course, has helped make analysts into folk heroes, quoting their epiphanies on industry trends. Indeed, it’s hard to find a financial story that doesn’t cite the wisdom of at least one analyst.
Analysts have always presented themselves to the press, and to the investing public, as objective and informed. I’ve never heard one admit he’s also greedy and self-serving.
Now along comes the SEC to suggest that over a quarter of the analysts surveyed have a habit of buying shares in companies before recommending them. They also acquire shares in private placements at delicious prices unavailable to the public, then tout those stocks as great buys.
Often these analysts are mere pawns of investment bankers. The so-called “Chinese wall” separating the bankers from the research departments has become a myth. The bankers tell their analysts what to push and reward them for pushing it. The SEC says analysts come away with paydays ranging from $100,000 to $3.5 million for going along with the game.
THEY EVEN GET SPECIAL REWARDS for issuing so-called “booster shots” — recommendations timed when analysts and their firms can dump their shares right after a successful IPO.
Everyone would still be enjoying these ploys if the bull market hadn’t collapsed. Now that investors have been reminded about the law of gravity, everyone, even the SEC, has started scrutinizing the machinery of hype. Is it a mere coincidence, the SEC asks, that analysts always issue “positive research” when their firm happens to be the underwriter?
And why has the press become a helpmate in this process? When a company goes public, reporters manage to quote an analyst testifying as to its dazzling growth potential. A major merger always seems to be accompanied by the applause of several analysts. These quotes, of course, often emanate from the very firms that orchestrated the deal.
The global mega-companies are especially shrewd at playing the analyst card. Having made preposterous projections to Wall Street about their future growth, the corporate hierarchs summon up the help of investment bankers to find an acquisition that will reinforce this illusion and help them hit their numbers. The bankers not only come up with the mergers, but also the grandiose pronouncement about their merits — a cacophony of self-approbation that’s dutifully reflected in the press.
The analysts, at least, are rewarded for their complicity. The reporters who quote them just look stupid.
WHAT DOES THE SEC PROPOSE to do about all this? At the moment it’s just presenting the facts; congressional hearings supposedly will take it from there. And at least two lawsuits have been filed against top analysts at Morgan Stanley and Merrill Lynch.
Meanwhile, Wall Street is rising to the challenge. The Securities Industry Assn. has issued a code of conduct for analysts mandating disclosure of personal financial holdings. Furthermore, brokerage firms may not base analysts’ pay on overall company earnings or on the performance of the stocks they’ve hustled.
But guess what: The so-called guidelines are voluntary. And there’s as much chance they’ll be enforced as that the dot-com bubble will imminently re-inflate itself.