Like a stinging slap delivered by an ex-lover across the face of a
protesting cad, Wall Street analysts have been turned upon by their
amours of yesteryear. Journalists and investors, compounded by the
general buzz on the Street, have turned nasty.
The breakup was in the works since last November, when economic
indicators turned sour; but the first "Dear Analyst" letter didn't turn
up until a month later, when The New York Times market reporter Gretchen
Morgenson penned her "Memo to Analysts: Thanks for Nothing" column. The
column informed analysts they were a "disgrace" who only reported happy
news and who, if it were up to disgruntled investors, would be out of a
Since Morgenson opened the floodgates for the complaints of those burned
by their quickie affair with the New Economy, analysts have taken their
lumps in other media (see sidebar). A three-part cover story in the May
21, 2001 issue of Fortune magazine (headlined 'Can we ever trust Wall
Street again?') focused on Morgan Stanley's Mary Meeker, the onetime
queen of Internet stocks, and accused analysts of losing their
objectivity and becoming media darlings. One supposed display of excess
was when the bank appointed a full-time PR staffer to field Meeker's
The bad press continues. An article in the current (August) issue of
Vanity Fair calls Meeker and her cohorts "superstar analysts who were no
longer objective observers of the market: they were insiders with
inherent conflicts of interest."
And a CBS 60 Minutes II story quoted Tom Brown, a banking analyst turned
whistle-blower, as saying his former employer, Wall Street firm
Donaldson, Lufkin, and Jenrette (DLJ), instructed analysts to make
DLJ-issued stocks look good. Brown called the conflict of interest "less
than moral." The report also singled out Merrill Lynch celebrity analyst
Henry Blodget for continuing buy recommendations as stocks went into
And it's not just bad press. The value of Blodget's advice will be the
main feature of an arbitration case mounted against him and Merrill
Lynch by a disgruntled individual investor.
The analyst police
Bank trade bodies have attempted to salvage the image of their
But no one is very confident that their measures are going to help
The Securities Industry Association (SIA), the trade group for
investment houses, has issued toothless "best practices" guidelines for
brokerage firms. Fourteen major firms pledged to follow the guidelines,
which require analysts not to report to a business unit (such as
investment banking, which would compromise their integrity), but for
analysts to make transparent and consistent recommendations, and
disclose personal interests in securities.
The guidelines also call for analyst pay not to be linked to specific
investment banking transactions, sales, trading, or asset management
However, the SIA has no power to enforce the guidelines, and many firms
that agreed to the guidelines already claim to conform to the SIA best
The National Association of Securities Dealers (NASD) has made an even
more empty gesture: asking its members to comment by August 15 on a
proposed rule to require research analysts and brokerages to disclose
potential conflicts of interest in written reports and public
So, with the SIA and NASD making empty gestures to placate angry
governmental and media masses primed to designate analysts the weakest
link of a weak economy, what can analysts do to regain investor
Richard Wyler is the PR director for the Association for Investment
Management and Research (AIMR). With 2,500 sell-side analysts, 62.5% of
the nation's estimated 4,000 sell-side analysts are members of the
investment professionals organization.
Wyler says AIMR will create research objectivity standards. Unlike other
organizations, Wyler says AIMR will be able to enforce these standards
by revoking the membership of non-compliant analysts. But AIMR's members
are individuals, likely to find it tough to dictate standards to their
However, Wyler is hopeful that his efforts (together with those of his
PR agency Fleishman-Hillard) to communicate the standards to investors
via the media will pressure firms into adopting the association's
"Firms that use the standards should have a competitive advantage
because they can claim compliance in their marketing materials. This is
all geared to a free-market solution rather than a regulatory solution,"
The National Investor Relations Institute (NIRI) represents corporate
and agency IR practitioners that attempt to educate analysts about the
prospects of their own companies or clients' stocks. But Louis Thompson,
president and CEO of NIRI, thinks analysts will lose in their attempt at
self-regulation. When 99% of analysts showed their misplaced allegiance
to bank clients over investors by issuing "buy" ratings as the market
tanked, their duplicity, according to Thompson, cost analysts the trust
necessary for self-regulation.
"Congress is not going to let this go," says Thompson, who thinks the
government or a self-regulatory organization such as the New York Stock
Exchange or Nasdaq will force regulation on analysts. "I'm not sure they
can correct their credibility problem on their own without some club
over their heads."
David Levine, SEC chief of staff, confirmed to PRWeek that the SEC has
formed a panel to examine possible regulation. The panel is expected to
issue a report in a few months, but the SEC has already issued an
investor alert and sent out a press release cautioning investors on
Some in the industry still cling to the belief that the analysts'
pummeling is unwarranted. Ted Pincus, chairman emeritus of the Financial
Relations Board (which has been hired by an AIMR chapter to help polish
the image of its analysts), believes the entire issue is a result of
media and investors spoiled by a ten-year bull market.
"Analysts have to fight back with numbers," says Pincus. "They have to
get as factual as possible, and remind people that people made money,
and viable companies continue on."
Pincus says analysts were guilty of the same sin as everyone else in
1999: they overestimated the power of e-commerce and the Internet in
general, running up dot-com, telecom, and fiber-optic stocks. "To err is
human," says Pincus. "They overestimated the growth demand for
e-commerce and the telecom industry. So did everyone else."
Of the six major brokerages contacted for this article, Lehman Brothers
held the position closest to Pincus' pragmatic view. Lehman SVP Bill
Ahearn admits that 1999 and 2000 were years of "hyperkinetic media
interest" in analysts, but he points out that of 100 analyst media calls
a day, around 98 of the callers still want to learn an analyst's views
on a particular stock or industry.
"The motion of the public relations surrounding analysts is no different
than it was five or 10 years ago," says Ahearn. "At the end of the day,
you want to promote the methodology and professionalism of your
Merrill Lynch has taken a more proactive approach. Earlier this month,
the brokerage announced it was banning its analysts from personally
buying shares in the companies Merrill Lynch covers. In addition, to
give greater transparency to the issue of corporate conflict of
interest, the investment bank is making efforts to explain the dual
nature of the bank's business activities. Reports bear the following:
"Merrill Lynch, as a full-service firm, has or may have business
relationships, including investment banking relationships, with
companies in this report."
But most brokerage houses and banks said their plans are to lay low to
avoid the media spotlight.
Peter Elkind, the Fortune senior writer who wrote about Mary Meeker as a
synecdoche for all corrupted analysts, says he thinks Meeker simply
"lost sight of her role. I think she's a symbol of Wall Street's
corruption of a process."
His solution to analyst image woes would be greater disclosure along the
lines of the SIA guidelines, but in the form of enforceable regulation
by an agency such as the SEC. In other words, analysts should be honest
about their paychecks, clients, and personal investment in a stock.
Honesty. Not exactly a new concept in trying to woo back former
paramours, but analysts just might try it if they want to be welcomed
back into the good graces of their former media, investor, and
THE SINS OF THE ANALYSTS
Analysts serve two masters. They issue straightforward stock advice to
private clients, but they are also often "encouraged" to keep their
bank's or brokerage's clients happy, either by recommending their
stocks, or by supporting the merchant bank's pitch for the account. The
Great Wall of China between these two sides has long since deteriorated,
but many believe that the analysts' independence went by the wayside
when tech stocks surged and analysts backed stocks that their banks (or
even they personally) had a stake in.