LIEBERMAN
QUESTIONS WALL STREET ANALYSTS
GREATER PROTECTION NEEDED FOR AVERAGE INVESTORS
February
27, 2002
WASHINGTON - Governmental Affairs Committee Chairman
Joe Lieberman, D-Conn., quizzed a quartet of Wall Street
analysts Wednesday about conflicts of interest regarding their
stock evaluations and called for greater protections for the
average investor, who relies on analyst recommendations.
“The Watchdogs Didn’t Bark: Enron and the Wall
Street Analysts” was the third in a series of Committee
hearings on the collapse of the Enron corporation and is part
of an ongoing attempt to assess the damage, learn the lessons,
and craft the solutions to the problems that led to the fall
of Enron and its related catastrophes.
“We don’t expect Wall Street analysts to be fortune
tellers,” Lieberman said, “but average investors expect
them to filter out the vast and potentially confusing flow of
information about companies... in a way that’s meaningful
not only to Wall Street insiders but to investors on Main
Street. Information, after all, is one of the most precious cargos in
America’s economy, and Wall Street analysts are expected to
transport it with maximum care.”
Ten out of 15 analysts who followed Enron were still
rating the stock as a “buy” or a “strong buy” as late
as November 8, Lieberman noted.
That was three weeks after the initial report of the
company’s hidden losses appeared in The Wall Street
Journal and about two weeks after Enron announced it was
being investigated by the SEC.
Each analyst before the Committee claimed their
recommendations were based on what the company told them but
they failed to explain why they missed red flags that other
analysts caught. Witness
Howard Schilit, an independent analyst, said in a one-hour
review of Enron’s financial statements, he found numerous
problems that should have been noted by any analyst covering
the company.
One of the reasons, Lieberman suggested, is that the vast
majority of analysts work for
Wall Street firms and banks and analysts’ compensation is
often tied to the success of their firms’ business. Analysts
may develop cozy relationships with the companies they
cover—relationships that are valuable to their firms and
could be endangered by their release of a critical report or
opinion.
As it turns out, no matter what the market does,
analysts seem to just keep saying “buy.”
According to Thomson Financial, two-thirds of all
analyst recommendations are “buy.”
Only one percent are “sell.” Over the last two
years, no matter what the S&P 500 did, the recommendation
of the major analysts was virtually unchanged.
Corrective action is necessary to strengthen the
division between the analysts and the investment banks they
work for in order to better protect the millions of average
Americans who entered the stock market during the prosperous
decade of the 1990s, Lieberman said.
“Because of the range of conflicts of interest between the
analysts and the companies they cover, I believe more must
ultimately be done to guarantee that their analyses are truly
independent,” Lieberman said.
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