Forum Archive Index - August 2001

[Sarah Corkill <sarahcorkill@yahoo.com>]

Hello everyone,

Does anybody follow Michael Lewis's columns on Bloomberg.com?
Here's one his most recent offerings. Highly relevant and very well said!

New York, July 27 (Bloomberg) -- Some months ago I had a weird encounter
with the then head of enforcement at the Securities and Exchange
Commission, Richard Walker. 
I was visiting his boss, then SEC Chairman Arthur Levitt, to learn what I
could about the agency's prosecution of a 15-year-old New Jersey boy named
Jonathan Lebed. 
The kid had bought shares in small-cap companies and then posted messages
on the Internet telling other people they should buy them too. Every time
he did this, he drove the stock price up and got out with a profit. The
SEC had found this investment technique offensive, and so set about
putting him out of business. 

I wanted Levitt to explain to me how what the kid did was ethically
different from what Wall Street analysts did every day. He couldn't - at
least not to my satisfaction - so he called Walker into his office. 

No sooner had I repeated my unpleasant question than Walker became upset
with me. He said my point was ridiculous, because Wall Street analysts
didn't own stock in the companies they recommend. 

Plausible, Just Wrong 

I didn't call him on this as a) I assumed he knew what he was talking
about, b) it sounded like a reasonable enough claim, since most
journalists are prevented from owning stuff they write about and c) there
was a more insidious conflict of interest on Wall Street, one that much
more successfully corrupts analysts' willingness to tell the truth: Every
analyst knows that if he offends a big company with a negative
recommendation, he puts in jeopardy his employer's ability to rake in huge
investment banking fees from that company. 

Now it turns out that, in addition to the primary source of corruption,
the analysts indeed owned the stocks they plugged. A few days ago, Credit
Suisse First Boston followed the lead of Merrill Lynch & Co. and announced
that from here on out its analysts would no longer be allowed to own stock
in the companies they cover. 

This was a weird case where the news of the reform came bundled with the
news of the original offense. A CSFB spokeswoman named Victoria Harmon
told Bloomberg News, apropos of its old code of ethics for analysts, that
`we didn't do anything that everyone else wasn't doing.' Allowing analysts
to invest in companies that the firm was taking public, and that they
would later cover, `was a bigger deal than dress-down Fridays, but it was
really just another incentive to stem the tide of employees leaving for
dot- coms,' she said. 

So They Were Clueless? 

It's fiercely tempting to make Richard Walker's - and the SEC's - idiocy
the point of this column. It's amazing to me that the SEC's director of
enforcement would be as clueless as everyone else about what appears to
have been standard practice on Wall Street. (At what point do
investigators investigate themselves, and explain how on earth they
remained blind to all of the financial activity that occurred right under
their noses during the Internet Boom that they now claim to find so
sinister?) 

But the truth is, I didn't know myself that Wall Street analysts owned the
stocks they told investors to buy. (Did you?) So perhaps Walker was just
ordinarily stupid rather than extraordinarily so. 

No, the real point of this story is that analysts eating their own cooking
is beside the point, which is why CSFB and Merrill are so ready to make
rules against it. 

Making Matters Worse 

CSFB and Merrill Lynch would like you to believe they've cleaned up that
little apparent conflict of interest. They've probably just made matters
worse. 

Preventing analysts from owning what they recommend to others will only
further untether Wall Street analysis from reality. As one investor
intelligently pointed out, if you wanted to clean up the system, and
compel analysts to say what they actually think, you would require them to
invest a big chunk of their bonus money into the stocks they plugged, and
insist that they hold that stock for at least a year. 

But that sane idea has no chance in the currently insane world, where
every Wall Street boss is scrambling to find ways to appear to reform his
business without actually doing so. 

Brain Drain 

Henceforth any analyst at CSFB and Merrill Lynch who actually possesses
real insight into the future value of a company or an industry will be
much more inclined to quit his job and go work someplace where he is
permitted to eat his own cooking. The colleagues they leave behind will be
the only people on the planet who are allowed to invest in anything except
what they actually know about. 

The end result will be to lower the quality of Wall Street analysis, and
so to raise the relative importance of their natural competitors for
public attention, mainly journalists and financial pundits. 

The people who run CSFB and Merrill must know this, so we may assume that
they don't much care, and that they are resigned to the slow but sure
whittling away of their influence on everyday financial public opinion.
Meanwhile the serious conflicts of interest -- the ones that actually
cause analysts to fudge their opinions -- go largely unaddressed. That's
because the serious conflicts of interest generate the serious profits. 



Cheers,
Sarah


__________________________________________________
Do You Yahoo!?
Make international calls for as low as $.04/minute with Yahoo! Messenger
http://phonecard.yahoo.com/


----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.