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.