November 30, 2001
From the desk of Jane Galt:The Only New York Times
The Only New York Times Editorial Today I Agree WIth
The Times says that analysts were the accomplices in Enron's rise and fall. The analysis is dead on -- talking to classmates about their experience with research analysts shows clearly that the fox is guarding the henhouse.
I think the problem isn't so much that the banks sold their analysts verdicts in order to get IPO and M&A business -- although I think it's pretty clear that they did. The editorial points out that banks who wanted to do business with Enron had it made clear to them that they'd better not probe too deeply into the financial statements. I'm sure that the banks will pay in plaintiff's verdicts and legal fees for their decision to go along.
Even if this weren't the case, however, the analysts would STILL be ridiculously optimistic about companies, because their stock in trade is information on those firms -- and if they aren't optimistic, they don't get access. Buy side is probably better in this regard -- but not too much better, because the companies can always cut off the flow, and the analysts know it. If you're specializing in an industry, you can't afford to piss off a major player, buy side or sell side.
Personally, I think the whole process of banks selling research reports should be abolished (although this would put a number of close friends out of work). The chinese wall has not only been breached, but has a welcome mat in front of the opening, and those who don't know better take the reports seriously. The final point made by this editorial is that while banks feel bad now, what is truly remarkable about the big banks is that they never learn from the past. Sure as the sun rises tomorrow, when the market rises again, there will be Abby Cohens and Mary Meekers ready to help us believe that there really IS a Santa Claus, one that dispenses money without requiring effort or thought to earn it. WHile I am generally not a fan of government regulation, I think that in this case, we must change the system or be doomed to repeat its mistakes. Either keep the big boys from rooking the little old lady in Paducah with phony reports -- or make them print "Caveat Emptor" on the cover.
Posted by Jane Galt at November 30, 2001 11:53 AM | TrackBack | Technorati inbound links