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CNN Live At Daybreak
Congress Analyzes the Analysts
Aired June 14, 2001 - 07:46 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: Well, a lot of you stock investors might get a kick out of watching a congressional hearing very closely today. The focus is not going to be on Alan Greenspan, but on financial analysts.
CNN's Peter Viles looks at why those advisers are now in the hot seat.
(BEGIN VIDEOTAPE)
PETER VILES, CNN CORRESPONDENT (voice-over): The markets may have stabilized, but $3.5 trillion of value has disappeared. Now Congress wants to know why Wall Street analysts never warned investors to sell, or at least duck.
REP. MICHAEL OXLEY (R), OHIO: I'm distressed by the statistic that as the markets were crashing last year, less than 2 percent of analysts' recommendations were for selling.
VILES: In a hearing Thursday, Congress will pose the question the news media has been asking for months: can you trust Wall Street analysts? Trustworthy or not, they still don't like to say, "sell." Research by First Call shows 29 percent of all recommendations are strong buys; 37 percent buy; 31 percent hold; only 1 percent sell; and only .4 percent strong sell.
Wall Street will go to Washington armed with a voluntary solution -- so-called best practices to ensure the integrity of stock research. Research departments should not report to investment banking units, analysts should recommend both buy and sell ratings, analysts should not trade against their recommendations, analysts' pay should not be linked directly to investment banking business.
FRANK FERNANDEZ, SECURITIES INDUSTRY ASSN.: Clearly, there is a perceptual issue at the very least, and the industry felt we needed to address this, because even the perception of a conflict of interest is too much.
VILES: But the initial reaction from Congress is that this voluntary code is not enough.
REP. RICHARD BAKER (R), LOUISIANA: It's one thing to put a nice pretty code of standards together, publish it and put it on a shelf. I'm more interested in the usage, and whether or not it's actually being applied in the market. As my hero Ronald Reagan said, "You trust, but you also verify."
VILES (on camera): Expect some pointed criticism of Wall Street at this hearing on Thursday, notably from bearish investor David Tice. Now, he has argued in the past that bad advice from Wall Street is bad not just for investors, but for the entire economy. He cites the example of over investment in telecommunications, under investment in energy, both problems for the economy that Wall Street bears some of the blame for.
Peter Viles, CNN Financial News, New York.
(END VIDEOTAPE)
LIN: Well, one of those testifying today is Marc Lackritz of the Securities Industry Association, a brokerage lobbying group.
Good morning to you, Mr. Lackritz. And thanks for joining us today.
MARC LACKRITZ, SECURITIES INDUSTRY ASSOCIATION: Good morning, Carol. It's a pleasure to be here.
LIN: So what is it that you want to make perfectly clear to these members of Congress?
LACKRITZ: Well, we issued our best practices earlier this week because we wanted to reassure the public that we placed a top priority on putting investor interests first. And we wanted to remove any clouds of perception or misperception as to the independence and the objectivity of our research analysts.
LIN: All right, well, let's try to do some of that this morning.
As people watch -- stockholders watch analysts on television, what should they know? Do these -- can these analysts own the stocks that they are recommending or recommending to sell or buy or hold?
LACKRITZ: What we're saying is that there should be clear disclosure of any economic interest of stock ownership by analysts. And an analyst cannot trade against their recommendations. So, for example, if they have a buy recommendation on a security, they could not sell their own holdings. And they would have to disclose what those holdings were at the time they were making a research recommendation.
LIN: But they're only human, so how objective can an analyst really be?
LACKRITZ: Well, analysts have a very good track record. First of all, there are about 30,000 -- over 30,000 chartered financial analysts in this country. Not all of them work for broker dealers, but a number of them do. And they have a very difficult job to do.
They have to go out and talk to management, review balance sheets, talk to suppliers, talk to customers, and reach conclusions as to what the prospects of companies are and the prospects of those securities. They've got a very good track record over time. In fact, for the 12 years prior to last year, investors received an annual average return of 16 percent year-to-year in those 12 years. Last year was a terrible year.
LIN: Yes.
LACKRITZ: And that's why these problems have sort of arisen and these perceptions have arisen.
LIN: Well, what is the analyst's relationship with my broker, the one who calls me up and makes those recommendations?
LACKRITZ: Your broker is in business to serve your best interest. And so the analyst's recommendation is only one factor that goes into whether or not you should buy or sell a security. Your own broker is -- has obligations to you to make sure that the security is suitable for you, to understand your own risk profile, your investment objectives, and your long-term goals in investing.
LIN: Well, that's the ideal...
LACKRITZ: And so...
LIN: I'm sorry, Mr. Lackritz.
That is the ideal scenario. But, frankly, aren't brokers at -- especially at major brokerage houses -- aren't they, if not, under pressure, I mean, isn't there certainly the impression at the morning meeting, you know, "This is the stock that, you know, Merrill Lynch -- we at Merrill Lynch or we at Fidelity are recommending today"?
And isn't there often built-in incentives for that broker to sell that stock -- a bit of a bonus on the side?
LACKRITZ: Well, Carol, the major incentive for brokers and for our whole industry is to put our investors' interest first, because when we do well -- when our investors succeed, we succeed. When our investors don't succeed, we don't succeed. So we really have our interest, I think, aligned very strongly with those of our customers. We put our customers' interest first and take into account their interests first. Then they're going to do well and we'll do well as well.
LIN: So how do you account for so many people being underweighted in the stocks that are doing the best today?
LACKRITZ: Well, I guess the reason is because we can't forecast markets. Carol, if we could forecast markets, probably neither one of us would be here today talking about this. We'd be retired off in some cushy spot.
Markets go up and markets go down. It's up to us as an industry to make sure that we educate our investors as to the risks involved in investing. And it's up to us as professionals to give them the best advice possible.
LIN: Ah, the adage...
LACKRITZ: And that's why...
LIN: The adage...
Marc Lackritz, I'm sorry, we've got to leave right now -- but the adage of always "buyer beware." Thanks so much this morning. And good luck with your testimony today.
LACKRITZ: Thank you very much, Carol.
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