Merrill Lynch Hears the Boo Birds

Jul 11 2001

Two old-timers swung for the fences yesterday: Cal Ripken earned a standing ovation from fans and reporters, but Merrill Lynch only got panned. The ancient Wall Street warrior was page-one news for its announcement that it would no longer permit analysts to buy stock in companies they cover. That's nice, unimpressed business reporters said, now when will Merrill tackle the real issues?

According to outlets, Merrill's analysts will have an unspecified time to sell stock that conflicts with the new policy, transfer it to a managed account over which they have no control, or adhere to strict disclosure rules. And forget hiding it in the kids' accounts; Spouses' and children's accounts are covered, too.

The suggestion is that the policy change will inject integrity into the research process, wrote The Street.com's Adam Lashinsky. "If that's not an admission that integrity doesn't exist now, what is?" But most reporters, including Lashinsky, chalked up Merrill's move to addressing issues of mere appearance, and not substance. "Merrill is heralding an ethics coup that's as worthless as the Internet stocks touted by its star analyst Henry Blodget," wrote CBS MarketWatch's Mike Tarsala. Even Merrill piped up that fewer than 20 percent of equity analysts own stock in the industries they follow.

The real culprit is that analysts' "rhapsodic" research reports, as the New York Times described them, can be a contributing factor in companies' ability to win lucrative investment deals. Analysts "are nothing more than claques for their investment banking departments," one chief investment officer told the Times. It'll be a while before there's any movement on that issue. As the Times' Gretchen Morgenson pointed out, research departments don't generate the income to pay for themselves, so they have to be supported by their firm's more profitable activities. Translation: They've got to earn a place on the team somehow.

In the meantime, we can't decide what's worse for Net stock analysts like Blodget: selling some of the stocks they own, or fessing up to owning some of the dogs.

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