Analysts have not been helped by research departments’ poor track record in calling the past year’s economic crisis and the slide in companies’ earnings and stock prices.
In one famous example, Merrill Lynch’s research team was publicly promoting LifeMinders.com, an online diary/address-book service, as “an attractive investment”. Yet the firm’s then internet analyst Henry Blodget sent an internal e-mail that said: “I can’t believe what a POS (piece of shit) that thing is.”
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Wall Street Cull Amid Meltdown Turns Analysts into Endangered Species
Reuters in New York
20 November 2008
Securities analysts are being culled in large numbers on Wall Street - and unlike in previous downturns, many of these jobs may never come back.
Already, an estimated 150,000 jobs have been lost by the financial sector worldwide, and more are expected in investment banking and trading. Banks and brokers are not only struggling to recover from huge write-downs of mortgages and other assets but are also facing a collapse in deal and financing activity.
But tens of thousands of analysts, who work in research departments that had already shrunk as government inquiries after the technology stocks’ crash in 2000-2001 led to the forced separation of research from investment banking, are again on the chopping block.
“There’s wicked consolidation occurring and, in the process, a lot of analyst jobs are getting cut - and not coming back,” said Jim Bianco, president of independent firm Bianco Research which tracks and analyses macroeconomic and market trends.
It all means that some large companies may not be covered by many of the big banks, and many more medium and small-sized companies will lose coverage altogether. That can really hurt the entrepreneurial edges of corporate America as without the exposure that analyst coverage brings, it can be more difficult for smaller companies to attract investment.
In the past, analysts could be revenue earners for banks and brokers, helping their investment bankers sell deals to investors.
But following reforms forced on the banks by then New York attorney general Eliot Spitzer after a tainted research scandal during the dotcom boom and bust, they can no longer work with the bankers as research analysts and depend on investment banking work for their own bonuses.
That means they are now seen largely as costs that can be slashed when times get hard. The deteriorating condition of the United States and global economies and the impact of the financial crisis on bank income have made matters worse.
“These research positions won’t come back in 2009 and possibly 2010,” added Lawrence McDonald, formerly the vice-president of distressed convertible trading at Lehman Brothers Holdings, who left the firm in March before its bankruptcy in September.
“The duplication of analysts between the different divisions at investment houses is profound.”
“The sell side cannot justify the cost of fundamental research,” said Tom Sowanick, the chief investment officer at Clearbrook Financial.
In September, the Federal Reserve allowed Goldman Sachs Group and Morgan Stanley to become bank holding companies. The investment banks will now be regulated like commercial banks, limiting the amount they can borrow against their assets.
In other words, they would not be able to leverage and bet the way they used to, Mr. Sowanick added.
“Without that business, it will put a big hole in these firms,” he said.
Analysts have not been helped by research departments’ poor track record in calling the past year’s economic crisis and the slide in companies’ earnings and stock prices.
Too often, analysts have had “buy” and “hold” calls on stocks of companies that have gone out of business, including Lehman Brothers and Circuit City.
There are now about half as many Wall Street analysts as in 2000. Mr. Spitzer overhauled the profession with US$1.4 billion in settlements and a new mandate for how the industry would be structured, but it made it more difficult for analysts to justify their existence.
Some brokerages had combined analysis with investment banking during the dotcom boom, but Mr. Spitzer’s crackdown changed all that.
In one famous example, Merrill Lynch’s research team was publicly promoting LifeMinders.com, an online diary/address-book service, as “an attractive investment”. Yet the firm’s then internet analyst Henry Blodget sent an internal e-mail that said: “I can’t believe what a POS (piece of shit) that thing is.”
In April 2003, Mr. Blodget was censured and barred for life from the industry. LifeMinders was just one of six internet firms on which his research was cited in this case.
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