Congress Questions Wall Street Practices

ByABC News
June 13, 2001, 5:44 PM

June 14 -- Congress is joining the ranks of those turning up the heat on Wall Street's analysts.

House committee hearings are being held today on Capitol Hill in order to further scrutinize the abysmal record put together last year by Wall Street's leading stock forecasters and to examine potential conflicts of interest that may lie behind the seemingly perpetual "buy" ratings some analysts have maintained despite the market's poor performance over the last year.

"Analysts affiliated with the lead underwriter of an [initial public] offering tend to issue more overly optimistic growth forecasts than unaffiliated analysts," asserted Rep. Richard Baker, R-La., chair of the House Subcommittee on Capital Markets, at the outset of the hearing.

While the markets tanked in 2000, a stunning percentage of analysts clung to their "buy" ratings. In a year during which the Nasdaq index plummeted almost 60 percent, only 1 percent of the recommendations made by Wall Street analysts were "sell."

But not everyone on the subcommittee whose panel is called "Analyzing the Analysts" expressed agreement with Baker.

"We have the most successful capital and financial markets in the world," countered Rep. Paul Kanjorski, D-Pa. "Because we are in some difficulty in the markets this is not the time to grab a club and take personal advantage by playing the role of lead demagogue."

Will Best Practices Help?

Baker added that a purpose of the hearing would be to "converse with regulators" in an effort to establish standards that will protect investors by making sure stock recommendations that are supposed to be unbiased remain that way.

With Congress joining the Securities and Exchange Commission and the New York State Attorney General investigating Wall Street's analysts, the industry's trade group announced its own clean-up plan on Tuesday.

The Securities Industry Association, endorsed by research directors at 14 major Wall Street firms, put forward a series of "Best Practices" guidelines it wants analysts to follow.