Congress Questions Wall Street Practices

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.

Among the recommendations: no direct link between an analyst's pay and specific investment banking transactions, and disclosure by analysts about whether or not they hold the stocks they cover.

Securities Industry Association president Marc Lackritz also appeared at today's hearing, telling the subcommittee that analysts as a whole had performed "pretty well" overall.

For his part, Baker said he appreciated industry's efforts to map out guidelines, but was "not convinced they go far enough to insure accountability and enforcement."

And other observers have questioned whether the guidelines, which lack an enforcement mechanism, will change anything about the way Wall Street does business.

"What does an industry do that's under attack?" Arthur Levitt, former chairman of the Securities and Exchange Commission, asked ABCNEWS. "Let's go out with 'Best Practices' before Congress or regulators step in."

Pressure to Be Positive

Certainly, there seems to be a great deal of pressure on research analysts. Tom Brown, a former analyst for investment bank Credit Suisse First Boston, described himself in a recent interview with ABCNEWS as one of the few analysts who did tell investors to sell — but says that honesty eventually cost him his job.

"I was the No. 1-rated analyst for eight out of nine years and the No. 2 for the other year in external surveys, so it's hard to conclude my performance was poor," he argues.

According to Brown, the issue boils down to a matter of money. Analysts who publish glowing research reports about a company can help attract that company to their firm's investment banking department — where the big Wall Street profits are made, through mergers, acquisitions, initial public offerings or other deals.

"Being positive on a company, being positive on a sector certainly helps the company's investment bankers go to that company and generate more business," Brown notes.

Betsy Stark and ABCNEWS Radio contributed to this report.