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Barry Ritholtz

Wall Street Analysts, Honestly Wrong at Last

Financial analysts are asked to do the impossible: predict the future.
Doing the humanly impossible.

Doing the humanly impossible.

Photographer: Douglas Engle/Bloomberg

Sometimes the gains from a new regulatory regime are obvious. The creation of the Federal Deposit Insurance Corp. is a perfect example. Your bank deposits are guaranteed by the government up to some stated amount, no matter the recklessness or irresponsibility of the bankers running the place. It wasn’t always this way. Before the FDIC, bank runs were common and depositors could and did lose all their money. The changes were an enormous improvement, allowing people to safely deposit their cash without fear of a run on the bank in times of trouble. Savings increased, stress over bank accounts fell, bank lending rose. The entire economy benefitted. It was pretty hard to misconstrue the impact: a win-win-win.

In the late 1990s and early 2000s, a series of scandals led to major regulatory changes in how Wall Street analysts did their jobs. A brief litany of related outrages would have to include: the WorldCom and Enron accounting scandals; manipulation of initial public offering pricing; private calls to larger investors that gave them an unfair advantage on the timing of analyst upgrades and downgrades; and slanted analyst reports on companies in order to winning investment banking business. A series of investigations by the Securities and Exchange Commission led to improved corporate disclosure under Regulation Fair Disclosure in 2000 and Congress passed the Sarbanes-Oxley Act in 2002, laying out rules on financial reporting, corporate governance and auditing. On top of that, in 2003 the state of New York forced Wall Street to clean up the way their analysts did business, clamping down on the conflicts that led to biased research and forecasts.