By: Mark Fitzgerald
I’ll admit I used to be a little bit in awe of stock analysts. They could talk with apparent knowledge about hedges and subordinated debt and intangible asset amortization. Even their shorthand — all those casual references to “cap ex” and “last quarter’s guidance” — bespoke a sophistication that seems unobtainable to those of us so dim we actually majored in journalism.
But then, a couple of years ago, former Securities and Exchange Commission (SEC) Chairman Arthur Levitt issued his so-called “Reg FD,” the rule that prohibited the common practice among public companies of disclosing significant news to favored analysts or investors while keeping it from the press and the investing public. Suddenly, we reporters could get in on all those insider conference calls. What a shock awaited us behind the green door.
Public companies — especially newspaper companies — love to whine about Wall Street’s relentless demand for short-term results. But if you have an image of tough-talking analysts holding executives’ feet to the fire during conference calls — well, take a listen to them some time. Analysts routinely introduce their questions with some comment like, “Great quarter, guys!” If a company is announcing an acquisition, the first thing the analysts say, one after another, is something like, “Great deal, guys!”
Clearly, analysts are not heeding the commandment in the title of the book by former Chicago Tribune sportswriter Jerome Holtzman — No Cheering in the Press Box. I can only imagine a White House press conference conducted like an analysts’ call: “Nice work on the Homeland Security Act, Mr. President!” “Great diplomacy at that G-7 summit, sir!”
Of course, it wasn’t just this unseemly toadying that wiped away whatever awe of analysts remained. As we now know, some big-time analysts behaved badly while riding up the dot-com and telecom stock bubble. Because much of their compensation was tied to winning underwriting or consulting business for their firm, analysts would laud certain stocks on the many cable TV channels devoted to soft-core porn of the financial variety. In e-mail messages to colleagues, they were disparaging these same stocks as dogs.
But it seems to me that analysts, their employers, and the SEC that regulates them both are drawing exactly the wrong lessons from this scandal.
As last week’s editorial in E&P noted, the SEC has already imposed strict conflict-of-interest disclosure requirements for analysts who appear on cable or broadcast TV shows — and now the New York Stock Exchange is asking regulators to extend those rules to newspapers. Under the Big Board’s proposal, analysts would be forbidden from ever again talking to a newspaper if that paper had quoted the analyst without including detailed information about whether any conflict existed.
Official Wall Street, in other words, wants more SEC regulation in journalism — when what the market really needs is more journalism in the culture of the analysts regulated by the SEC.
I’ve been thinking about this since the last summer when I found myself on a boat cruising Lake Michigan off Chicago with an interesting group of passengers. One had been a leader of the pro-democracy students slaughtered in Beijing’s Tiananmen Square. There was a former World Bank economist, several groomed-to-zoom lawyers, a software engineer who was already channeling into a charitable foundation some of the wealth accumulated in her precious few years on Earth, and even a young newspaper executive.
One of the passengers faced a daunting task: She had just been made responsible for writing new policies ensuring that opinions by analysts at her well-known firm were untainted by influence from the same firm’s banking business. If only, she mused aloud, she could find a way to import a journalistic culture for analysts.
But my fellow passenger said analysts couldn’t ever be like journalists because they need to get much closer to companies to form their insights. Of course, this idea — that if we’re chummy girls and boys, we’ll get inside and learn the real scoop — is the snare and delusion that all good journalists learn very early to avoid. Whether the press box is in a baseball park or a state legislature, reporters should know they are not part of the team.
As reporters also learn quickly, journalism’s culture of distance and independence often makes them unpopular guests whatever the venue. Stock analysts do not need to take it to the arrogant extremes of some reporters with rabid questions, but a little reserve and a little starch would do wonders for their credibility. And, frankly, their self-respect.
For as smart as they are, analysts apparently haven’t figured out that most corporate suits are just shining them on, anyway. The other day — monitoring a media-company analyst call in my reporter’s “listen-only mode” — I heard the executives greet one well-known analyst by shouting almost in unison: “Hey, we all saw you on CNBC yesterday!”
Over the line, I could hear the analyst practically purring in pleasure.