From: Richard Bove
Date: Tue, 4 Oct 2011
Subject: Dick Bove’s Notes On Hysteria
The American banking system is not on the verge of failure.
Richard X. Bove
But what can he expect, really? So typical. Read more »
From: Richard Bove
Subject: Regulator role in UBS loss
Did regulators play a role in the UBS loss?
Richard X. Bove
Let’s hear him out. Read more »
We tend to give analysts a hard time around these parts. There are way too many buy recommendations and the rare sell calls come out too late and too infrequently. Even on the upside it often seems they miss the call, jumping on the bandwagon after the band has already played its best tunes. (That’s our attempt to use the word ‘bandwagon’ in an extended metaphor. We actually have no clue what a bandwagon is.)
But the reaction to CIBC’s Meredith Whitney’s negative report on Citigroup demonstrates one reason analysts are so gun shy when it comes to (uh-oh, more metaphor extension) pulling the trigger and putting a bullet in the head of a widely-held public corporation. After her report helped drive down the firm’s shareprice by 7 percent last week, Whitney was harassed by angry investors, and even received death threats. “Fuck you, dumb analyst. I hope you get hit by a truck,” is how she describes to the New York Post the typical call from irate investors.
But Whitney isn’t backing down. “When a lot of money is at stake, it’s the average investor who reacts most emotionally,” Ms Whitney said. “I suspect that’s the case here. I’m more than capable of defending myself. If I were a shrinking violet, I wouldn’t have made the call.”
We’re naming Whitney our analyst of the month for her Citi call and for her self-defiant poise under fire. The world needs more analysts like Whitney. Shooting the messenger in these things is basically an elaborate suicide pact. It’s like beating up your doctor because he tells you that you’re sick.
Two more reasons we’re crushing on Whitney this morning. First, she had this conversation with Post reporters at the St. Regis. We assume that this means in the King Cole bar, one of three acceptable places midtown. The second, she is married to former pro-wrestler Bradshaw Layfield, a three-hundred pound, six-foot-six giant who was sometimes known as “Deathmask.” So her haters should be glad they were leaving voice-mails rather than confronting her in person.
City $licker Goes To The Matt [New York Post]
From a report that’s poised to win a cornucopia of awards for its breakthroughs in the field of human behavior, scientists—yes, scientists—have determined that “US executives have been able to secure more favorable research ratings for their companies from investment banks by bestowing professional favors on Wall Street analysts.” Time out. Did they just say what we think they just said? Let’s watch the tape again: “US executives have been able to secure more favorable research ratings for their companies from investment banks by bestowing professional favors on Wall Street analysts.” They did, indeed! Hang on. We need a second.
Okay, we’re going to try and muscle through this. “Unprecedented research” performed on 1,800 equity analysts found that an executive could greatly increase the odds of his company getting a happy face emoticon instead of the one with a foot where the mouth should be, by offering analysts favors ranging from recommending them for a job to agreeing to speak with their clients to blow job y backrub combos. Jesusmaryandjoseph! Keithrichardhahn! Johnfranciscarneythethird!
We’re not finished— analyst receiving two favors were 50% less likely than non-favor receiving colleagues to downgrade a company. We’re not finished—“favor-rending” to analysts in order to reduce the chances of a downgrade in the wake of poor results or a controversial deal is “widespread.” Meaning it happens a lot? In what kind of sick, fucked up, alternate universe was this study conducted?
Are you ready for this biggest kicker of them all? Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers, said that “Activities such as these are in clear breach of our code of conducts and standards…and are unethical.” Someone hand us a Molotov cocktail.
Executives find favours bring better ratings [FT]
Another day, another person with no sense of humor suing Borat. This time it’s Jeffrey Lemerond, former Carlyle employee and, previous to that, JP Morgan analyst. In a June 1 lawsuit, Lemerond takes issue with the fact that he can be seen screaming “go away” at Cohen, and is depicted “fleeing in apparent terror.” In the trailer, Lemerond’s face is pixelated, but not in the film itself. Lemerdond argues that Twentieth Century Fox “unjustly enriched itself through the unauthorized use of his image” and also claims to have suffered “public ridicule, degradation, and humiliation.” For those of you keeping score at home, “public ridicule, degradation, and humilation” as an analyst at the hands of associates and various other senior (to you) level staff at your various BBs = okay. “Public ridicule, degradation, and humilation” by Borat = not okay (though this may not actually hold up in court. Stay tuned).
“Borat” Sued Yet Again [The Smoking Gun]
It’s hard to throw a stone on Wall Street without hitting a senior investment banker who thinks the new kids these days are too much money. Just two weeks ago we saw John Whitehead, who was one of Goldman Sach’s co-heads exactly one billion years ago, griping about that he was “appalled at the salaries” on Wall Street. He had in mind more than just the junior bankers and newly recruited analysts—he even singled-out Goldman Sachs chief Lloyd Blankfein’s paycheck. But you don’t have to press to aim your tossed rocks very well to knock around a few grey-hairs covering the minds of those who think that salaries for associates are getting too high.
Not surprisingly, those on the receiving end of the “appalling” paychecks tend disagree. Fortunately for the youngsters, there are more places to take their finance degrees than ever before—and many of them hold out the promise of even more money to the next generation of would-be tycoons. Many recent graduates of some of the best finance programs look at Wall Street’s traditional investment banks more as finishing schools than as places to spend their careers.
Take “Fred”—the pseudonymous rising third-year featured in Liz Peek’s New York Sun column this morning. Fred is a top analyst at Lehman Brothers. You can tell he’s a top analyst because Fred’s been invited back for a third year at the firm, which means he is getting promoted upwards without going through the trouble of getting an MBA. He describes his work as “mind-numblingly boring.” And he’s leaving for greener—meaning, potentially more exciting and more lucrative—work in private equity.
It isn’t just the potential to make more money that is luring Fred away from Lehman. It’s also the transparency of how his new firm makes compensation decisions. The mysterious machinery of bonus decisions has long been a source of frustration on Wall Street. Exactly who gets what and why is often a mystery, fueling rumors of favoritism and envious speculation. It can even be more irksome for junior employees of Wall Street firms, who are often paid in lock-step with their peers regardless of personal or business group performance.
“The private equity guys tell us what they want and we do it,” Fred tells Peek.
Indeed, contrary to the impressions given by headlines about bonuses and the gripes of retired bankers, these days Wall Street firms pay-out far less of a percentage of revenues to compensate their professionals. Last year, for instance, Goldman Sachs made news by handing out large bonuses but still managed to shrink its compensation costs to the lowest percentage of profits in recent memory. This is good news for shareholders but bad news from the perspective of the bankers who are doing the work generating those profits.
Perhaps even more troubling for traditional Wall Street firms is that they are losing some of their luster. There is widespread feeling that the last generation of tycoons has passed through the doors of the investment banks and that the next generation will arise elsewhere. A decade ago, investment bankers would describe themselves as the “hunters” of the tribe of finance, relegating the lawyers and others to the job “basket weavers.” But these days many Wall Street firms seem to be playing catch-up in a deal market whose biggest headlines are made by hedge funds and private equity firms, often serving in what are considered decidedly secondary roles by providing financing and bridge equity to deals cut by the new class of hunters.
“Whereas in the old days the investment bankers were the creative masterminds behind financial transactions, these days the intellectual baton has passed to the firms that are taking everlarger companies private at an accelerating pace. Investment bankers view themselves as necessary but not very exciting ingredients in the mix,” Peek writes.
Wall Street Adjusts as Top Hires Flee [New York Sun]
We already know that there’s an extremely high turn-over rate at Forbes.com because of the “sweatshop”-like conditions, but would somebody like to explain the attrition rate of 50% among analysts at Citigroup, Credit Suisse, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley? Surely Dick Fuld isn’t making anyone stitch t-shirts by hand for 16-hours a day as part of his partnership with the Gap. (He knows plenty of less uppity kids in Vietnam).
So what then? Institutional Investor reports that 47-62% of analysts at those firms, who published research in 2003, dropped all coverage by 2006. There was no indication of who switched to other firms, went buyside or retired. The study noted surprise at such steep attrition rates and attributed the highest factors to “commission compression, the sell-side business model changes brought on by the Global Research Settlement, and increased competition for research from the buy-side.” But we want more details—did associates peace because their jobs sucked? Because Lloyd Blankfein was/is too palsy with his employees? Because they wanted to be shepherds? Let’s hear if from the horse(s)’ mouth(s).
50% Of Analysts Dropped Out Since ’03 [Daily ii]
Yeah. We think backanalyzing sounds as dirty as you do.
But not just like that. That’s the backdating-derived name we’ve given to the latest scandal to rock Wall Street some four months after it broke. You probably ignored it the first time around because we sure did. A refresher: it’s the one where a group of academics have accused Thompson Financial of cooking its books—or allowing its books to be cooked by analysts or maybe just being sloppy about keeping the books—to make the calls by analysts seem better than they were. (Some background from DealBook here and here.) We’re not sure why attention has returned to this thing but it has.
Here’s DealBook on the resurged scandal:
We thought it was dead, but the controversy over a widely used database of Wall Street research has popped up again. The debate began last fall when a group of researchers questioned the integrity of Thomson Financial’s I/B/E/S service, a clearinghouse of analysts’ stock picks. The researchers appeared to backtrack after Thomson disputed their methodology, but last month they published the paper and are standing by its conclusions.
“Is it sleazy fraud or inadvertent error?” a headline on Slate asks. “You be the judge.”
In their paper titled “Rewriting History,” professors Alexander Ljungqvist of New York University, Christopher J. Malloy of the London Business School and Felicia C. Marston of the University of Virginia say they found 55,000 changes to the database from 1993 to 2002 that tend to make certain stock analysts look good.
Thompson denies that there is anything wrong with their databases. It’s the researchers who don’t know how to use the tools developed for people in the business.
If analyzed as a whole, all of the data these authors claim is missing is actually present and accessible. The writers of the report clearly had little experience in dealing with Thomson Financial’s system, which is designed for financial professionals.
Translation: Go back to your ivory tower, egg-heads. We here down on the Street have real work to do.
Slate’s Daniel Gross, who first reported on the paper on Tuesday, writes that its hard to tell who to believe. Except that, you know, you probably can’t trust Wall Street. Note how he begins on with a touch of faux-humility before going for the jugular.
It’s hard to know what to conclude. Most of my fellow financial journalists and I aren’t competent to judge the methodology of the academics. Most of my fellow financial journalists and I also routinely, and uncritically, rely on Thomson Financial for data we use in articles.
Wall Street executives—stock analysts among them—have shown that there’s virtually nothing they won’t do, and nobody they won’t corrupt, to advance their own careers and portfolios. Until a few years ago, people would have thought it impossible that a telecom analyst would offer to swap favorable stock recommendations for help in getting a child into preschool. Or that mutual funds would let certain investors trade in and out of their funds after the market closed for guaranteed profits. Or that well-known companies would mislead investors by backdating options for CEOs ensure that compensation that is supposed to be at risk would be guaranteed. And yet, here we are.
Okay, Danny. But until a few years ago, a lot of us never thought well-known financial journalists would generate pseudo-scandals like backdating. Or that politicians would pass irresponsible legislation like Sarbanes-Oxley without much thought about the consequences or costs just to appease a temporary (and largely media generated panic) about corporate corruption. Or that prosecutors would ask courts to impose sentences like the ones we saw come out of the Enron case. And yet, and yet.
The Coming Wall Street Scandal [Slate]
Are Some Stock Analysts Rewriting History? [DealBook]
Morgan Stanley’s stock analysts downgraded the stock of the New York Times to the equivalent of a “sell” rating yesterday, the New York Post reports this morning.
Publishing analyst Lisa Monaco cut her rating on the stock from “hold” to “underweight” – the equivalent of “sell” – saying that the Times’ revenue is deteriorating and that, contrary to some investor expectations, a sale of part or all of the company is “implausible.”
The negative report came only a day after a Morgan Stanley investment fund based in London stepped up a campaign to push the Times to take away either the chairman or publisher posts from scion Arthur “Pinch” Sulzberger, Jr. and the two-tiered stock structure that keeps the family in control of the company.
Although the New York Post is treating this a blow to Pinch (see graphic on left), ironically the downgrade might indicate good news for the chairman/publisher. If the changes demanded by Morgan Stanley’s investment fund were realistically in the pipeline, Morgan Stanely analysts probably wouldn’t have downgraded the stock. The downgrade is a vote of no-confidence in Pinch but its also a sign that he’s probably pretty safe in both his jobs at the Times. That meter is never going to reach KO.
Times Scared [New York Post]
The announcement came today that veteran tech analyst “Rick Sherlund” would soon leave Goldman Sachs. The official story is that “Sherlund”started covering Microsoft when it went public thirty years ago. Whatever. That moustache isn’t fooling everyone. Very clearly, Sherland is the same person as Bill Gates.
Tech Analyst Sherlund Plans Walk on the Buy Side [Wall Street Journal]