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Banking analysts should, perhaps, think twice about their headlines. A report by Ladenburg Thalmann’s Richard Bove recently caused a stir with the title “Who is next?”, after IndyMac’s demise. It concluded that danger in the system is far from levels during the 1980s savings and loan crisis. But his ranking of banks prompted sharp share price falls and a lawsuit. “Don’t blame the messenger,” a note from independent outfit Gimme Credit helped spur a 13 per cent drop in Washington Mutual’s share price on Thursday. Analyst Kathleen Shanley’s stated intention to avoid the phrase “run on the bank” still startled a skittish market.
The influence of eye-catching research has been magnified by an unfortunate legacy of the last time authorities tried to regulate the area. After then-New York Attorney General Eliot Spitzer’s 2003 settlement with 12 large investment banks, Wall Street’s finest put their analysts on a much tighter rein. That may have given undue prominence to those not under similar constraints.
The Spitzer rules were taking aim at abuses common in a rising market – analysts writing favourably about companies for which their banks were raising money. In a bear market, different problems surface. Negative rather than positive reports have the most impact and short-selling hedge funds are a significant source of research funding. The most controversial reports are coming from firms not covered by the settlement.
In the current climate, authorities will be tempted to take another look. They should be cautious. When the Securities and Exchange Commission investigated allegations that research house Gradient was conspiring with short-sellers, it cleared the firm and this year brought an accounting fraud case against one of the two companies that had complained about negative reports. Investors need to hear more voices, not fewer, covering the full spectrum of opinion. No one is served if commentary is limited to anodyne recitations of the obvious.
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