NEW YORK'S alpha investment houses have agreed to stop rewarding their stock analysts for knowingly lying to the public.
This will "change the way Wall Street operates," said New York Attorney General Eliot Spitzer, and the ridiculous thing is, he's right. Banning "objective" analysts from flacking for investment banking clients is a major concession for Wall Street, a fat holiday kiss for which Manhattan expects you to be grateful.
But it does not mean stock research will improve.
Not paying analysts to intentionally give bad advice is different from getting analysts to give good advice.
Stock research is difficult. It involves accounting, a million economic variables and the future, which nobody can see except Sidney Omarr.
The mere removal of the ugliest conflict of interest from analystland will not turn research pros into Bill Miller-style stock picking geniuses. It won't even get rid of all conflicts.
Under last week's settlement with Spitzer and the Securities and Exchange Commission, the "independent" research houses that will henceforth make recommendations to stock-brokerage clients of Merrill Lynch, Salomon Smith Barney and the others will still get paid.
They'll get paid by Merrill, Salomon and the other settling firms - all of which will still have banking clients to flatter, dubious stocks to flog, brokerage commissions to reap, trading desks to feed and a dozen other agendas that diverge from the interests of their retail brokerage customers.
The money flowing from Merrill etc. to outside research houses is supposed to be sanitized by a "monitor," appointed by regulators, who has the power to hire and fire the freelance soothsayers.
The setup looks good on Spitzer's news release. But on Wall Street, dollars have memories. Everybody knows everybody, and the mightiest "Chinese Walls" have a habit of being breached.
Big investment banks will still dominate finance, retain their own research shops and probably pay analysts better than the independent operations. Securities scholars who want to work at Morgan Stanley someday might pull punches on Morgan Stanley's initial-public-offering clients.
Eliot Spitzer believes that quarantining the analysts will fix Wall Street.
The mother played by Ellen Burstyn in The Exorcist thought her big problem was rats in the attic.
Despite the Internet, the largest investment influence on millions of small-timers is not analysts, the financial media or even brothers-in-law. It's stockbrokers.
There are thousands of excellent brokers, and often their advice is more valuable than that of their MBA-wielding colleagues downtown.
But brokers working on commission have a built-in incentive to maximize trading volume, which is not the same as maximizing clients' welfare. The Securities and Exchange Commission disciplines hundreds of brokers annually. Rogue brokers, who will always be with us, can suppress good stock advice or just plain lie no matter how much money their employers are required to spend on independent research.
And of course there is the larger point: Stocks are risky, inscrutable and surprising. Even richly endowed, ivory-plated sanctuaries full of the wisest philosopher-analysts are going to crank out a lot of bad stock advice. It's the way things work. Winning stocks are hard to find until afterward.
Stock pickers and market timers have done better recently as the bear market creamed buy-and-hold investors as well as index mutual funds, which try to track the overall market. But most stock-advice newsletters and mutual-fund managers - who don't have investment-banking clients to pander to - still trail the indexes.
For the five years ending Dec. 19, only 18.7 percent of actively managed stock mutual funds beat the S&P 500, according to Lipper Inc.
This is not to say that excellent stock research is impossible or doesn't get done. Legg Mason's Bill Miller is proof of that. So is Value Line, the research outfit that consistently beats the market.
But the best analysis is still unlikely to trickle down to the average investor. If Merrill Lynch bosses discover a stock-picking prodigy, they're going to put the sucker on their trading desk, not pay him to advise retail clients in Cedar Rapids.
When their risks and benefits are properly understood, stocks can be good investments for the long term. But that was true before last week's $1.4 billion settlement, which doesn't punish any individuals responsible for the wrongdoing and amounts to a tiny fraction of what Wall Street made in the bull market.
Spitzer says the deal will "restore integrity to the marketplace." Who's issuing false advertising now?
