Analyze this

April 30, 2003

THE LONG COMING civil settlement by 10 of the nation's top securities firms and two celebrity stock analysts - accused of profiting in the late 1990s from fraudulent stock research and ratings - is supposed to induce enduring changes on Wall Street.

The deal is part of a much larger context of unfolding moves to restore confidence in the nation's badly shaken financial markets. More is to come. But for now, the Street got off relatively easy - with too little financial pain and too few structural changes.

In the first place, the $1.4 billion to be coughed up by Citigroup, Merrill Lynch and other big-name brokerages pales in comparison to this industry's scale. The fine reportedly amounts to just 7 percent of its profits last year - its worst year in almost two decades.

Only about $400 million of that money will be set aside to compensate investor losses. After administrative and legal costs, beaten-up investors shouldn't hope for much.

The firms and key executives remain vulnerable to a mountain of investor lawsuits. But critically, Monday's settlement didn't include admissions of guilt - making such lawsuits less than slam dunks.

Last but not least, the deal allows the big retail stock vendors - even those with investment banking interests - to continue providing stock research and ratings, albeit with more controls. This clear conflict of interest remains the core problem.

The settlement with federal, market and state regulators stems from their investigation into securities firms providing knowingly optimistic stock ratings to drum up business for their lucrative investment banking trade of promoting initial stock offerings. They paid their analysts for reports that brought in such business. They even paid outside analysts to issue similarly happy reports.

The settlement will force the brokerages to spend $432 million over five years on independent analyses to be offered to investors along with their own research. It tells the companies to separate their analysts from their investment bankers, even barring Sanford I. Weill - Citicorp's chairman - from interacting with his own firm's analysts without a company lawyer present.

Why bother? Why not just end the whole game instead of trying to regulate it more closely? Why not just force stock promoters and vendors out of the business of offering the public stock research and ratings?

This settlement still leaves the corrupt cycle intact. Companies tout their prospects to supposedly independent analysts, who in turn issue ratings and set targets used by their own firms to peddle stocks to investors. Then the companies pull out the stops - sometimes illegally so - to hit those targets. If they don't - and their stock prices collapse - the securities companies have already taken their profits.

Is it any wonder the Street is prone to bubbles? A real question is why retail investors - who might extensively research the car or refrigerator markets for weeks so as not to be taken by glib salesmen - would put their hard-earned money behind any in-house analysis offered by stock salesmen.

Wall Street doubtless hopes this deal marks the last chapter in this debacle. Like too many stock ratings, that's far from the truth.

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