Analyzing the Analysts

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So can we start believing the experts again?

The SEC took its stab Wednesday at trying to rebuild the wall between analysts and investment bankers, announcing new rules barring Wall Street firms from using (and compensating) their analysts as investment-banking shills and upping the disclosure requirements for analysts' reports and public appearances. Other proposed prohibitions include an analyst owning the stocks he covers, and the issuing of reports by firms while they're closing related investment-banking deals.

Meanwhile, New York Attorney General Elliot Spitzer — who tore the last fig leaf off the opinions-for-sale game by releasing internal Merrill Lynch emails scoffing at stocks the analysts were publicly promoting — is talking settlement with Merrill, attempting to make over the firm as a model for a more trustworthy Wall Street.

So the next time you see an analyst on CNBC telling you Company X is a "strong buy" at $30, and Company X promptly goes bankrupt, he wasn't ripping you off — he was just really, really wrong. Which, under the new SEC rules, will still be legal — and still be quite common.

And a good thing too, because let me tell you something, folks: peel back the inside information, the hands washing each other, the corruption and the greed, and Wall Street is still, at its heart, a high-stakes crapshoot. And nobody craves advice, good or bad, like gamblers. It gives them some sense of intelligence — and gives them someone to blame when they lose.

And so Wall Street will always have experts. Economists, who will be the first to tell you their game is as much art as science, are nearly always wrong to some degree — you may recall that the recovery has been "on its way" since at least the beginning of 2001. (They at least have the decency to be constantly "revising" their forecasts.) But Wall Street firms still hire their own economists at big salaries, mainly to give the rest of the company a crystal ball to lean on — and to hide behind when it loses money.

Not to mention it's a nice little industry. Wall Street firms hire economists to tell them about the world and analysts to tell them about the companies in it; then they put the economists and analysts on TV to give the firm credibility with investors — which allows them to sell the research and reports to other firms and investors without research staffs of their own. And us? We pay mutual-fund managers, some of whom just can't seem to beat the S&P 500 with our retirement money no matter how hard they try, and hire brokers to throw us the occasional bone. We subscribe to Investor's Business Daily and watch CNBC. All in the hopes that we'll make some money of our own.

With so much advice swirling around — and so much of it cooked, corrupt or just plain bad — even the companies themselves get to play oracle. For weeks, Wall Street has been a chastened bettor, placing few bets and admitting its ignorance. Then Cisco announced after the bell Tuesday that the year in tech looked pretty good — and Wednesday the casino was jumping again with a furious rally that added 122 points to the NASDAQ and 305 points to the Dow, the biggest daily gains of 2002. Nobody even complained about Cisco's obvious conflict of interest as a company that stands to profit from a tech rebirth.

The SEC could take the fatalistic approach and just let the rules alone, forcing Wall Street and its analysts to create their own value as seers by the quality of advice they give out — or risk the collapse of the whole fortune-telling industry. (There is some evidence that Wall Street pros earn their money — in the Wall Street Journal's "Dartboard" feature, which announced its retirement last month after 14 years pitting dart-chucking staffers against investment advisers, the dartboard won only 55 of 142 contests.) Another way might be simply to abolish the "buy," "hold" and "sell" ratings, letting analysts stick to analyzing. Instead they're doing their regulatory thing, trying to get the investment bankers listening to the analysts again, instead of the other way around.

But there's one conflict of interest that the SEC will never get at: Everybody on Wall Street benefits when the markets go up. Deals get bigger. Commissions get fatter. Decisions get easier — just run with the bulls — and CNBC anchors' smiles get wider, because the more people making money in the market, the more viewers tuning in to hear what the analysts, economists, CEOs and Warren Buffett think is the best place to put your chips.

And the salaries Wall Street pays in boom times are enough to make anybody bullish.