Wall Street's New Honor Code

By Daniel Kadlec Sunday, June 17, 2001
    • The evidence of naked greed on Wall Street is, and long has been, as plain as the words spilling from bankers' mouths. Bear Stearns boss Ace Greenberg once said he didn't give a hoot about job applicants' education so long as they had "a deep desire to become rich." Donald Trump opined that "you can't be too greedy." Who can forget the greed-is-good speech from the felon Ivan Boesky, memorialized in the 1987 movie Wall Street?

    From Michael Milken to Mary Meeker, me-first Wall Street has been billboarded for two decades. Even before that it was an open secret. The mystery is that so many are shocked--shocked!--to learn that bankers take kickbacks for allocating shares of a hot ipo, or that analysts tout stocks not for their potential but because cheery opinions help reel in underwriting fees and a monster year-end bonus.

    But shocked we are, and now the Street is being strapped down for another public flogging. It happens after every period of excess, and little good comes from it. In the merger-crazed '80s, Boesky and junk-bond king Milken served time for their roles in insider trading scandals. Yet insider trading thrives. Stocks still jump a day or two ahead of major corporate announcements.

    The Internet bust has sharpened attention on Wall Street's myopia anew. Credit Suisse First Boston, which underwrote the world's hottest IPO--VA Linux Systems--is at the center of a kickback dustup. At least three government agencies are investigating who got what and whether outsize fees later paid to the firm constitute an illegal payoff. Lawsuits are piling up faster than dead dotcoms.

    Meanwhile, the entire analyst community is under siege, essentially charged with fueling the irrational ascent of worthless stock via questionable buy recommendations that enriched analysts and their firms. Internet pinups Meeker at Morgan Stanley and Henry Blodget at Merrill Lynch each earned about $15 million for their bullishness in 1999--while those who listened paid dearly. Now we demand accountability.

    So last Thursday Congress kicked off hearings on analysts' many conflicts of interest, which in some cases are so egregious that even Wall Street has stopped pretending they're all right. Front-running the hearing by a day, CEOs at 14 firms that underwrite 95% of all stock and bond deals endorsed a set of voluntary "best practices" for analysts. No more selling a stock after you advise others to buy. No more bonuses tied directly to banking deals. That kind of thing.

    Watchdogs barked instantly. "There are so many ways of indirectly compensating analysts for bringing in deals that this is a toothless gesture," says Arthur Levitt, former chairman of the Securities and Exchange Commission. Indeed, the guidelines won't change much--and thus threaten to dupe the next generation of investors, led to believe that analysts will look out for them.

    The timing of the "best practices" document is suspect; it's a blunt effort to head off legislation. The move fortifies a well-grounded belief that Wall Street--for all its talk of self-policing--will never do anything to undercut its own self-enrichment unless forced.

    Do we need laws to govern analyst behavior? G.O.P. Congressman Richard Baker of Louisiana is chairing subcommittee hearings on the matter and says voluntary guidelines are not enough. But at least they're a start. John Markese, president of the American Association of Individual Investors, says, "There's a lot of important moral suasion here. No one who signed wants to be singled out as not following the rules."

    "We're taking this very seriously" and plan to clearly disclose conflicts on the front of research reports and issue more sell ratings, says Andrew Melnick, director of global research at Merrill Lynch. O.K., we're waiting. But investors have their own guideline: Wall Street's history. It doesn't stir much faith that the little guy will ever be put first. We might be better off just understanding that and leaving things be.

    E-mail Dan at kadlec@time.com . See him Tuesday on CNNfn's MoneyGang (2:15 p.m. E.T.)