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"Honey, I shrunk the analysts" - Wall St. toll mounts
November 18, 2008 / 7:57 PM / 9 years ago

"Honey, I shrunk the analysts" - Wall St. toll mounts

By Jennifer Ablan - Analysis

<p>Signs marking the entrance to Wall Street are seen in New York October 6, 2008. REUTERS/Shannon Stapleton</p>

NEW YORK (Reuters) - Securities analysts are being culled in large numbers on Wall Street -- and unlike in previous downturns, many of these jobs may never come back.

Already, an estimated 150,000 jobs have been lost by the financial sector worldwide, and more are expected in investment banking and trading. Banks and brokers are not only struggling to recover from huge write-downs of mortgages and other assets but are also facing a collapse in deal and financing activity.

But tens of thousands of analysts, who work in research departments that had already shrunk as government probes after the technology stocks’ crash in 2000-2001 led to the forced separation of research from investment banking, are again on the chopping block.

“There’s wicked consolidation occurring and, in the process, a lot of analyst jobs are getting cut -- and not coming back,” said Jim Bianco, president of independent firm Bianco Research in Chicago, which tracks and analyzes macro economic and market trends.

It all means that some major companies may not be covered by as many of the big banks, and many more medium and small-sized companies will lose coverage altogether. That can really hurt the entrepreneurial edges of Corporate America as without the exposure that analyst coverage brings, it can be more difficult for smaller companies to attract investment.

In the past, analysts could be revenue earners for banks and brokers, helping their investment bankers sell deals to investors.

But following reforms forced on the banks by then New York Attorney General Eliot Spitzer after a tainted research scandal during the dot-com boom and bust, they can no longer work hand in hand with the bankers as research analysts and depend on investment banking work for their own bonuses.

And that means they are now seen largely as costs that can be slashed when times get hard. The rapidly deteriorating condition of the U.S. and global economies and the impact of the financial crisis on bank income have made matters all the worse.

“These research positions won’t come back in 2009 and possibly 2010,” added Lawrence McDonald, formerly vice president of distressed convertible trading at Lehman Brothers, who left the New York-based firm this March before its bankruptcy in September.

“The duplication of analysts between the different divisions at investment houses is profound,” McDonald said.

Even venerable Goldman Sachs Group (GS.N), the largest investment bank known to avoid sizeable losses from mortgages and corporate loans, is cutting almost 3,300 jobs, including some equity analysts. The casualties included William Tanona, the firm’s financial services analyst, who covered companies such as JPMorgan Chase & Co. (JPM.N) and Morgan Stanley (MS.N).

WHEN RISK-TAKING FADES, SO DOES RESEARCH

“The sell side cannot justify the cost of fundamental research,” said Tom Sowanick, the chief investment officer for $22 billion in assets at Clearbrook Financial LLC, in Princeton, New Jersey.

In September, the Federal Reserve allowed Goldman Sachs and Morgan Stanley to become bank holding companies. The investment banks will now be regulated like commercial banks, limiting the amount they can borrow against their assets.

In other words, they will not be able to leverage and bet the way they used to, Sowanick added.

“Without that business, it will put a big hole in these firms,” he said.

Sowanick said analysts have become very short-term-oriented and lend value to hedge-fund trading types, but are of little use to the retail or pension industry.

In that regard, “if risk-taking is shrinking on Wall Street, then proprietary research will also have to shrink,” he added. “I think that analyst roles will be in-house roles for the buy side.”

Their case has not been helped by Wall Street research departments’ poor track record in calling the past year’s economic crisis and the slide in companies’ earnings and stock prices.

Too often, analysts have had “buy” and “hold” recommendations on the stocks of companies that have gone out of business, including Lehman Brothers and Circuit City.

Many analysts, or formerly employed ones, appear to be aware of their challenges.

In an ironic twist, though, the New York Society of Security Analysts or NYSSA, founded by a group of professionals that included Benjamin Graham, the “father of securities analysis,” has seen an increase -- instead of a decrease -- in its membership of 11,000.

“We were expecting membership to drop off and not increase. It looks like analysts are increasing their networking possibilities,” said Nanci Roth, manager of marketing and development member services of NYSSA.

She quickly added: “We will know more about the environment for analysts in the next six months to a year.”

ANALYSTS CAN‘T CATCH A BREAK

There are now about half as many Wall Street analysts as in 2000. Spitzer overhauled the profession with $1.4 billion in settlements and a new mandate for how the industry would be structured, but it made it more difficult for analysts to justify their existence.

Some brokerages had combined analysis with investment banking during the dot-com boom, but Spitzer’s crackdown changed all that, erecting Chinese walls between the two areas.

In one famous example, Merrill Lynch’s research team was publicly promoting LifeMinders.com, an online diary/address-book service, as “an attractive investment.”

Yet the firm’s then Internet analyst Henry Blodget sent an internal e-mail that said: “I can’t believe what a POS (piece of shit) that thing is.”

In late April 2003, Blodget was censured and permanently barred from the securities industry, and required to pay $4 million to settle charges brought against him of aiding and abetting violations of the antifraud provisions of federal securities laws, following an investigation by the SEC, the NASD and the New York Stock Exchange. LifeMinders was just one of six Internet companies on which Blodget’s research was cited in this case.

Blodget neither admitted nor denied the allegations and findings.

“Because of Spitzer, analysts had to retool themselves,” Sowanick said. “Essentially, these analysts became analysts for hedge funds because hedge funds were a source of income and they had an appetite for equity and fixed-income research.”

Now that avenue is virtually shutting down, as deleveraging, less risk-taking and lower returns have hurt hedge funds, too.

“Analyst jobs are a function of the size of Wall Street -- and Wall Street is shrinking, so these jobs will be going away,” Bianco added.

Reporting by Jennifer Ablan; Editing by Jan Paschal

Our Standards:The Thomson Reuters Trust Principles.
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