Wall Street Analyst

Wall Street Analyst

Wall Street analysts use their industry knowledge and financial expertise to issue earnings estimates and investment recommendations. At least that's what Wall Street analysts are supposed to do in theory.

In reality, Wall Street analysts are salesmen in disguise. Instead of making recommendations based on facts, Wall Street analysts look for facts to justify the recommendations they are told to make. This is the norm on Wall Street. How could this be and why?

Say a biotech analyst at an investment bank sees the sector getting overstretched and due for consolidation. When the word gets around the firm that he is writing a report on this, he gets a telephone call from the biotech head of the investment banking division, who tells him that the firm is about to take another biotech company public. Since they need to drum up buyers for the offering, the analyst is told to write that the sector is still looking rosy, and he does.

Doesn't the bank safeguard against such manipulation and pressure?

To the contrary, investment banks have systems and safeguards in place to promote such manipulation. For example, the amount of the analyst's bonus, which can be 3 times the salary, is determined by the investment banking division, which rewards analysts who are "team players".

Why do banks do this? It's simple: analyst reports don't make money. Investment banking activities do.

Most Wall Street analysts are hypocritical cheerleaders who write not what they believe, but what they believe will maximize their bonuses. At the height of the dotcom market bubble in 2000, the analysts on Wall Street gave an average "Sell" rating to just 0.3% of the NYSE stocks. Right up until the market crashed, they were saying in effect, "Don't sell anything!" 

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