For those who wonder why analysts didn’t blow the whistle on Enron prior to the inglorious collapse, this Wall St. Journal article (requires subscription) explains it all:
Financial analysts who tracked Enron Corp. have taken a pounding for being company “shills” and for failing to concede they didn’t fully understand the Houston energy-trading concern’s complex finances.
Then there is Daniel Scotto.The bond analyst in New York for BNP Paribas says he was forced out of the French securities firm because he told his clients in August that Enron securities “should be sold at all costs and sold now.” That warning came about two weeks after Enron Chief Executive Jeffrey Skilling suddenly quit and a couple of months before Enron began the plunge that ended in federal bankruptcy court on Dec. 2.
Mr. Scotto, 49 years old, issued a research report on Aug. 23 to his clients that lowered his firm’s recommendation on Enron to “neutral” from “buy.” He pushed that designation even further by suggesting Enron might be a “source of funds.” Translation: Consider selling Enron securities to raise money for other investments.
One analyst changes his rating from “buy” to “neutral,” and he gets canned. And the canner, Paribas, covers-up the whole affair. This, coming on the heels of the Frontline report on the shenanigans in Silicon Valley around dot Com IPOs, makes me think our model of the stock market as a basically honest place, is fundamentally flawed. Traders on the Vancouver and Hong Kong exchanges don’t suffer with such an illusion – they know their financial markets are ruled by pirates, where it’s caveat emptor at every turn. Since the reality of the US markets is closer to the pirate model than we thought, it’s probably time to take the rhetoric down that path as well.