As I watch members of Congress scold Wall Street research analysts for recommending stocks that had the audacity to decline, as I read about analysts duping investors with fraudulent reports, I rub my eyes and think, "Have these people ever talked to an analyst?"
In the late 1990s, I worked as an associate research analyst at Goldman Sachs, and the prevailing cartoons of analysts _ as brilliant puppeteers manipulating markets or as useless, empty-headed puppets _ seem to me unfair and incomplete.
Analysts are far from perfect, and in the days of the bubble some were careless or complacent, but their activities are more varied, benign and valuable than commonly portrayed.
Investment banks employ analysts to serve the bank's brokerage clients. Analysts spend their days gathering and assessing information about companies and industries, rating stocks "buy" or "sell" or something in between, and communicating these recommendations and their insights to the bank's clients.
None of which is as straightforward as it seems. First, analysts are daily reminded that the stock market will make a fool of you. Predicting stock prices is predicting the future, and being wrong is part of the job.
Second, analysts are subject to internal and external pressures to be positive on essentially every stock they cover.
From the inside, investment bankers arm-twist analysts to write and speak favorably about their firms' existing and prospective clients.
From the outside, some executives bypass their bankers and go straight to the analysts, hoping to win a higher rating (and hoping, no doubt, that the fruits of that rating will enable them to buy more gold umbrella stands and diamond-studded shower rods).
The response of analysts to this pressure varies greatly. Some cave; some don't. Most, however, are neither notably corrupt nor especially brave.
Yet, whatever their individual mettle, all analysts face a powerful force that checks the influence of bankers and pushes them toward a more ethical path: the pressure to win the ear of institutional investors.
Analysts dedicate almost all their time and energy to serving institutional investors _ the people who manage mutual funds, pension funds and hedge funds.
Like a dozen waiters climbing over one another to wait on a new table, analysts furiously compete with their counterparts at other banks to be the most useful voice to fund managers on Disney, say, or General Electric. It is this competition, more than anything else, that keeps analysts honest.
Analysts whose research doesn't hold up quickly find that fund managers will no longer return their calls. Then they quickly find themselves out of work, especially these days. Analysts whose research is valuable find themselves voted onto Institutional Investor's annual poll of "All-Star" analysts, an honor that results in prestige and money.
Of course, there are some gray areas. Occasionally an analyst gives the bankers and their clients the higher ratings they want _ often with a tepidly positive rating like "outperform." But in the candid conversations between analysts and institutional investors, the nuances of an investment are discussed. Official ratings almost never come up.
That's because institutional investors don't care about ratings. Fund managers are not schoolchildren looking for instructions on what to buy. They look to analysts for specific information and general insight.
More to the point, they understand that opinions about a stock change every minute with its price. While an analyst may write a report enthusiastic about a company's long-term prospects, he or she may be less enthusiastic about its stock on a given day.
Critics must understand that analysts have succeeded in making themselves necessary for institutional investors. Few of the recent caricatures of Jack Grubman, for example, note that the former Salomon Smith Barney analyst reached his position of power _ with the obscenity of his compensation _ because he was institutional investors' favorite telecom analyst.
These investors weren't tricked. They were aware of Grubman's well-deserved reputation for investment banking hanky-panky, his too-convenient ratings changes and his penchant for recommending companies all the way into bankruptcy.
But as a friend who met with him earlier this year told me, Grubman's insights were perceptive. After the meeting, my friend's firm was better equipped to invest in telecom companies.
But someone forgot to tell small investors how all this worked.
When analysts, more out of laziness than corruption, allowed reports or ratings to persist that didn't reflect their latest views, they misled investors who didn't have access to the financial world's cozy candor. For this, analysts deserve part of blame for the losses amateur investors incurred.
More blame, however, should go to those who never explained to small investors how even the best Wall Street research is conditional, fluid and fallible.
In their celebration of the limitless possibilities of stock ownership, online brokers, traditional brokers and the press created a culture of reckless, ill-informed investing.
They were aided in this by a particularly unconscionable group of blow-dried analysts and fund managers _ mostly in the technology and telecommunications sectors _ who went out of their way to reduce the complex, hazardous investing process into breezy sound bites.
They were partly aided by the bubble itself, which seemed to make everyone around 1994 forget that stocks could actually go down.
And while I sympathize with people who lost money on banker-tinged recommendations, many of them probably lost much more investing in stocks that have had nothing to do with the current conflict-of-interest scandal _ stocks about which analysts, brokers, the financial press and people armed with their own half-baked ideas were simply wrong.
With all this in mind, the plan advanced by Eliot Spitzer, New York's attorney general, and other regulators to reform Wall Street research seems intended more for the headlines than the bottom line of investors' brokerage statements.
Regulators, perhaps, should take a cue from cigarette packaging. On every page of every analyst report, in tall capital letters, the message should be blunt: THE PERSON WHO WROTE THIS REPORT IS A FALLIBLE HUMAN BEING. And in even taller letters: SMALL INVESTORS SHOULD NOT BUY INDIVIDUAL STOCKS.
+ Gary Sernovitz is author of The Contrarians, a novel. +
New York Times