Now Who Do You Trust?

Among the 1990s fads was a rah-rah team-building game played at management retreats. You had to fall backward from a modest height and rely on your buddies to catch you before you crashed. Supposedly, the game taught trust (I flunked, as all reporters should). I always wondered what the game taught the trusting souls who were accidentally dropped.

Well, teammates, now we've all been dropped--and I don't mean just because stocks went down. We crashed through the public face of American business, which isn't quite the buddy we thought.

Most investors still trust business institutions, even while mouthing the classic escape clause ("a few rotten apples in every barrel"). But the rot is more structural than you probably thought. Top-drawer accountant Arthur Andersen, shredding evidence. Venerable brokerage firm Merrill Lynch, privately calling stocks "dogs" and "crap" while telling the public to "accumulate" or "buy." Bankrupt Enron, deceiving even its own loyal workers about their company stock. Xerox and WorldCom, floating dubious earnings reports.

As for the zillions of dollars that egomaniac CEOs leeched from their troubled corporations, don't get me started.

The most riveting reading of my week was a fat book of e-mails, subpoenaed by New York Attorney General Eliot Spitzer from the files of Merrill Lynch's Internet Research Group. These are the genuine voices of hot-shot analysts talking to each other--and believe me, they're not pondering how to help fatten your 401(k).

For top Wall Street firms, the big bucks lie in investment banking. The bankers negotiate corporate mergers and manage new issues of stocks and bonds. To win this business, they promise (or imply) that they'll praise the stock as an investment.

That's where analysts come in. You thought that their research reports were objective, and some are. But analysts often shade their recommendations to keep the companies happy, even if that sticks you with a loser. One Merrill analyst e-mailed that she'd pulled her punches on a stock "to protect the... banking business."

You probably blamed your broker for failing to get you out of the tech and dot-com dive in time. But the e-mails show the brokers begging the analysts for guidance and often getting nowhere. In fact, it's mainly the brokers who say, "I am really concerned about our clients."

Adding insult to injury, the young, rich and famous Internet analyst Henry Blodget blew off one of his plunging Net stocks by writing "no one gives a s--t except retail and the press" (in case you're wondering, "retail" is you). Another analyst grumped about brokers who "blindly" sold clients' stock from Merrill's list of "Top Ten Techs." Merrill says these e-mails were misconstrued. Blodget isn't there anymore.

The many stockholder suits filed against Merrill and others include claims on behalf of buyers of Internet Capital Group, InfoSpace, Excite@Home and Aether Systems. Spitzer is collecting files from other firms. The Securities and Exchange Commission--trailing Spitzer--started a broader probe of its own. SEC Commissioner Harvey Pitt recently endorsed some industry proposals, supporting fuller explanations of stock recommendations and more disclosure of conflicts of interest. But analysts still could get big paychecks for helping out with investment-banking deals, Spitzer says. One businessman told me that--even now--Wall Street is sending analysts to pitch him on taking his company public, implying favorable research coverage as part of the deal.

What would help you believe in Wall Street's stock recommendations again? "Developing independent research boutiques that sell advice for fees," says former SEC commissioner Arthur Levitt. Two small boutiques, Argus Research and Precursor Group, are trying to start an "investor-side" research association. Charles Schwab is promoting a new advice service for wealthy investors--including calls on which stocks to sell (Wall Street rarely hangs a "sell" on a corporate client's stock).

I won't lead you through the painful details of the accounting lapses, too, but they're pretty bad. While plenty of audits are fair, the accountants have done a lousy job of setting standards and policing themselves. Even now, no leading industry figure has stepped forward to drive the industry toward reform. On the contrary, they're all high-fiving their success in watering down the no-teeth "oversight" bill just passed by the House. The accounting profession desperately needs an independent standard-setting and investigatory board, whose financing isn't under direct industry control. Anything less is foot-dragging.

All that goes to public trust. Privately, plenty of people trust individual brokers and planners--typically, those who have played the game conservatively. Whether you can trust yourself depends on how you handled the bubble. Did you or didn't you clamor for dot-coms, no questions asked?

Right now, everyone's fired up about business ethics. But the outrage may melt away if stocks go up. These issues have been on the table for years and no one wanted to know. Have things really changed? We'll see.