A panel of Wall Street analysts told Congress yesterday that they stayed bullish on Enron Corp. stock because they were consistently misled by the energy-trading company, not because they felt pressure from their firms to maintain positive ratings.
Representatives of four financial services firms said they relied exclusively on publicly available documents and conversations with Enron executives to make their ratings decisions, and had no access to information about off-the-books partnerships that may have been available to investment bankers at their firms.
“I recommended Enron stock because I believed in the company’s business model and believed in the company’s management,” said Raymond C. Niles, who covered Enron for the Salomon Smith Barney unit of Citigroup Inc.
Curt N. Launer, an analyst at Credit Suisse First Boston, said Enron’s lack of transparency about its finances made an independent assessment impossible. “Without accurate and complete information I simply do not have the proper tools to do my job,” he said.
Wall Street analysts have been criticized over the past two months for continuing to recommend Enron even as the company neared bankruptcy. Yesterday was the first time that the analysts, whose recommendations are widely reported by the media and can often move stocks, have been called to account in public for their role in the Enron collapse.
Sen. Joseph I. Lieberman (D-Conn.), chairman of the Senate panel that held yesterday’s hearing, noted that about two-thirds of the analysts who followed Enron continued to rate the company a “buy” or a “strong buy” as late as Nov. 8. Enron filed for bankruptcy protection on Dec. 2.
Senators repeatedly asked whether the investment banking sides of the analysts’ firms, all of which did lucrative work for Enron, applied pressure, implicit or explicit, on the analysts to keep recommending the stock to clients and other investors.
The analysts uniformly said they felt no such pressure, reached all of their judgments independently and that they were not paid to bring in investment banking business. They said strict “Chinese wall” policies prevented them from having any communication with the investment bankers at their firms who were underwriting Enron securities, advising Enron on mergers and acquisitions and, in some cases, helping the company design the complex partnerships that allowed it to appear more profitable than it really was.
“I have complete freedom with respect to the recommendations that I make concerning any equity security and my compensation is not tied to the recommendations that I make,” said Anatol Feygin, an analyst with J.P. Morgan Chase.
Several analysts did say, however, they were allowed “over the wall” from time to time. Launer for instance, noted that he was able to invest in NewPower Holding Inc., an Enron unit that sold gas and electricity to retail customers in deregulated markets, when Enron spun it off.
Several senators described the walls as hopelessly porous, noting that analysts’ year-end bonus checks depend on the overall performance of their firms — which in turn depends in large measure on bringing in big investment banking fees. “Some of the things you are telling us are very difficult to believe,” said Sen. Jim Bunning (R-Ky.).
Since 1986, top Wall Street firms have collected $323 million in fees for underwriting stocks and bonds issued by Enron, according to data from Thomson Financial. That included $64 million for Credit Suisse First Boston and $61 million for Salomon Smith Barney.
Sen. Fred Thompson (R-Tenn.) noted that the four analysts were chosen because of their prominence and because they agreed to appear without being subpoenaed. He said they were far from alone in performing poorly on Enron.
Launer maintained a “strong buy” until Nov. 29, three days before the company filed for bankruptcy protection. And Lehman Brothers, represented at the hearing by Richard Gross, never dropped its “strong buy” rating on Enron. But officials at the firm note that Gross’s rating was “frozen” in late October, when Lehman Brothers began working for Dynegy Inc. on a proposed merger with Enron.
Several senators asked why the analysts did not downgrade Enron after chief executive Jeffrey K. Skilling’s surprise resignation in August and revelations about repeated Enron stock sales by other company executives. Lieberman and others also pointed to news stories that raised questions about Enron’s balance sheet as early as last summer.
Several of the analysts said the stock sales appeared routine. They said company executives convinced them that the issues raised by journalists were groundless and that Skilling’s departure had nothing to do with Enron’s health.
“The corporate business model, we believe, was strong and growing rapidly and was portable to other commodities,” Gross said.
While criticizing the analysts, senators also sympathized somewhat. Sen. Robert G. Torricelli (D-N.J.) called the Enron debacle a case of “outright fraud” and said that while the analysts deserve some blame, they also “have to rely on information coming from executives as being truthful.”