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Telling Congress About the Rigged Research Game (Cont'd)

Editor's note: columnist Adam Lashinsky is testifying today before the House of Representatives Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises. The committee is investigating the quality of equity research and reporting available to the average U.S. investor. We are running Lashinsky's testimony in full and in three parts. This is the second part. Be sure to read part one and part three.

As I began to understand how Wall Street works, I made it a standard practice in my reporting to point out these conflicts. Just because an analyst worked for the investment bank that took public a company I was covering didn't mean I wouldn't talk to the analyst about the stock. I just wanted to be sure my readers understood the pros and cons of this analyst's perspective. After all, while the analyst might be predisposed to be positive about his client, he also tended to know the company better than an analyst who didn't have extensive access. These are trade-offs. started in late 1996 with the same principles I already was using. From the beginning it was standard operating procedure to mention any investment banking conflicts any time an analyst commented on a stock. The goal, according to Dave Kansas, former editor-in-chief of, was to make sure the reader understood that an analyst was "not some disinterested professor pontificating from the ivory tower" about a stock. That didn't make the person a bad source, just one colored by their experiences, as are we all. didn't get everything right. We shined a bright light on analysts. But at the same time we did our share to hype the momentum stocks of the era. We created the Red Hot Index -- notice that it hasn't been mentioned much lately -- which tracked the performance of the sizzling technology stocks of the late 1990s. And we wrote favorably about IPOs on the assumption that new offerings would continue doubling, tripling and quadrupling upon their introduction. Our own shares rose nearly fourfold on their first day of trading in May, 1999, so we benefited from the phenomenon we were covering.

Other financial news outlets also pointed out analyst conflicts, but none with the formulaic and purposeful attention of Most financial news media quoted stock analysts the same way I did when I first started covering business in the late 1980s: Analysts who returned phone calls were the most valuable.

Star Search for Analysts

The diligence or oversights of print or online journalists, however, paled in comparison to the influence of broadcast journalism, especially CNBC. For years, CNBC acted as if conflicts of interest simply didn't exist. Analysts weren't questioned on their conflicts; fund managers weren't asked their positions in stocks they discussed. Yes, CNBC humorously pilloried flip-flopping analysts by comparing them to penguins. But no institution, in my opinion, did more to sell hyped-up stocks to poorly informed individual investors than CNBC during the late 1990s. By the way, there is undoubtedly a correlation between bullish hype and ratings. It always was in CNBC's interests to hype stocks because rising stocks meant greater viewership.

In sum, the media in general failed the investing public by failing to provide skeptical analysis about the stock market. After all, an investment bank's job is to sell. The media are supposed to scrutinize. If the financial media had been as critical of Wall Street as political reporters are of Congress, it's possible, though unlikely, that the bubble wouldn't have become as inflated as it did. Many skeptical journalists have much to be proud of for their work during the bubble era. But many should be ashamed of strapping on their pompoms and simply cheerleading along with the salesmen.

Please continue reading Lashinsky's testimony in part three. To return to the first part, click here.
In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, frequently guest hosts the TechTV cable television news show Silicon Spin, and is a regular commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to Adam Lashinsky.

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