Monkey Logic: Is the Chinese Wall Working?
On Wall Street, it's not uncommon for a fund manager, investor, or commentator to berate an analyst.The analyst is Wall Street's version of the punching bag.
The Spitzer-led crusade on banking practices indelibly tainted the modus operandi of most analysts, who are now confined to working in codified spaces "behind the Chinese Wall."
Ostensibly, the Chinese Wall is Wall Street's policing force, tempering and keeping analysts in check whenever they ditch their suspenders for pom-poms and turn into cheerleaders.
The term was coined following the crash of 1929.
Our government saw the Chinese Wall as a means to provide an information barrier between bankers and brokerage firms.
The aim was to limit the conflict of interest between objective analysis of companies and the desire to harvest lucrative banking fees.
Is the Chinese Wall working?
We think it is.
The circumstances surrounding the Baidu.com IPO demonstrate so.
This past summer, Chinese internet portal Baidu went public under the ticker BIDU -- in a blast back to 1999, the nascent and barely profitable company raised milions, enriched insiders, and landed itself a Herculean market cap.
The Street knew Baidu.com was junk but they bid the stock up anyways.
Then the analysts (who have been mum all this time as ordained by "the quiet period") at the same bank that took Baidu.com public came out with guns blazing and trashed the stock like Kurt Cobain did guitars.
On the day the quiet period ended, esteemed internet analyst Anthony Noto put a 27$ price target on the stock , effectively crippling Baidu's share price.
Piper Jaffray followed suit with their own downgrade, citing valuation concerns and whatever else they could come up with.
Granted, the deal's underwriters (Goldman Sachs) had already gotten their cut (handsomely paid, in other words), the consolation for us was that -- unlike his less autonomous counterparts of the 90s -- Anthony Noto wasn't at the mercy of the firm's banking deals.
Analysts need to come clean.
The days of guys like Henry Blodget and Mary Meeker -- whose names are forever sullied by images of deceit and chicanery -- injecting euphoria into the indices are thankfully over.
And with the credibility of analysts continuing to deterioate, investors are looking elsewhere for their information.
Like insiders.
There was a great article in the New York Times 2 or 3 Sundays ago called "Insiders vs. Analysts."
The article elaborated on a recent study that concluded that listening to an analyst's opinion was as useful as buying Chistmas lights in July.
What about insiders, you ask?
Granted, their pronouncements and actions are no more impartial than the notes analysts fire away.
Nor are execs the Holiest Party That Ever Lived.
But at least they (insiders) have their money on the line.
And lots of it.
If an analyst touts stock XYZ, but XYZ's CFO is selling blocks hand over fist -- whose opinion are you going to go with?
Even a chimp would raise an eyebrow.
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