The Wall Street Journal-20080216-The -Told Ya So- Analysts- Correct Predictions For Mortgage Troubles Help to Boost Careers

Return to: The_Wall_Street_Journal-20080216

The 'Told Ya So' Analysts; Correct Predictions For Mortgage Troubles Help to Boost Careers

Full Text (990  words)

The mortgage upheaval is costing some stock analysts their jobs as Wall Street firms cut expenses. But the doom has vaulted the careers of a handful of analysts who correctly predicted some of the biggest blowups.

Among those most often mentioned as making a name for themselves with smart calls about firms in the vortex of the credit storm are Goldman Sachs Group Inc. brokerage analyst William Tanona and Meredith Whitney, a bank analyst at Oppenheimer & Co.

Ms. Whitney, 38 years old, gained notice by suggesting in the fall that Citigroup Inc. would need to raise lots of capital, possibly through a dividend cut, while Mr. Tanona, 33, warned that Merrill Lynch & Co.'s third-quarter profit could be nearly wiped out by write- downs on mortgage-related securities and financing analysts. Both analysts turned out to be right.

By sticking their necks out and standing by their views despite criticism from rival analysts and company executives, Ms. Whitney, Mr. Tanona and other previously unheralded stock pickers have won back a bit of respect for the analyst profession, which still is trying to overcome scandal.

The reputation of these "sell side" securities analysts has fallen far from the glory days of the Internet-stock boom in the late 1990s, when analysts such as Henry Blodget and Jack Grubman became household names. Their predictions often sent stock prices soaring.

In 2003, 10 big Wall Street firms paid $1.4 billion in fines and penalties to settle civil charges by securities regulators that they issued overly optimistic stock research to win investment-banking business from companies they were supposed to analyze independently. Regulators forced firms to separate their banking and research operations -- and barred them from paying analysts based on investment banking, a common practice at the time.

Messrs. Blodget and Grubman were banned from the securities business. They neither admitted nor denied wrongdoing in their cases, nor did the firms who settled.

The paychecks and prestige of research analysts sank, with some leaving Wall Street. These days, the fallout from the credit crisis is a new threat to job security. In recent weeks, Bank of America Corp., Citigroup and J.P. Morgan Chase & Co. have all laid off stock analysts.

Some investors complain that the analysts who are left are as bullish as ever. Despite the stock market's turmoil, 48.8% of all analyst ratings were a buy in December, the latest month for which figures are available, according to Thomson Financial. That is up from 45.8% a year earlier. Just 5.5% of all stocks covered by analysts were considered a sell, down from 7.3%.

But those analysts praised for their unusually bold calls say there has never been a better time. "Good research is much more valuable in a bad market because people really need the advice," says Ms. Whitney, who became an analyst in 1993.

She surprised Wall Street with her prediction that Citigroup could need to bolster its capital levels by $30 billion. Ms. Whitney says she received threats after issuing her report. Since her report, though, Citigroup has raised more than $20 billion and cut its dividend.

Even though Ms. Whitney now is one of the most talked-about Wall Street analysts, she isn't as famous as her husband, bad-guy professional wrestler John Layfield, who uses the ring names John "Bradshaw" Layfield and JBL.

Four weeks after Mr. Tanona predicted a possible write-down of $4 billion at Merrill Lynch, an estimate widely considered to be aggressive, the brokerage firm announced a write-down that was more than twice as big.

Mr. Tanona says everyone on Wall Street knew Merrill Lynch was the biggest underwriter of so-called collateralized debt obligations, a mortgage-backed security that has been behind many whopping write- downs. In the weeks leading up to his report, Mr. Tanona phoned numerous contacts on Wall Street to see if the firm was selling these securities. "It became clear that Merrill must be keeping a lot of stuff on its own books," he says now.

Of course, while many investors are grateful that some analysts are getting tougher, that can make them extremely unpopular with the companies they follow. In November, analyst Prashant Bhatia of Citigroup issued a report warning that mortgage woes at E*Trade Financial Corp. could prompt a run on the brokerage firm's banking subsidiary.

"Customers may withdraw assets, and ask questions later," Mr. Bhatia wrote, estimating there was a 15% chance that E*Trade would be forced to file for bankruptcy-law protection. The stock sank.

Jarrett Lilien, E*Trade's acting chief executive officer, has publicly challenged Mr. Bhatia. He claims the analyst's comments are "reckless," comparing them to yelling "Fire!" in a crowded theater.

Mr. Bhatia responds: "You can go back over time and look at what we have written and what has taken place and be the judge of it."

Messrs. Bhatia and Lilien currently disagree over when E*Trade will return to profitability. E*Trade has said it will break into the black in 2008. "We don't agree," Mr. Bhatia wrote in a recent report, saying it probably won't happen until at least 2010.

Curiously, despite Mr. Bhatia's dour longer-term outlook, he expects E*Trade to turn a two-cents-per-share profit in the first quarter, even more optimistic than the company's projections. "I can only guess he is doing this so when we miss his projection he can say we missed his estimates again," Mr. Lilien says.

Mr. Bhatia says the first quarter usually is strong for E*Trade. "I don't listen to what management says," he adds.

Michael Mayo, a stock analyst at Deutsche Bank AG who slapped a sell rating on Citigroup last year and publicly called for the resignation of then-CEO Charles Prince, has since been reined in, according to people familiar with the situation. Now when Mr. Mayo talks to the media, he is joined by a Deutsche Bank press officer.

The firm was concerned Mr. Mayo had become overexposed and that some of his comments were being taken out of context.