Banking: Bursting the analysts’ bubble

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The reputations of many analysts soared as other bankers lost credibility. But are their opinions as sound as many think?

The financial crisis rocketed analysts back into the spotlight. In the years leading up to 2008, we had almost forgotten that they existed. A few spoke out publicly but for the most part their analysis was attributed to the firms for which they worked, and it was hard to find analysts that really wanted to put their necks on the line.

Now, however, they are revered. It took a prediction of the housing crash for Nouriel Roubini, whose history boasts roles at the IMF and Treasury, to become so noted that he appears in the movie Wall Street 2. Meredith Whitney shot to fame after her accurately damning report on Citigroup back in 2007, and now runs her own research firm. Dick Bove, analyst at Rochdale Securities, is also now a household name for his outspoken critique of the banking industry – although he has not yet made it to Wikipedia, unlike Roubini or Whitney.

It’s fair enough. After sentiment developed that the ratings agencies, banks and regulators were all in bed together, the analyst is now regarded as the unbiased voice of Wall Street. And those who predicted correctly the events of 2008 and early 2009 are naturally held in high regard.

The new power of the banking analyst is perhaps best evidenced by the recent furore involving Mike Mayo and Citi. Mayo, managing director and analyst at Crédit Agricole in New York, managed to wreak havoc with Citi stock at the end of August after he put out a note claiming that Citi was not taking write-downs on its deferred-tax assets and that the bank’s profits were therefore inflated. To add insult to injury, Mayo said later that he had little trust in the senior management of Citi as they had refused to meet with him for two years. Citi’s stock hasn’t gone back above $4 since August 10 (as of September 23).

The accuracy of Mayo’s opinions on Citi’s write-downs is open to its own scrutiny. Bove, for example, has been public in defending Citi against the allegations, saying Mayo’s assumptions are based on a failure of the bank and are therefore false. It should not be forgotten also that Mayo’s judgements elsewhere have been somewhat shaken (as admittedly have Bove’s). While at Deutsche Bank, Mayo made the unfortunate move of recommending Lehman Brothers shortly before the firm went bankrupt.

So has the pendulum of analyst influence swung too far? It looks that way. Such is the influence of analyst Mayo that Citi chief executive Vikram Pandit had to agree to meet with him on October 1. Although it’s certainly entertaining to watch the analysts fight it out for star status, it might be wise not to take them quite so seriously.