Star-Bulletin news services
Brokerage stocks now
are some of Wall Street’s
higher-risk investments
NEW YORK >> When Wall Street's biggest brokerage firms settled charges this past week that they issued biased research, their own stocks suddenly became higher-risk bets.
Analysts say investors are concerned that the brokerages, which include Merrill Lynch and Goldman Sachs, will face a possible deluge of investor lawsuits at the same time they're being forced to change the way they do business -- both of which could hurt their profits.
"If investors take massive action, that is going to have a severe negative impact on stock prices" of the brokerage firms, said Martin D. Weiss, chairman of Weiss Ratings Inc., a Palm Beach Gardens, Fla., firm that evaluates the creditworthiness of companies.
Weiss Ratings has already lowered the credit ratings of some of the brokerages to take into account their potential legal liabilities.
The $1.4 billion industrywide settlement called for one of the largest penalties ever levied by securities regulators. It also made public evidence of how securities firms misled or took advantage of investors during the 1990s bull market.
Lawyers are already sifting through evidence showing that some analysts hyped stocks or issued overly upbeat reports on companies so their firms' investment banking arms could score lucrative deals from those companies.
The settlement and the evidence released by regulators also shows that some of the firms promised shares of hot initial public offerings to companies that agreed to give them more business in return.
Analysts believe the consequences of the settlement could take the firms years to resolve and cost them millions of dollars in addition to the $1.4 billion they must pay to set up a restitution fund for investors and to establish other investor-related funds, such as one for independent stock research and another for investor education.
"Investors may sue brokers. Brokers may sue analysts. Analysts may sue companies," Mike Porter, senior stock analyst at Morningstar, wrote in a recent article for Morningstar.com.
The 10 firms are: US Bancorp Piper Jaffray, Morgan Stanley, Lehman Brothers, Merrill Lynch, J.P. Morgan, Goldman Sachs, UBS Warburg, Citigroup, Credit Suisse First Boston and Bear Stearns.
The other unknown is how the reforms the firms agreed to will affect profits for several quarter and possibly years into the future.
The market's major indexes all ended the week higher.
The Dow Jones industrial average rose 276.33, or 3.3 percent. It closed yesterday at 8,582.68, the highest level since Jan. 17.
The Nasdaq composite index had a weekly gain of 38.34, or 4.8 percent, closing at 1,502.88 on yesterday, the highest level since June 18, 2002.
For the week, the Standard & Poor's 500 index rose 31.27, or 3.5 percent, to finish at 930.08, the highest level since Jan. 14.
The Russell 2000 index had a weekly advance of 19.17, or 4.9 percent, closing yesterday at 407.67.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,834.06, up 308.17 from the previous week. A year ago, the index was at 10,202.04.
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