The success of some Wall Street analysts has long been measured by how much press they can garner from their stock predictions. In the late '90s, analysts famously tried to outdo each other by making outlandish tech stock predictions that helped inflate the by-now notorious dot-com bubble. Recall Merrill Lynch & Co. Internet analyst Henry Blodget, who became a celebrity by predicting Amazon.com Inc. would reach $400 a share, and that other dot-com stocks would attain amazing heights? For a time, it seemed like Blodget might be right. But, as an investigation pursued by then-New York State Attorney General Eliot Spitzer, showed, Blodget was not as sanguine about these stocks privately as he was publicly.
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Fast forward nearly a decade later, and the topic of the day is the credit crunch and how low bank stocks may go or -- in light of the IndyMac BanCorp failure -- which banks may fail. Now the controversial analyst calls are on the downside, not the upside. But it doesn't matter. Analysts can still get into serious hot water for voicing their opinions publicly.
Case in point: Ladenburg Thalmann & Co.'s Richard X. Bove, an analyst that had garnered considerable publicity since calling the fall of the banks nearly a year ago. Last week, after the Fannie Mae and Freddie Mac scares and the IndyMac failure, he got another shot of fame after his report "Who is next?" offered a list of banks in financial peril. The list, in some cases elaborated upon, quickly spread across the media. Was Bove too quick to judge before analyzing the facts? The executives at BankAtlantic Bancorp, one of the firms on the list, think so. The Fort Lauderdale, Fla.-based bank fired back at Bove and his employer with a defamation lawsuit. In a statement, chairman of BankAtlantic Alan Levan lashed out against Bove and Ladenburg saying, "Although we do not know how many errors appear in the Bove 'analysis,' we do know about BankAtlantic."
Levan went on to point to several indicators that he says are "not opinions. They are facts." Levan said Bove neglected to give the full picture of the bank, pointing to numbers of his own:
- BankAtlantic's ratio of nonperforming loans to total loans is 1.25%;
- BankAtlantic's ratio of nonperforming loans to its capital and reserves is 12.5%; and
- Bove's "Danger Zone" was above 5% of nonperforming loans to total loans and above 40% of nonperforming loans to total common equity plus reserves.
We'll have to wait to see how the facts really shake out. What does BankAtlantic have to lose? It got a lot of free publicity for its case on the back of Bove's fame. As for Bove, could this be a case of overzealous research geared to self-promotion? Possibly, although how responsible is Bove for the use others make of his data and analysis? What are the rights of an analyst to offer what is clearly opinion, no matter how controversial or even, in hindsight, wrong? Can BankAtlantic prove that he was reckless in his facts and published what he clearly knew was wrong? Blodget, remember, never went to court; he settled with Spitzer after the leaking of his damning e-mails. No one, including BankAtlantic, has suggested that Bove was conflicted in any particular way; there are certainly no e-mails suggesting that he didn't believe the facts in his report, and he has had a decent record predicting bank distress. The notion that he was releasing the names of troubled banks in an anxious market probably doesn't rise to the level required to nail him legally. Maybe it would have been better if he invented some cotton-candy upside.
- Gerald Magpily
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See The Deal newsweekly: Bove report: After IndyMac fall, 'Who is next?'
