By Benjamin Mark Cole (Bloomberg Press, 2001).

Ever wonder why the stocks your brokerage recommends never seem to perform particularly well? The premise of this timely book is that the analysts who work at brokerages are little more than shills who suspend skepticism and abandon objectivity in order to sing the praises of investment banking clients for whom the brokerages underwrite IPOs, do mergers and acquisitions, and make private placements. The author, a long time financial writer, demonstrates that as brokerages have lost commission income from retail clients owing to increased competition from discounters, they have more than made it up with revenue from investment banking clients. And with that shift of income has come a shift of loyalty.

In years past, brokerages assured us that there was a "Chinese Wall" between their research and investment banking departments; today they are Siamese twins. As one former research director put it, "An analyst is just a banker who writes reports... no one makes a pretense that it's independent." One result of this incestuous relationship is that between 1989 and 1996, the average error in forecasting earnings was a staggering 50%, and by a 3-to-1 margin the earnings estimates made by analysts were too high. Likewise, brokerage research departments are loathe to issue a "sell" signal on companies they follow. In 1999, out of 33,169 recommendations by brokerage analysts, only about one percent were actual "sells" or could be interpreted as such.

Mr. Cole also includes numerous case studies where analysts have either closed their eyes to obvious problems and touted favored companies virtually up to the day they file for bankruptcy, or, in some instances, actively participated in schemes to manipulate stock prices. On the positive side, Cole presents examples of honest analysts who have sacrificed their jobs to tell the truth and even identifies several truly independent analysts (such as Value Line, Red Chip Review and Standard & Poors) with good track records. Overall, this is an important book, which despite its weighty topic, is written in an entertaining, journalistic manner. (Brian N. Smiley)

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