October 18, 2004

When Wall Street’s biggest firms settled with regulators in April 2003 over charges of fraudulent stock research, the industry promised a new era of independence. Marc Lackritz, president of the Securities Industry Association, promised Wall Street would ensure that “the quality and integrity of financial analysis is beyond reproach.”

The recent highly critical report by federal regulators on Fannie Mae’s accounting practices, though, may rekindle questions about Wall Street’s ability to issue unbiased research. Fannie is one of Wall Street’s best clients, issuing close to $2 trillion in debt to provide cheap loans for home buyers, and those figures don’t include other huge fees Wall Street earns in helping Fannie. Fannie’s top five underwriters have earned close to $700 million in fees since 1999, according to Thomson Financial. Those same firms have provided continuing upbeat assessments despite growing signs Fannie was facing financial difficulties. Merrill Lynch, Fannie’s largest underwriter, maintained its “buy” rating last week. A Merrill spokesman said the firm’s research is objective, adding: “Our buy rating is in line with the consensus of research on this company.” Other leading underwriters–Goldman Sachs, Lehman Brothers, Morgan Stanley, and JPMorgan–declined to comment.

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