“It has been more than a year since the party ended on Wall Street and investment bliss gave way to numbing losses,” writes Michael Santoli in this week’s Barron’s

“Yet the hunt for blameworthy villains continues. Among the likely suspects, the Street’s securities research analysts have come in for some of the fiercest criticism. The charge: that their perpetually rosy stock recommendations and deliberately misguided Buy ratings not merely allowed but encouraged their clients to stay too long at the fair.”

“Laura Unger, the acting chief of the Securities and Exchange Commission, last month publicly chided Wall Street’s research machine, decrying the dearth of negative ratings on stocks and the conflicts that inevitably arise when brokerage firms mingle investment banking with stock-picking responsibilities. Her diatribe spurred plans for a Congressional committee to schedule hearings on the independence of Wall Street analysts, elevating the opaque practices of once-obscure spreadsheet jockeys to a level of inquiry normally reserved for such threats to the public interest as stolen defense secrets.”

“Our counterparts in the media have helped amplify the hue and cry for analysts’ heads by detailing the falls from grace of some of the most celebrated bull-market muses, chief among them Mary Meeker, Morgan Stanley’s famous Internet analyst, who maintained her enthusiasm until long after the horse had left the barn. Indeed, the headline in a recent op-ed piece in theFinancial Times advanced a particularly radical remedy: ‘Shoot All the Analysts’. Meanwhile, sources report that the New York attorney general’s office has been sniffing around the Street to learn more about research practices, although that office wouldn’t confirm an inquiry is underway.”

“And what say the objects of all this scorn? The Association for Investment Management and Research, or AIMR, a professional organization that confers credentials on financial analysts, last week issued a vague call for managing research conflicts better. Meanwhile, brokerage-firm research chiefs reportedly are huddling to fashion a collective response to the furor before public pressure gets out of hand and aggrieved citizens wielding pitch forks breach their glass and marble walls.”

“The truth is that Wall Street’s 2,000 analysts, some 700 of whom are senior enough to have their names atop research reports, did not kill the bull market so much as help to perpetuate a mania that fueled its own demise. But that’s not to suggest the Street’s research system, as it currently exists, isn’t grievously broken. Most analysts have purged their prose of any views likely to give lasting offense to their firms’ corporate clients, while most research departments have expanded their stock-rating nomenclature to include fuzzy advice like Accumulate, Neutral and Long-term Outperform, but almost never the unambiguous Sell.”

“A year ago, as the Nasdaq Composite was collapsing, analysts across Wall Street rated just 206 stocks, or 0.8% of all rated issues, either Sell or Strong Sell, according to Thomson Financial/First Call, a ratings and estimate-tracking service. Nearly 74% of all ratings, in contrast, were either Strong Buy or Buy. Is it any wonder that investors have lost trust in the ability of Wall Street to provide honest and compelling investment advice untainted by competing concerns, such as analysts’ commitments to help their firms win lucrative banking assignments?”

“It’s time for Wall Street to take a fresh look at the role of investment research, and to replace a dysfunctional system with one that renders the best possible investment advice to the clients who use it. This will necessitate the development of more inventive and comprehensive research strategies, the setting of new standards to govern the role of analysts in the investment banking process, and quite possibly an overhaul of compensation practices currently common throughout the industry.”