Olson eventually left in 1998–and was replaced with an analyst who soon upgraded Enron’s rating. But it was not until four years after he left Merrill, when a Senate committee began questioning the nation’s largest brokerage firm a few weeks ago about its dealings with the failed energy giant, that Olson learned just how much his Enron research had riled executives within his firm as well.
The Senate Permanent Subcommittee on Investigations released an April 1998 memo from two Merrill bankers to then-company president Herb Allison saying Enron executives had a “visceral” dislike of Olson, and that his negative comments had affected the bankers’ dealings with Enron. They had also, said the memo, nearly shut Merrill out of Enron’s upcoming stock offering. Merrill insisted that Olson’s departure was not a result of his negative call but because of a restructuring. It also denied that that the firm’s research on Enron–or the advice it gave to investors–was ever compromised by Merrill’s relationship with Enron. Nonetheless, after Olson left, Merrill picked up millions of dollars in business with Enron, some of which is now being investigated by the Securities and Exchange Commission.
NEWSWEEK’s Jennifer Barrett spoke with Olson–who now works as a senior vice president and research director at Houston-based securities firm Sanders Morris Harris–about his former employer and the pressure facing analysts who criticize their employers’ clients.
NEWSWEEK: Were you pressured to leave Merrill because you refused to change your Enron rating from “neutral”?
John Olson: It was made very clear that there was going to be a parting of the ways. My decision to leave was really in the third week of May in 1998, as opposed to the fall, which is what they [Merrill executives] have been saying. I took [an] early retirement plan and that kept me around until the end of August.
Merrill Lynch denies that your negative take on Enron had anything to do with your departure.
I simply would tell you that that is not congruent with the facts.
During the recent Senate hearings, a memo was released from April 1998–a few months before you’d left–that indicated your negative views of Enron were costing Merrill business with the energy company. Had you seen this memo?
The first time I’d ever heard about it was on the day it was presented [on July 30].
What was your reaction?
Let’s just say that, well, it was stunned disbelief. This was complete news to me. Nothing like that was ever discussed. And Enron was discussed.
I understand that Ken Lay had told you that he was not happy with the neutral rating. Was that unusual?
I’ve covered the entire energy industry from rank exploration companies to uranium and coal companies–ExxonMobil on down, the whole nine yards–and most companies have had a respectful and professional arms-length dealing with securities analysts. I think that in Ken’s case, he would get great satisfaction out of having as many “strong buy” recommendations on his company from analysts as possible because I think he believed that gave Enron a greater validation.
I’d imagine all CEOs would want as many “strong buy” ratings on their companies as possible. How were your interactions with Lay different than those with executives of other companies you covered?
With me at least, the veering off from the behavior of most executives came in the form of occasional comments about how I ‘just didn’t get it.’ And also comments, secondary comments, coming back through the investment banking side. Ken would rarely have discussions on the merits of a valuation or recommendation. He would much rather exercise the pressure through discussions with the firm’s investment bankers.
Do you think that the pressure you felt from the investment banking side was an exception? Or is it more common in the industry than most people are aware of?
It’s hard for me to say. That was the first time it had ever happened to me. It’s not an enjoyable experience but I’m sure others have gone down this particular road as well.
When did you first question Ken Lay’s projections at Enron?
I think it was 1995, because I had wondered aloud at one of the analysts’ meetings. I questioned how they were going to double their earnings over the next five years. At that point, a very exasperated Ken Lay told me and the others around me that I ‘just didn’t get it.’
Have you felt vindicated over the past few months?
I had numerous friends at Enron. It was a very unhappy time for everybody. I didn’t feel vindicated per se. It was a hard, bad ending for many people there. What disappointed me most was the experience at Merrill Lynch.
Three months ago Merrill adopted certain reforms as part of its $100 million agreement to settle charges that it misled investors with overly optimistic ratings and research intended to help it win business. Will these measures help prevent other analysts from being pressured not to release negative research on companies they cover?
They are a step in the right direction. But what is needed in particular is a clearer line in the sand preventing investment banking coercion or intimidation of analysts. I have no issue with an analyst genuinely liking and recommending a company as long as it is an honestly rendered opinion. I have–and I think Wall Street and Congress has–a tremendous issue if analysts continue to be mandated or culturally brainwashed to never say anything ugly or critical of investment banking clients. The integrity of the whole process has been completely debased by the investment banking overreaching of the research function over the past 10 years.
How long do you think it will take to restore investors’ confidence in Wall Street research?
We have a whole vintage of analysts who have been badly compromised by the somewhat toxic culture of the 1990s’ bull market. It will take years to undo this. And it will come only with a lot more normal distribution of buy, sell and hold recommendations.
You’ve been in the securities business for a long time. Has this always been an issue?
When I got into this business 35 years ago, there were men of impeccable integrity in research and in investment banking. None of this would have happened prior to May Day, 1975. That’s when institutional negotiating rates became effective. After that, both research and investment banking became highly commoditized.
How do you change that?
There are ways. It would involve undoing some of the other cultural landmarks that have developed over the last 25 years. Institutional and retail investors pay securities firms for good advice buying and selling stocks. That does not result in analysts getting rewarded or punished by the commission stream. Analysts do not have their own income statements. Traders, salesmen, investment bankers, merger and acquisition people all have their own income statements. Analysts do not. They have been co-opted by the trading and brokerage functions. As a result, they are always dealing from a position of weakness. If institutions want good research, they need to specifically identify research dollars as opposed to doing so for specific analysts or specific analysis.
Do you think these changes might be possible in the near future?
Something has to change in the process. Right now there are no catalysts to do so unless mandated by Congress or the regulators. The economics of this business are difficult enough in times like this, but research is the prime mover on Wall Street. Traders and investment bankers and other sides of the business really don’t function without research, without ideas. There has to be a very clear redefinition of the economics of the business as well as the code of conduct of this business to reassure investors that the terrible–almost comical–events of the 1997-through-early-2000 markets don’t happen again.
Is Wall Street more receptive to making these changes now in the current climate?
Wall Street clearly needs better leadership in these matters. The current managements are a result of this heritage. This is not terribly encouraging from an analyst’s viewpoint, or from an investor viewpoint. You are going to need to see some bona fide gestures on the part of the new [investment banking] managements that they are truly and sincerely interested in giving the investor a fair and an honest deal–as opposed to investment-banking-driven research that never said anything bad about anybody.
