Most broker/dealers recommend that clients buy or hold onto stocks of companies until the day those companies file for bankruptcy, according to a study by Weiss Ratings. Despite widespread concerns about dubious ratings following scandals at Merrill Lynch and other brokerages, in the fourth quarter of 2002, Weiss found that only 10 out of 30 broker/dealers switched their recommendations to "sell" before companies went bankrupt.
"We have seen widespread investigations by the state regulators and the SEC, a massive public outcry, and solemn promises by Wall Street to change its ways. Despite all this, most brokerage firms continue to urge investors to buy or hold the shares in companies, even as their lawyers are marching up the steps of bankruptcy court," said Martin D. Weiss, chairman of Weiss Ratings.
However, Weiss said that the study actually uncovered some improvement among certain firms, with nine issuing sell ratings for all companies that went bankrupt, including Lehman Brothers, Salomon Smith Barney, and Merrill Lynch. Overall, the number of sells rose to 51%, while the number of buys fell to only 7% and the number of holds fell to 36%.
Weiss called the change a "positive sign" but cautioned that investors cannot necessarily rely upon firms to maintain such levels of integrity in their ratings.
"What remains to be seen is whether or not the industry will continue to improve once regulators turn their attention elsewhere," Weiss said.