Reports that the Securities and Exchange Commission is looking into a merger prediction by Thomas H. Hanley of UBS Securities highlight some newfound hazards facing Wall Street analysts.
As the brokerage industry rapidly consolidates at what may be the peak of a bull market, "sell-side" analysts find themselves under greater pressure than ever to make their voices heard, and Mr. Hanley has succeeded at keeping an especially high profile.
The bull market has been so sustained and lucrative that bank stock investors have needed relatively less advice than in previous cycles. Advances in bank earnings and share prices have seemed almost automatic. So analysts find themselves scrambling for stories, and they usually have something to do with mergers.
"To be heard over the din these days, you need a louder speaker, a megaphone if you will," said Anthony R. Davis, bank analyst at SBC Warburg Dillon Read. "Forecasting specific deals has become a distinguishing characteristic."
According to published reports, the SEC is investigating a September prediction by Mr. Hanley that Travelers Group would buy Bankers Trust New York Corp. Though the prediction proved wrong, it prompted a sharp runup in Bankers Trust's share price.
An SEC spokeswoman declined to comment on the reported probe, first disclosed Monday in the newsletter Wall Street Letter. Mr. Hanley was out of the office and did not return a phone call. A UBS Securities spokeswoman said, "We don't discuss the existence of or details relating to regulatory inquiries."
Many analysts offer clients extensive scenarios of possible combinations among banks. Salomon Brothers' twice-yearly "Merger Modeler" runs 200 pages and includes maps showing the territories covered by banking organizations.
But no one has topped Mr. Hanley on the bank merger theme. A veteran of nearly three decades on the Street, he regularly names likely takeover candidates and is often quoted in the financial media.
Scott Edgar, director of research at SIFE Trust Fund, which invests primarily in bank stocks, said the volume of analysts' merger predictions has risen in tandem with investor interest in the subject.
"It's great to have your name attached, or semi-attached, to a merger," Mr. Edgar said. "It really raises your profile among clients and potential clients, helps you in the Institutional Investor rankings, and those things are what their compensation is based upon."
Few analysts make assertions as bold as Mr. Hanley's on Sept. 18. That morning, traders say, he told them Bankers Trust would be sold to Travelers.
The "story" was reported later in the morning by CNBC, the cable television network, and Bankers Trust's stock price jumped 10% before closing up $5.6875, to $124. A week later Travelers Group announced it would buy Salomon Brothers.
Attorneys and other observers declined to speculate what the SEC may be probing. Links between securities analysis and investment bank dealmaking could raise insider trading questions.
Though Mr. Hanley was hired by UBS Securities two years ago to help build the group's investment banking business, people in the merger advisory business say analysts seldom if ever get market information directly from their firms' investment bankers.
"There are crooks in investment banking, as we saw in the 1980s, but overall people are honest and try to observe the Chinese Wall," said Ronald H. Janis, partner at Pitney, Hardin, Kipp & Szuch in Morristown, N.J.
Though so-called Chinese walls may exist, investment bankers privately say it is naive to think that experienced analysts don't have ways of getting information that may at times be sensitive.
"A guy like Hanley who's been doing this over 20 years has got contacts all over banking," said an investment banker not affiliated with UBS. "Every time he travels to visit bank managements, he can spend the entire day if he wants just seeing all the employees at the bank he has met over the years. Everyone wants everyone else to know they're in the know, so they'll tell him things, and that's how rumors start. That's the real world."
The Bankers Trust/Travelers miscue was not the first by Mr. Hanley, one of Wall Street's most renowned banking analysts.
In August 1989, while at Salomon Brothers, he told American Banker that Northern Trust Corp. of Chicago was going to sell to an unnamed bank for $75 to $80 a share, or three times book value, which would have been a huge price at the time. Northern Trust is still independent.