This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the best...
Bank of America (NYSE:BAC), Citigroup (NYSE:C), Lehman Brothers (NYSE:LEH), Deutsche Bank (NYSE:DB), Wachovia (NYSE:WB) -- pretty much everybody who's anybody on Wall Street had a piece of the action when Blackstone Group (NYSE:BX) IPOed a few weeks ago. And most of the big names came out yesterday to initiate coverage of the private equity powerhouse, as well (for good measure, Deutsche Bank also chimed in with a buy rating on Blackstone peer Fortress Investment Group (NYSE:FIG)).

For the most part, this bankers' brain trust sounds optimistic. Out of the five firms initiating coverage on Blackstone yesterday, only one gave it a lukewarm "market perform" rating. Everyone else thinks Blackstone's a buy. Surprised at the near unanimity of bullish opinion on this stock? You shouldn't be. As my ever-Foolish, ever-cynical -- and often right -- colleague Seth Jayson explained back in June:

Nearly every investment bank in the biz was involved in the [Blackstone] IPO. What's more, they reportedly did this on the cheap, for half the usual price. The reason is simple: Wall Street wanted this to be the biggest news of the year. Wall Street wants to see more private-equity IPOs, because it gets a slice of that cake, as well as all those fat banking fees that come along when these firms go about the business of deploying that capital. Quid pro quo, Clarice.

For those whose eyeglass prescriptions are out of date, let me read between the lines for you here: Seth is saying that Wall Street's best and brightest may not be seeing too clearly themselves when it comes to Blackstone. They may have been blinded by the glare of riches associated with the firm. They may be endorsing the stock more out of greed than conviction.

The law of unintended consequences
Early indications suggest that the bankers have miscalculated. Their "buy" ratings barely budged the stock yesterday (it closed up $0.06), and they seem to be fighting a retreating riptide of investor enthusiasm for the stock. As the press has been screaming for weeks, the floodgate on cheap capital is lowering, and with it, the attractiveness -- and profitability -- of the buyout deals in which Blackstone specializes. In fear of this, investors have sold off the stock by 30% since its IPO.

All of which got this Fool to wondering about the implications of yesterday's buy ratings for the raters themselves. The way I see it, our prime-time players are putting two things at risk when they endorse Blackstone: their reputations and their pocketbooks.

Reputational risk
Let's look at that reputation first. Below I've prepared a table showing you the five Wall Street firms that initiated coverage on Blackstone yesterday, their opinions, their CAPS ratings (out of a possible 100 points), and their records for accuracy (also out of 100). See for yourself how they stack up:

What you see above looks encouraging at first glance. The better the investor, the more likely it is to think Blackstone is a buy. On the face of it, this argues in favor of the stock.

Pocketbook risk
But before getting too excited about the reputations of the firms endorsing Blackstone, consider the risks. Look at this from another angle. Right or wrong in their analysis, I wonder whether it's really worth it for these banks to be endorsing a company they helped bring to market, and from which they expect to profit. Because. make no mistake: If they're wrong -- if Blackstone's stock falls further -- not only will the bankers be blamed for making a "bad call," but they'll almost certainly also be accused of making that call under the influence of a conflict of interest. To me, that sounds like a recipe for not just jaded clients, but inspired lawsuits.

Seems to me the bankers are playing a dangerous game with this one. Dangerous to their reputations, even if their analysis is right. Dangerous to their clients if it's wrong. And in the doomsday scenario described above, dangerous, too, to the banks' own investors.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 694 out of more than 60,000 players. Bank of America is an Income Investor recommendation. The Fool's disclosure policy has a CAPS rating that is off the charts.