Lehman bust highlights analyst "group-think disease"

By Elinor Comlay

NEW YORK (Reuters) - All of Wall Street's bank analysts were caught out by Lehman's collapse -- and few have redeemed themselves since.

Just a handful have dared to issue a "buy" on bank stocks that have surged since March -- after they all failed to slap that "sell" on Lehman Brothers (LEHMQ.PK) before it went bust a year ago.

"There's a group-think disease on Wall Street," said Robert Lutts, chief investment officer of Cabot Money Management who started buying financial stocks for his $400 million (240 million pound) fund this year.

Even star analysts like Meredith Whitney -- famed for calling Citigroup's (C.N) troubles in 2007 -- and renowned bear Mike Mayo, whiffed on both this year's turnaround and Lehman's problems.

Only 45 percent of bank analysts managed to beat an index of commercial banks or capital markets firms with their recommendations in 2008, according to Thomson Reuters' StarMine. And it is hardly better this year, with just 46 percent of analysts beating the market.

You figure analysts would know their own industry better.

Think again. A herd mentality and a concern that controversial calls could damage their careers are holding them back from greatness.

"There's a fear of publicly being wrong," said David Ellison, chief investment officer at FBR Funds with $1.4 billion under management. Anonymous researchers at fund companies have an easier time making edgy calls because they work behind closed doors, he explained.