THE TALKING CURE.(Wall Street's new candor regarding conflicts of interest in securities and accounting industries)

When you think of Wall Street, candor is probably not the first word that leaps to mind, but in the past few months the Street has been gripped by it. Merrill Lynch now warns, on the first page of each of its research reports, that it may be seeking "investment banking or other business relationships from the companies covered in this report." (That is to say, the analysis may be tainted.) The New York Stock Exchange, meanwhile, has proposed a rule that would bar a stock-market analyst from talking to newspapers that fail to disclose the analyst's conflicts of interest. Even the C.E.O. of Goldman Sachs, one of Wall Street's most discreet firms, has chimed in with a public nostra culpa on behalf of the industry, and has exhorted his peers to restore "trust in our system."

This outbreak of straight talk is Wall Street's way of addressing the collapse of its credibility. Everyone agrees that conflicts of interest riddle the securities and accounting industries--research analysts touting dubious companies to win their business, auditors signing off on dubious numbers to keep it--and that something must be done, so Wall Street has decided to adopt the talking cure. The problem with the conflicts of interest, the argument goes, is that no one knows about them. Fess up, and the problem goes away.

It's a nice thought, but the diagnosis is facile, and the remedy won't work. Start with the central tenet: that during the boom the conflicts of interest were kept secret. The truth is, people knew more than they like to admit. Back in 1998, a Business Week cover story called "Wall Street's Spin Game" put the matter succinctly: "The analyst today is an investment banker in sheep's clothing." When Merrill Lynch hired Henry Blodget as an Internet analyst in 1999, the media explained the decision by saying that Blodget, with his rosy predictions, would help the firm bring in more investment-banking business. Jack Grubman, the former Salomon Smith Barney analyst, bragged of his intimate relationship with the companies he was supposed to be evaluating objectively. And the problems in the accounting industry were even more obvious. Though the firms maintained their game face, it was no secret, by the late nineties, that the game itself was rigged. Most investors accepted this state of affairs with the genial tolerance of pro-wrestling fans.

Why? One reason, clearly, was the boom itself--people didn't care why an analyst recommended a stock, as long as it went up. But there was something else: it turns out that people think conflicts of interest don't much matter. "If you disclose a conflict of interest, people in general don't know how to use that information," George Loewenstein, an economics professor at Carnegie Mellon, says. "And, to the extent that they do anything at all, they actually tend to underestimate the severity of these conflicts."

Usually, conflicts of interest lead not to corruption but, rather, ...