Financial reporting in the U.S. is
devoted primarily to hero worship. My former colleague at Fortune, Carol Loomis,
once said that business reporting has only two phases, the glory of it and the
woe of it.
Whenever we get to the woe, as we do
now, it is usually after the fact. As a Wall Street market timer once told me in
an interview, "Journalism is a trailing indicator." By the time the financial
media get to a tough story, the barn door has long been open - or the barn has
burned down completely. This failure of vision happened before during the
dot-com bubble when companies with no revenue and no possibility of making a
profit soared in value to rival real companies like IBM, GE and General Foods. It
also happened with Enron, HealthSouth and a bunch of other
scandals.
I was at Fortune when we created
the cult of the CEO. The universe revolved around the dashing chief executive,
who was invariably handsome, square-jawed and some kind of genius. We were told that we could never write that
"companies" did something; any action by a company was an act of the CEO. So
Steve Jobs did this or Jack Welsh did that, but never Apple did this or GE did
that. We invented the CEO as some sort of super being, completely in control of
every facet of his company and completely ethical.
The fact is that even in covering
public companies, journalists don't get a lot of information; quarterly reports
mostly tell you what companies want you to know. Carol Loomis made a career of
reading the footnotes in annual reports and taking companies to task for
financial manipulation. But she was the exception. Financial journalism doesn't
have much of a tradition of muckraking and investigative reporting. It has
mostly been about identifying the "heroes" and building stories around them. In
other words, like much of journalism, it is one step up from stenography. Look
at it this way, the financial press has been no more enlightening about the
Ponzi schemes of the last five years than the political press was about the
lead-up to the Iraq war.
Knowing what's going on in private
companies, who don't provide much information at all, is even more difficult. I
spent the last four years editing Red Herring magazine, which in its early days,
created the cult of the venture capitalist as the industrial hero. Some of that
may have been justified in the early days of tech startups, but as the tech
market matured, many VCs became increasingly greedy, focused more on returns
than on nurturing companies. When we relaunched Red Herring in 2004, I insisted
we bring more balance and more skepticism to our reporting. We celebrated
success, but we also asked hard questions about markets, competition and
viability.
The feedback from the publisher was
that Silicon Valley thought we were being too negative. The sector was unused to
critical analysis. And it wasn't just the small private companies; the big ones
like Microsoft, Apple and Hewlett-Packard were also thin-skinned. Questions they
didn't like were viewed as hostile. For years, Microsoft was reputed to keep a
chart of reporters that ranked them according to how much they bought into
Microsoft's "vision."
One of the barriers to better
financial reporting is the fact that even the regulators didn't understand the
depth and scale of fraud. As far back as Enron, when the occasional brave
journalists raised questions, the response from the company was, "you just don't
understand."
Once again, we've seen that it isn't
just the journalists who didn't get; the people who were supposed to protect
us didn't have a clue about the cliff-edge walk that many banks were indulging
in. The SEC didn't understand the
vast gamble involved in credit default swaps. And those were the pros with the
MBAs and accounting degrees and law degrees whose job was to
understand.
But like the Silicon Valley folks who
complained about reporter hostility, there was a consensus on Wall Street about
not asking hard questions. Many people knew it was a house of cards, and in that
case, Jon Stewart is right to lambaste Jim Cramer. He knew better -- or should
have- and he should have told us sooner.