Enron and Newspapers

Another thought on Enron, following on my New Yorker piece.

One of the big points made by Jonathan Macey and others is that the Enron scandal is an example of “receiver failure” as well as “transmitter failure”: that is, that it wasn’t just the case that the company sent misleading signals. It was also the case that those who were supposed to be listening to and interpreting those signals didn’t do their job.

The exception, of course, were newspapers. The Enron scandal was, in large part, broken by the Wall Street Journal.

This is strange, no?

We operate with the assumption, particularly in our understanding of what makes financial markets efficient, that those with the best incentives to ferret out the truth are those who are partial—that is, are directly involved in the process—and those who are economically motivated, who have money at stake. So you’d think that hedge funds, shorts, arbs, and analysts—all of whom were massively partial and economically motivated—would have been the first to see the “real” Enron.

But they weren’t. Reporters were, a group who—at least in theory—you’d think were in the least advantageous position. They aren’t partial to the proceedings. They have no money at stake. (Compared to their Wall Street counterparts, in fact, they barely make any money at all.) They aren’t (relatively speaking) as well-trained as financial intermediaries. They have to serve a general audience, which disposes them against highly technical examination. There are real limits on how much space and time they can devote to a particular story, and their rewards for doing well are almost entirely internal and professional: good reporters are rewarded, largely, by having their status elevated among other reporters. On Wall Street, seeing truth gets you a million dollar bonus. At a newspaper, it gets you a slap on the back.

We’ve spent a lot of time, post-Enron, criticizing the flaws in the investment community’s gatekeeping activities. But I think we should also recognize what the Enron case tells us about the value of newspaper journalism. Maybe, in other words, we have underestimated the value of impartial, professionally-motivated, under-paid and overworked generalists in tackling the kind of information-rich, analysis-dependent “mysteries” that the modern world throws at us.

All of which, of course, points out the irony of what’s happening in the newspaper business right now. We are dismantling the institution of newspaper journalism precisely at the moment when it seems to be of greatest social value.

Comments

[H]

When's an update coming along?

[Rick Yorgey]

Malcolm,
Where did you go? Any more blog postings coming? I love reading your stuff!

[easy]

what kind of stuff you like to read?

[shopautodotca seocontest]

I think you are related to Colin Powell

[Paul Blake]

"All of which, of course, points out the irony of what’s happening in the newspaper business right now. We are dismantling the institution of newspaper journalism precisely at the moment when it seems to be of greatest social value."

Just to stretch the irony a little further...the dismantling of newspaper jounalism is being done by these financial institutions that it seems could benefit from more investigative journalism. Unfortunately professionalism and a duty to the community get in the way of the bottom line.

[China Law Blog]

Worry not. With only a few exceptions, newspaper journalism is pretty much worthless. The Wall Street Journal is definitely one of the exceptions and in large part because of this it is in no danger.

[Mark]

I didn't read all the comments, so this might have been mentioned, but I think the question of motivation is a fascinating one and I wonder if interests are all that different at the end of the day. Are people really motivated by money or is it actually status that drives behaviour? The journalists are clearly motivated by status and one could probably argue that the Enron actors were motivated by status as measured by money.

On the flip side you could argue that the journalists were used by short sellers so money was a factor here as well.

[Preetham Venky]

Long, since we connected. But it seems to me like you are busy with you next work of genius. All the very best for the same. Btw, nice blog, would be better if you could get some-one to keep it updated for you. What say!