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American Journalism Review
Continuation of <i>Ignoring the Alarm</i>  | American Journalism Review
From AJR,   March 2003

Continuation of Ignoring the Alarm   

By Charles Layton
Charles Layton ( is a former editor and reporter at the Philadelphia Inquirer and a former AJR senior contributing writer.     

There is something perversely satisfying in these little histories--so neat, so clean, so easy to compile. And they certainly give credence to the charge that a gullible press helped feed the market mania of the 1990s. What they don't reflect is the degree to which, throughout this time, the press was ignoring its own best reporting.

BusinessWeek, for instance, might expose the ethical conflicts of stock analysts in 1998. Then, in 1999, it would run a cover story saying, "When it comes to knowing companies, Wall Street stock analysts still hold sway." And then it would ask Mary Meeker to list her favorite stocks. In the spring of 2001, Fortune published one of the first skeptical stories about Enron, suggesting serious problems with the company's financial statements. Eight months later, it would be calling Enron's CEO one of "the smartest people we know."

In retrospect, this is hard to explain. The business press seemed born anew each day.

A good case study in this regard is the coverage of a stock analyst with the Dickensian name of Jack Grubman. Grubman, of the brokerage firm Salomon Smith Barney, is one of the most egregious examples of a Wall Street bad guy treated like a guru by the press.

One of his pet companies was Winstar Communications. Even after Winstar's stock had fallen from a high of $66.50 a share to less than $10, Grubman insisted it was really still worth $50. He didn't abandon that position until the day before the company filed for bankruptcy. By then its stock was at 14 cents a share. But while ordinary investors lost money, Salomon made a bundle through its investment banking business--helping Winstar sell $1.2 billion worth of junk bonds, for instance.

The National Association of Securities Dealers fined Salomon Smith Barney $5 million last year because of Grubman's "materially misleading" reports on Winstar.

Another of Grubman's strong buys was Qwest Communications, the dominant local phone company in 14 states. It has recently faced criminal and regulatory investigations over its accounting practices, as well as a shareholder lawsuit, and last year it barely avoided bankruptcy.

Grubman, who resigned from Salomon in August, also touted a string of companies that filed for bankruptcy. These included WorldCom (the largest American company ever to file for bankruptcy), Global Crossing, Metromedia Fiber Networks, McLeodUSA, Flag Telecom Holdings, Rhythms Netconnections and XO Communications. According to the New York Times, of the 25 largest bankruptcy filings in the United States, 10 were by companies recommended by Grubman. All of those 10 also had investment banking ties to Salomon.

WorldCom was Grubman's big favorite. He continued to recommend it until last April, when the firm's practices were under investigation by the SEC. In November, a special bankruptcy-court examiner's report criticized Grubman for promoting the stock. While Grubman urged investors to "load up the truck" with WorldCom, the report said, Salomon got $107 million for 23 deals with the company.

Business reporters turned frequently to Grubman as a source during the 1990s. Typical was a February 29, 1996, Wall Street Journal story that predicted great things for WorldCom and its cigar-chomping CEO, Bernard Ebbers. "WorldCom isn't yet a household name," said the Journal. "But that may change soon." The article's only named source was Grubman, whose word the writer appeared to accept without question.

This swallowing of an analyst's opinions without inquiring into his hidden agendas was standard practice throughout the 1990s.

That was so even after March 25, 1997, when the Journal's Anita Raghavan wrote that the "Chinese Wall" traditionally separating investment bankers (who sold services to companies) from research analysts (who evaluated stocks) had broken down. Now, she wrote, the main function of research analysts was to promote their firms' investment-banking business.

Raghavan cited Grubman as emblematic of the problem. She didn't accuse him of misusing his dual function; in fact, she remarked on "how skillfully he manages to walk the divide between banking and research." Still, in a perfect world the story might have bred a certain caution.

On May 18, 1998, the Journal's sister publication, Barron's, ran an extensive interview with Grubman, asking him to name his favorite stocks. "WorldCom is my favorite stock anywhere," the analyst said. "If I had to pick one telecom to own...this would be the one."

On June 12, 1998, Grubman turned up on "Wall $treet Week with Louis Rukeyser," advising viewers to invest in WorldCom. On June 15, the Dow Jones News Service dutifully passed along his opinion that "WorldCom was a good value."

These are just a few of Grubman's countless appearances on television and in the business press.

On October 5, 1998, BusinessWeek scored with its remarkably prescient exposure of corruption on Wall Street, including a full explanation of why analysts can't be trusted. A sidebar on Grubman described him as a prime example of the problem and cited his close relationship with WorldCom and its CEO, Ebbers.

On August 12, 1998, the Times of London mentioned Grubman's conflict of interest in a $40 billion deal between WorldCom and MCI. The analyst's participation in this deal, it said, blurred "the borders between analyzing financial statements and acting as an investment banker."

By now, word was obviously out on Grubman.

Yet on June 7, 1999, Barron's published a discussion of telecom stocks by a three-person "panel of experts," one of whom was Grubman. Grubman praised three of his (doomed, as we now know) favorites--Global Crossing, Qwest Communications and Level 3 Communications--calling their stocks "turbo-charged." He also praised WorldCom and Ebbers. In words that ring with irony now, Grubman was quoted as saying, "If Bernie Ebbers hadn't run WorldCom over the past 10 years, I doubt it would be where it is today."

The Dow Jones News Service ran an item based on the Barron's piece, repeating Grubman's "turbo-charged" quote and his praise for the three companies' "aggressive management teams." And again, his conflicts of interest went unremarked.

On December 6, 1999, the Wall Street Journal reported that Grubman's upgrading of AT&T stock from a "neutral" to a "buy" had put Salomon in line for a lucrative role in AT&T's new IPO. It said that AT&T had excluded Salomon from participating in a previous stock offering, presumably because Grubman had publicly expressed a low opinion of its stock. "A week ago, Mr. Grubman finally changed his tune," the Journal reported, and Salomon was reaping the rewards. The story suggested that Grubman may have had no choice. It said he was "nudged" to "revisit the merits" of AT&T by his boss, Sanford Weill, co-chairman of Salomon's parent company, Citigroup.

All this happened around the time Levitt, the SEC chairman, was lobbying (although not very effectively) for federal controls against such conflicts of interest.

Inexplicably, on June 15, 2000, BusinessWeek did an astonishing about-face on Grubman. It ran a long profile under the headline, "The Power Broker: From his Wall Street perch, Jack Grubman is reshaping telecom and stirring up controversy." This strange piece was so friendly toward Grubman as to constitute, if not a retraction, at least a major revision of the magazine's previous stance. Grubman was now described by one source as "almost a demigod."

The piece acknowledged most of the common complaints about Grubman, including his ties to WorldCom and other companies he praised to investors. But the writer seemed to feel that such conflicts didn't matter very much.

"Some academics and telecom industry insiders" considered Grubman's actions "nothing short of scandalous," the magazine granted. It gave a short account of how Grubman had changed his opinion on AT&T--the story that had been broken by the Wall Street Journal. "Some industry insiders suggest that Grubman may have reversed himself so that Salomon could get a slice of the [IPO] fees," the article said.

"But when it comes to Grubman," it went on, "it's far more complicated than that." Grubman was then quoted as saying that his close ties to companies like WorldCom actually made him a better analyst, because he had greater insight into how these businesses functioned. "What used to be a conflict [of interest] is now a synergy," Grubman said.

BusinessWeek appeared to buy this. "Like it or not, what Grubman is doing is redefining the traditional role of a stock analyst. It's not just about smart stock picks anymore. In fast-changing industries such as telecom and the Internet, analysts can end up with more information about a broader range of developments than anyone else. That makes them a critical cog in how capital gets allocated, which business plans get green-lighted, and which ones hit the dustheap."

And so far, the article said, "Grubman has managed to keep his professional credibility intact."

After that piece ran, Grubman was, to all appearances, back in BusinessWeek's good graces. As late as June 18, 2001, the magazine was still serving as a platform for Grubman to flog his stocks. It converted his sins into virtues, describing him as "a fanatical boxing fan and onetime amateur boxer [who] isn't afraid to lead with his chin."

"The analyst has been bloodied over the past year as many of his favorite stocks, notably WorldCom Inc., have been hammered," said BusinessWeek. "So what is Grubman recommending these days? Well, WorldCom again tops the list, putting him in the minority of Wall Street analysts who favor the stock. He also likes Qwest Communications International Inc. and Global Crossing Ltd."

After Grubman's stocks collapsed, and public outrage over Wall Street's misdeeds set off a storm of investigations and lawsuits, most business news organizations were jolted out of their slumbers, at least for a time.

"Can we ever trust Wall Street again?" Fortune asked on its cover, over a picture of Mary Meeker.

BusinessWeek had to execute a double-reverse. Last May, in a cover piece titled "How Corrupt Is Wall Street?" the magazine re-revisited the issue of compromised stock analysts, including Grubman. "Only now are the ugly details of the conflicts at play being laid bare," the magazine said.

But of course that wasn't entirely true. BusinessWeek itself had laid the problem bare way back in 1998.

How could the media have been at once so prescient and so deceived? How could they have plugged their ears to their own alarm bells?

I put that question to Stephen Shepard, who has been editor in chief of BusinessWeek for 18 years. Shepard didn't quite buy my premise that the media had defined the problem early on but then had failed to follow through.

He cited his magazine's investigative successes, especially a 1995 investigation of unethical practices at Bausch & Lomb Inc. Also, Shepard volunteered with enthusiasm, "We nailed Grubman!" by reporting that he had fabricated parts of his résumé and by illuminating the conflict of interest inherent in his dual role. When I brought up BusinessWeek's turnaround piece on Grubman--the "demigod" article--Shepard said he remembered that story as having been highly critical. When I begged to differ, he said, "I'll have to go back and read it again."

His overall assessment was that the media had been "good on systemic problems," meaning the general ethical problems of stock analysts, for instance, but "where we were less good was on the specific company stories. We didn't get Enron, we didn't get Tyco, we didn't get WorldCom." One reason they didn't, he says, was that it's hard to discover fraud in a company without having an inside source. The magazine had such a source at Bausch & Lomb, he said, but not at Enron and the rest.

Another difficulty, in his view, is that the bull market muffled the impact of hard-edged stories, such as BusinessWeek's excellent 1998 exposé. "Nobody paid attention," he says. "In 1998, nobody gave a shit. The stock market was booming, and [critical stories] didn't gain any traction." Many journalists have told me this. Ron Insana, an anchor on CNBC, says that he and others at his network talked often on the air about the danger that the bubble might burst. But in the midst of the longest bull market in American history, he says, their warnings were lost. Insana argues that CNBC has gotten a raw deal from critics who accused it of helping fuel the market mania. "I'm not going to go house to house in this country and say, 'You're not listening to me!' This is a country of adults," he says. "CNBC's job is not to regulate market psychology."

Insana agrees that most of those interviewed on CNBC expressed bullish views. When the network did interview someone more cautious, he says, it got hate mail. "The viewers would call and scream, 'Why do you put that person on?' "

"It's not just the market and it's not just the media, it's the public mind too," says author and Atlantic Monthly writer James Fallows, who was a columnist for The Industry Standard, a now-defunct magazine that covered the dotcom industry. "People really want to believe that it's going to keep going. Most people thought they had a stake in the helium never coming out of the balloon." Certainly, he says, journalists at The Industry Standard had a stake. That became clear when, right after the dotcom economy crashed, The Industry Standard lost so much of its advertising that it went bankrupt.

Terence O'Hara, a business editor at the Washington Post, says there was "irrational exuberance in all of the business press, including some at the Post." He adds, "A lot of the [technology] stuff we did was pretty rah-rah, as in 'Isn't this amazing!' Companies around here were going public and shooting up to 200 their first day. It was an amazing time."

Throughout the boom, of course, there were cautionary stories. Way back in April 1996, in a cover story, Fortune wrote that the bull market was "already showing signs of strain and speculation. Will it all end badly?" But as the years passed and stock prices kept advancing, reporters and editors got tired of being burned every time they made a gloomy prediction.

So when, in early 2000, the crash finally came, it was perhaps natural that BusinessWeek would advise readers to "relax, the overall market probably won't tank."

As for the phony accounting that so much of the boom was built on, that might have been uncovered sooner if the regulatory agencies hadn't been so lax. Both Insana and Shepard note, for instance, that the SEC investigated Tyco in the late 1990s but let the company off the hook. "So what were we supposed to think?" Insana asks.

"This was a failure of the entire system of checks and balances," Shepard says. "I'm talking about the directors of the companies, the accounting firms that audited the books, the credit ratings agencies, the SEC and the media."

It also didn't help that business journalism lacks the kind of investigative tradition one finds in government and political reporting. In many business news departments, says the Post's O'Hara, "documentary research and investigation is not necessarily where the big rewards are. And in the last five years, up until stories like Enron hit, there wasn't a whole lot of attention paid to what a company's numbers told you about the prospects of a business. It was a lot of personality-driven journalism. A lot of trends-driven journalism. You became successful if you got the interview with Jack Welch."

Quite a few journalists feel bad now about all that has happened. "I was once proud of my profession," Philip Longman, a veteran business reporter, confessed in The Washington Monthly. "But today, I'm more likely to admit--at least on a bad day--that I spent my youth hustling Tyco shares to senior citizens."

At its annual conference in Phoenix last April, the Society of American Business Editors and Writers held a panel discussion on Enron coverage, addressing the question: What did the media know and when did they know it?

One thing all agreed on was that business journalists can't learn to detect future Enrons unless they get more training. In fact, the strong desire for training is one very positive outcome of the whole fiasco. It's an open secret now that most business writers can't analyze a quarterly report in much depth, much less fathom the mysteries of special purpose entities, off-balance-sheet partnerships and capacity swaps.

Journalism schools are somewhat culpable here. "It's not something people cover in college," O'Hara says. "They learn how to cover government and public meetings. They learn about documents in those terms. Not many of them understand accounting theory and economics theory."

The Post has beefed up training for its business staff, sometimes by sending reporters to universities for special courses. More effective, though, according to Jill Dutt, the Post's assistant managing editor for financial news, is on-the-job training. "What works best," she says, "is when a reporter finds a company about which they have specific questions and they continue and continue and continue to probe it, with the help of an editor who has experience in this kind of a problem."

Shepard says BusinessWeek is trying to teach its writers more about accounting. "We've had outside people come in and teach, and consult with us on some of these stories," he says.

For reporters who can't get the kind of in-house support a BusinessWeek or a Washington Post can provide, SABEW has been running a series of seminars. Jay Taparia, a Chicago investment adviser who has been an instructor, says he's seen a powerful thirst for knowledge among business journalists. The first time he spoke to such a group, he says, people hung around long afterwards asking questions. The moderator finally said to the crowd, " 'Hey, we have drinks downstairs. If you still want to stay with Jay, keep on asking questions.' And the first words out of my mouth were, 'Hmm, financial analysis or alcohol. Go for the alcohol.' But they stayed."

There's a simple reason for this thirst for knowledge, according to the University of Missouri's Martha Steffens, who coordinates the SABEW seminars. "We don't want another Enron or WorldCom in our backyard, where we could have done something and we didn't."

Unfortunately, most news organizations have been cutting their training budgets, not expanding them. Reporters seeking to improve themselves sometimes have to attend seminars on their own time and at their own expense. The Southern Newspaper Publishers Association is taking up some of the slack by sponsoring SABEW seminars throughout the South.

A related problem is the lack of time for in-depth reporting. "If you've got a reporter who's got three beats...or they work at a wire service and they're covering 25 becomes somewhat difficult," says SABEW's president, Chuck Jaffe, a personal finance columnist for the Boston Globe.

And yet, if we've learned anything, it's that we can't afford to let someone else do our digging for us. We can't blindly trust the brokers, analysts, regulators and other such "expert" sources.

Steffens was returning home from a seminar one day when she struck up a conversation with a fellow passenger on her plane, who turned out to be a stockbroker. After Steffens mentioned her seminars, the broker said, "Well, I wish I knew more about financial analysis and balance sheets."

This admission of ignorance surprised Steffens. "I said, 'Oh.' And it really came home to me that we are the watchdogs."

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