AJR  Features
From AJR,   March 2003

Ignoring the Alarm   

A number of business journalists wrote pieces spotlighting the questionable practices that would lead to the bursting of the nation’s longest economic bubble. But even within their own news organizations, their insights were lost in a cacophony of naοve reportage.

By Charles Layton
Charles Layton (charlesmary@hotmail.com) is a former editor and reporter at the Philadelphia Inquirer and a former AJR senior contributing writer.     

Three years before Enron crumbled, and two years before the stock market hit the wall, BusinessWeek ran a cover story headlined "Corporate Earnings: Who Can You Trust?" Inside was a package of six stories, 16 pages of copy, explaining how corporations often overstated their earnings, auditors turned a blind eye, and Wall Street analysts had been bought off and compromised into compliance.

"Questions have begun to be raised about the integrity of the U.S. financial markets," reporter Sarah Bartlett wrote in an introduction. "It's the gnawing sense that companies...are regularly pushing the limit, accountants are AWOL, and analysts are too enmeshed with their investment-banking brethren to provide objective advice."

This hit the nail bang on the head--in October of 1998!

Long before the rapacious schemes of so many corporations came to light, and before Wall Street's duplicity became the stuff of subpoenas and congressional probes, here was BusinessWeek unmasking the whole scam, in language so forceful and clear a child could understand it.

Another early prophet was Michael Siconolfi of the Wall Street Journal. In 1997, he began exposing the way securities firms silently allocated hot new stocks, at artificially low prices, to the personal brokerage accounts of corporate executives, who then turned huge profits by "flipping" the stocks (that is, selling them at a higher price to people like you and me when the company goes public). It was, the Journal suggested, a way of bribing their best clients in order to keep their business.

Again, a bull's-eye--years ahead of its time.

Also in 1997, Anita Raghavan, another Journal reporter, wrote about "a new breed of Wall Street analyst," whose primary role was not to give unbiased advice about stocks, as the public is led to think, but to help their firms snag investment banking deals (such as assisting with mergers and stock offerings) with the very corporations they evaluated. This dual role, she wrote, is hard to police and fraught with potential conflicts of interest.

But if you really want to go back to the future, check out an August 27, 1995, story by David Hilzenrath in the Washington Post. More than six years before the Enron and Tyco scandals, Hilzenrath was writing this: "Many financial disasters--including corporate bankruptcies, fraud cases and the collapse of lending institutions--[have] developed under the noses of accountants." His topic wasn't crooked accounting per se; it was a financial mess in the Washington, D.C., government. But in the course of describing that, he also explained the basic conflict of interest that can keep an auditing firm from objecting when a company fiddles with its books: Auditing firms are paid by the companies they audit. They often do lucrative consulting work for those same companies. Why bite the hand that feeds them?

At a time when the country's financial system was rotten to its core, these stories and others like them should have been a wake-up call to the rest of the business press.

Only no one woke up.

Business journalists have been excoriated for their mind-blind behavior in the years leading up to the spring of 2000, when the longest market bubble in American history popped, and late 2001, when Enron's failure began a cascade of scandals: WorldCom. Arthur Andersen. Global Crossing. Tyco International. Adelphia. Qwest Communications. El Paso Corporation. MicroStrategy. Xerox. Dynegy. ImClone. Winstar. Merrill Lynch. Morgan Stanley. Salomon Smith Barney. Citigroup. Credit Suisse First Boston. Vivendi.

Orville Schell, dean of the Graduate School of Journalism at the University of California, Berkeley, wondered how virtually the entire press corps could have missed the fact "that so many of America's biggest corporations were financial houses of cards."

It was "one of the great journalistic failings in modern times," said Howard Kurtz of the Washington Post.

"We allowed Wall Street and these companies to lead us by the nose," said Martha Steffens, head of the University of Missouri's business journalism program.

In an online chat at washingtonpost.com, an anonymous resident of Winnipeg, Manitoba, probably spoke for millions in declaring: "Rich and powerful groups including the media conspired to fleece the public." (The italics are mine.)

These judgments are not wrong. But they are not the whole story. The whole story is more mixed, and more troubling.

The problem with business coverage in the 1990s was not that journalists weren't smart enough to root out the corruption. Many corrupt practices lay near the surface, and some were being openly questioned, at least in general terms, by people like the Yale economist Robert Shiller, independent financial researcher Howard Schilit and Arthur Levitt, head of the Securities and Exchange Commission under President Clinton. Reading the coverage of the past half-decade, one is struck by how much certain reporters did uncover. But even within their own news organizations, their insights were lost in a cacophony of naοve reportage that reassured us the system was sound, analysts and auditors and CEOs were basically trustworthy, and the market boom might go on forever. Instead of probing the harsh realities, much of the business press fell back on gimmicky formulas, such as the use of lists and numbers as a reader come-on.

Magazine stories like "The 10 Hottest Stocks for the New Millennium" and "The 50 Most Powerful Women in American Business" were really not so different from their counterparts in other genres, such as women's magazines like Cosmo. Applied to business coverage, though, the numbers gimmick becomes a minefield. Reading some of those lists from two or three years back--Fortune's lists of "The World's Most Admired Companies," for example, or BusinessWeek's "The 25 Top Managers of the Year"--one finds them peppered with the names of companies that were soon to become infamous, either for business failures (Cisco, Lucent) or for alleged criminal activity (Tyco, Enron, WorldCom).

Another common formula was (and still is) the fawning CEO profile. These pieces became an infestation in the 1990s, and not just in the business press. Time magazine featured Jerry Yang, cofounder of Yahoo!, on its cover in 1998, with a six-page article inside that ended by suggesting that Time's readers ought to own Yahoo! stock. The following year, Time honored the top executive of Amazon.com, Jeff Bezos, as its Person of the Year. Weeks after that story ran, Amazon's stock began a slide that would take it from more than $100 a share to less than $20.

While BusinessWeek featured only one CEO from the Fortune 1,000 on its cover in all of 1981, by the year 2000 the number of such covers had risen to 18. The man who documented this trend is Rakesh Khurana of Harvard Business School, author of the 2002 book "Searching for a Corporate Savior." The purpose, Khurana argued, was to make business news more appealing by turning CEOs into "a new category of American celebrity." The stories often dealt more with CEOs' "personal habits and attributes," he said, than with their companies' strategies or finances.

Business publications continued to wag their tails at Enron's top executives almost until the hour of that company's demise. According to several accounts, Fortune was about to put a group photo of "the smartest people we know" on the cover of its November 26, 2001, issue. One of those people was to be Kenneth Lay, chairman and CEO of Enron. But just as the magazine was going to press, the Enron scandal broke. Using photo-editing software, the editors hurriedly erased Lay. (Fortune Executive Editor Joseph Nocera declined to be interviewed for this article.) Enron declared bankruptcy days later, and in another two months Lay was pleading the Fifth Amendment.

Authors of irresponsible books also got a free media ride--authors who predicted, for instance, that the Dow Jones industrial average would eventually top 36,000 or 40,000 or maybe (what the hell) 100,000. David Elias, who wrote the book "Dow 40,000," boasts that he has appeared on CNBC, NBC's "Today," CNN's "Moneyline" and "Business Day," CNNfn, and public television's "Nightly Business Report" and has been quoted in Forbes, Fortune, the Wall Street Journal, Barron's, BusinessWeek and Chief Executive.

Another of these false prophets was Robert J. Froehlich, whose book "The Three Bears Are Dead!" maintained that the 1990s bull market would last into the 2010s. The Chicago Tribune once described Froehlich as being one of those gifted individuals with "eyes to see the dust in the distance, ears to hear the hoofbeats of the thundering herd, and noses to smell the money to be made." Besides being an analyst and spokesman for Zurich Scudder Investments, Froehlich is a television commentator. He is a regular guest cohost for CNBC and has been a frequent guest on CNNfn and Fox News.

Equally lionized by the business media were absurdly optimistic stock analysts whose opinions were tainted by their business relationships with the companies they praised. When these analysts appeared on television or in print, both they and their interviewers pretended that the information being passed along was just unbiased, good-natured advice for the public.

One such analyst was Mary Meeker, Morgan Stanley's high-tech specialist, touted by Barron's as the "Queen of the 'Net" and by Fortune as one of "the way-smartest investing minds in infotech"--until her overhyped, overheated stocks (including Amazon.com and Priceline. com) flamed out. Another celebrity analyst, Henry Blodget of Merrill Lynch, appeared about 125 times on CNBC and CNN over two years, according to the Washington Post. He was also widely and respectfully quoted in the print media. Blodget's credibility collapsed last year after investigators released interoffice e-mails in which he had privately derided stocks he was recommending to the public, calling one "a dog" and another "a piece of crap."

In August 1999, Karen Southwick wrote in Forbes ASAP that market analysts at top Wall Street firms seemed to be dividing into two groups: "the media stars and the wannabes." To become a media star, she wrote, "it helps to get listed in Institutional Investor's annual tally of top-ranked analysts, but it's also important to appear on CNBC or get quoted by the Wall Street Journal...or TheStreet.com."

To promote themselves and the stocks they were selling, each major investment house tried to develop its own superstar analysts. They competed for exposure, especially on television, where the easiest path to glory was to go wild with optimism about the market. One young analyst, Walter Piecyk of PaineWebber, became a star overnight by predicting that the price of Qualcomm Inc. would go from $560 to $1,000. Although that didn't happen, just predicting it got Piecyk featured in some 85 articles and mentioned 11 times on TV, according to BusinessWeek.

In his 2000 book, "Irrational Exuberance," Yale's Shiller described the television phenomenon from his perspective. "I have over the years been called by newspeople asking me if I would be willing to make a statement in support of some extreme view," Shiller wrote. "When I declined, the next request would inevitably be to recommend another expert who would go on record in support of the position."

It is clear that during the market boom many trusting viewers bought stocks based on what they heard on television. According to Sy Harding, author of the book "Riding the Bear," when someone like Mary Meeker appeared on CNBC to promote her pet stocks, "those stocks would soar 20 percent or more in a day on heavy volume." Insiders took advantage of this bounce by selling after a favorable mention on TV temporarily lifted the value of a stock. BusinessWeek exposed this practice in its April 3, 2000, issue. It quoted James Cramer, a columnist and TV personality, explaining how he manipulated the game. When Cramer heard that an analyst was about to appear on CNBC, he would rush to acquire that person's pet stocks. Then he'd turn a quick profit by selling after the program's audience had bid up the price. And it wasn't just Cramer. BusinessWeek described how Ken Wolff, a California stock trader, bought a stock at $14.50 and sold it, less than an hour after it was mentioned favorably on CNBC, for $28. The upshot was, a lot of money flowed from the pockets of credulous viewers to the big Wall Street firms and to insiders like Cramer and Wolff.

In the late 1990s, Arthur Levitt, then chairman of the SEC, expressed concern about the problem of stock tips in the media. "Every day, Wall Street analysts would take to the airwaves to wax poetic about one company or another," Levitt wrote in his recent book, "Take On the Street." "It seemed that just about every time I turned on the TV, an analyst was being asked to name his top five picks. But viewers were never told that the analyst's employer likely was the investment banker for most, if not all, of the companies on his list of hot stocks."

Although Levitt knew he had no authority to regulate the media, in 1999 he asked his staff to talk to TV executives, to ask "for their advice on what type of disclosure would be meaningful for viewers, but not too onerous for the shows." Levitt said Fox News and CNNfn refused to meet with his representatives. The general counsel of CNBC and the executive producer of the PBS program "Wall Street Week" did meet with them, Levitt said, but "it was like pulling teeth. Neither official would even admit that investors were harmed by not knowing about the relationship between the companies the analysts were selling and the business those companies had given the analysts' firms." Levitt gave up after concluding that the executives "were thinking only about their own ratings and not what might be best for the long-term interest of their viewers."

CNBC says it installed a conflict-of-interest policy that year requiring that analysts appearing on its programs disclose their firms' relationships to companies whose stocks they discussed. Since last year, the SEC has also required analysts to make that disclosure.

It's time now to play Humiliate the Press. Here is a sequence culled from press references to Cisco Systems, the networking equipment maker.

• July 1998: The Wall Street Journal predicts great things for Cisco, describing it as "the rarest of Wall Street birds: an Internet-driven company with a proven business plan, actual products and ample profits."

• December 1998: In a profile, the Los Angeles Times praises Cisco's CEO, John Chambers, as "a consummate evangelist" for the Internet revolution.

• January 1999: BusinessWeek honors Chambers as one of its top executives of the year, saying: "Will anything slow down Cisco Systems Inc. and its supercharged CEO John T. Chambers? Not likely."

• October 1999: Cisco ranks eighth on Fortune magazine's list of the world's most admired companies.

• March 2000: Based on its elevated stock price, Cisco passes Microsoft as the world's most valuable corporation, worth an incredible $555 billion, at least on paper.

• May 2000: Fortune writes that Chambers might well be "the world's greatest CEO." If a person could own just one company's stock, says the magazine, it ought to be Cisco's.

• March 2001: Facing a slump in demand for its products, Cisco fires 11 percent of its workforce.

• May 2001: Cisco has lost more than $400 billion in market value. Its stock is down 70 percent. Like a scorned lover, Fortune turns on Chambers, blaming him for the company's "mess" and charging that the beleaguered CEO "didn't seem able to turn off the spigot of his own optimism."

Anyone can assemble timelines like this. All it takes is a few hours surfing through media archives. Here is one for Lucent Technologies, which was the most widely held stock in America in the late 1990s.

• January 1999: Lucent's CEO, Richard McGinn, is one of BusinessWeek's top executives of the year. "McGinn has instilled a take-no-prisoners competitiveness" at Lucent, the magazine says.

• October 1999: Lucent ranks 11th on Fortune's list of the world's most admired companies.

• November 1999: Fortune writes that McGinn "has done a tremendous job" and that Lucent "should continue to thrive under the guidance of this affable, convivial, intelligent guy."

• January 2000: Money magazine ranks Lucent among the best investments for the coming year.

• March 2000: BusinessWeek calls Lucent "a master innovator" and says few companies can match its research capabilities.

• July 2000: The company misses its revenue projections, sending a shudder through Wall Street. Its stock drops to $51, down from a high of $84.

• February 2001: Lucent says it is cooperating with an SEC investigation of improperly booked sales.

• June 2001: The stock continues to plummet. Investors have lost nearly a quarter of a trillion dollars over 19 months.

• October 2002: The company's workforce has been cut by more than 50 percent since the beginning of 2001. It announces plans to cut another 10,000 employees. Its stock falls to 58 cents.

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