Panelists question news media's role in stock market rise, fall

By Natalie Cortes
freedomforum.org

09.24.02

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ARLINGTON, Va. — Who's to blame, other than CEOs and accounting firms, for the chain of events that burst the stock market bubble? Some critics say the news media.

They say the business press helped to bolster the image of many companies with glowing reports from stock analysts and ignored the signs that the Enron collapse, among other big business failures, was ahead.

One such critic is Jeff Madrick, who believes the problem goes back to how the news media reported on the economic expansion that began a decade ago. He said the term "new economy" was "largely an invention of the press and of Wall Street, both of whom needed a big idea to make some sense of the economic boom of the 1990s."

Madrick, editor of the economics journal Challenge and a former finance editor at Business Week, was one of several panelists who participated earlier this month in the program "Reporting Business: The Media and the Stock Market Bubble" at the National Press Club.

Madrick said that the business press used "new economy" frequently but never pinned down what the term really meant, which led to a lot of misleading reporting and analysis.

"The press … turned from observer to participant in this process, from analyst protecting the public interest to participant often promoting the idea of the new economy, in large part, because they knew that's what their readers and viewers wanted to hear," he said.

According to Howard Schilit, president of the Center for Financial Research and Analysis in Rockville, Md., there are new economies every 10 or 20 years. Although those new economies may create changes in our lifestyle, Schilit says, not everyone benefits from them.

"What was tragic in the interpretation of the new economy in the last decade is that people thought this is the new gold mine, that everybody's going to get rich," Schilit said. "… even the leading companies that are developing the technologies for the new economy, history shows that very, very few of those companies will ever make money."

Schilit said that the news media "should have spent a bigger part of their time, not getting all excited about how wonderful and exciting this new economy is, (but) showing how it's going to affect certain types of businesses, certain industries."

Jack Ciesielski, the publisher of The Analyst's Accounting Observer, an accounting advisory service for security analysts, agreed that the complicity between the news media and Wall Street was evident in much of the business reporting in the mid- to late-'90s. "Everybody needed each other, and I think there was an extraordinarily large streak of cowardice on the part of just about everybody involved — the press, the analysts, Wall Street — in that if Business Week was going to run a story about the new economy, Fortune wasn't going to run one two weeks later and say there is no new economy," Ciesielski said.

Those who report on Wall Street every day say they rely on analysts for information about companies because they're considered the experts. But one of the biggest challenges, according to CNBC reporter Mary Thompson, is finding the dissenting voice on a company. "They don't want to come out and say which stocks they like and which stocks they don't like. So you're automatically dealing with this kind of wall."

But the CNBC reporter acknowledged that one way the news media could improve coverage would be to provide some historical context. "Whether it be what the last comments were from that analyst or if we are in a bubble as we were or a mania as we were, and say look at the last time this happened when we had the NASDAQ or any index jump 70 plus percent in a single year, this is what was behind it, this is what happened afterwards," said Thompson.

Media critics like Madrick have pointed to another factor which led the business press to provide mostly glowing reports about dot coms and companies like Enron — the quest for greater and greater profits on the part of the media. "Hi-tech advertising in the print media soared and forgive me, Mary, but Wall Street advertising on CNBC went through the roof. … There used to be something of a wall just like the wall between investment banking and brokering. … Nobody's going to go over to a reporter and say 'Do this story 'cause we want this ad.' … It's not explicit. It becomes … implicit," Madrick said.

Madrick said the news media rarely provided opposing views about the companies propelling the bull market because they feared they would lose part of their audience or readership. "The press was afraid to take the punch bowl away from the table." He added, "They're marketing organizations in many respects. The public wanted to hear how to make money so if you told them how not to make money, they would change the channel. If you told them they won't be able to make money, and because the media became obsessed with this idea of keeping their audience and making profits, they weren't about to get them to change."

Media outlets weren't the only ones who had an interest in promoting certain stocks, Schilit said. "The brokerage firms have two masters, they not only have investors like you and I, retail investors, institutional investors, but they have a very important investment banking relationship with the public companies," he said.

Thompson said she had never been told not to do a story because of advertising, but in light of what happened on Wall Street in the last two years, CNBC had taken some steps to give the public a more accurate picture of who the network's sources are. "What we're starting to do now is ask the analysts to disclose what their rating is, whether or not they hold the stock themselves and the investment banking relationship that their company has with that firm. So at least … the viewer gets an idea of, you know, there might be some kind of taint to whatever he is saying," Thompson said.

In light of the conflict of interest that many brokerage firms have in promoting certain companies, where do the news media get objective and accurate investment information? Schilit said from independent research firms like his.

"The bursting of the bubble made a lot of people ask questions they didn't ask before. ... most of the problems that have come out in the last year were misstatements in financial reports in the last five years. So was nobody reading the financial reports in 1998, 1999?" Schilit said.

One of the biggest problems lies in how corporate earnings are reported. Ciesielski specifically points to the difference in what's reported to the SEC each quarter, known as the 10q, and the earnings release that comes out two weeks before that. "I think that the fact that there was this 'firstest-with-the-mostest' kind of mentality, 'Let's get it out, we're going to have the earnings release. It's going to be like a Super Bowl party. You know we got to have it now and if the 10q comes out 45 days later or 35 days later or 30 days later, it's ancient history. We're already thinking about the next quarter.' And you know I think that the SEC missed a good opportunity to clean that up."

The danger, Schilit says, is that it's those earnings releases, which are often based on false and incomplete information, that move the market.

Madrick said companies like Enron and WorldCom were able to use those and other accounting gimmicks for so long because the press abandoned its traditional role. "My concern, getting back to the press, is they're about the only people who have a chance to do anything. The government generally doesn't do anything. … (The news media) are the public watchdog but nobody talked about being a public watchdog in the late 1990s," he said.

Thompson pointed to the added challenge of making sense of financial information, while reporting live from the floor of the Stock Exchange. She also said companies are very defensive when reporters come to them with questions about their financial reports and earnings releases. She says the companies sometimes refuse to explain what the numbers mean.

"You run into that a lot. I think … that should immediately raise … the red flag. If they aren't willing to be honest, if they can't communicate in plain English, then whatever they are saying, I think should be called into question," Thompson said.

Other accounting tricks such as recording bogus revenue, boosting income with one-time gains, shifting current expenses to a later or earlier period by capitalizing normal operating costs and failing to record or improperly reducing liabilities are ones which Schilit said the news media should have picked up on had they not been so focused on the "sexy story."

"During the raging bull market, the sexiest thing … was … the new economy … and it would have been wonderful if the media [had] said, 'Well, let me add more depth to this.' …They should be able to look at a filing from a company without the eyes of a Ph.D. in accounting, but just look at this and say, 'Does anything look odd about this?' "

The panel discussion took place on Sept. 9 as part of a partnership between the Newseum and the National Press Club.