14th September 2012
Richards believes that this is a problem for markets because no-one is holding corporate managers to account: "In one view managers are less likely to furtively steal their shareholders' business if they are placed in the danger of possible exposure by financial journalists. This argument sees journalists as gatekeepers, helping to keep the majority of managers on the straight and narrow.
"This would suggest that the role of financial journalists is critical to the good functioning of markets and the way that they're treated by regulatory bodies argues that they share this apprehension."
Certainly financial journalism has its problems
Relatively few news organisations have the money or inclination to support investigative journalism. The Internet has rendered many journalists desk-bound, bashing out press releases to draw traffic to their site first. Press officers have become more controlling. Quote checks are an increasingly regular condition for 'access' to senior management, the cheekiest will ask to see a whole piece before it goes to print. And certainly, elements of the press are prone to creating heroes out of CEOs who have been nothing more than lucky.
But so do economists and regulators
But actually, journalists have generally been closer than economists or regulators when predicting market crises. Perhaps no-one predicted the scale or the reach of the credit crisis, but plenty were highlighting problems ahead of the Lehman's bust in 2008. Gillian Tett of the Financial Times is well-known as the journalist that predicted the credit crisis, but it is informative to look at some of her articles in 2006.
In this piece, she discusses correspondence from an anonymous source within one of the investment banks: "He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital – a 2% price decline in the CDO paper wipes out the capital supporting it." This is the best combination of modern and old school journalism – using a network of contacts to raise issues in a blog.
But it was not just the eminent Ms Tett raising concerns about the levels of debt.
"….the entire financial industry has boxed itself into a corner. Prices simply have to keep rising to make the leverage look rational – and route one to pushing up prices is to raise gearing again. And so runs every bubble, from the South Sea Bubble with its part-paid subscriptions right through to the 2000 top with its margin-trading and brokerage accounts opened by credit card.