WSJ Re: Merrill Lynch: Authority in Mainstream Media Takes a Hit

One of the big knocks on the blogosphere as a source of news and insight is that the content created is often of questionable authority. From whom are these views coming, anyway? Given this, how can the reader assign much weight to what is written? Sure, there are a handful of "cross-over" content creators who pen for alternative media outlets but are really mainstream writers in bloggers' clothing, but they are in the minority. Authority is the bugaboo of the blogging world. But this is clearly not a problem in the world of mainstream media (MSM) because of the editorial review process and the standards to which content creators are held, right? WRONG.

Consider a little snafu over at the Wall Street Journal. Felix Salmon pointed out today that the WSJ just corrected a front-page story from three weeks ago that showed their reporting to be something other than rigorous, balanced and professional. Consider this lead in from the original WSJ story dated 11/3/2007:

Deals With Hedge Funds
May Be Helping Merrill
Delay Mortgage Losses

By SUSAN PULLIAM
November 2, 2007; Page A1

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

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That was then, this is now. The correction to the story above, dated 11/26/2007:

ON NOV. 2, the Journal published a page-one article on Merrill Lynch & Co. that was based on incorrect information that the firm had engaged in off-balance-sheet deals with hedge funds in a possible bid to delay the recognition of losses connected to the firm's mortgage-securities exposure. In fact, Merrill proposed a deal with a hedge fund involving $1 billion in commercial paper issued by a Merrill-related entity containing mortgage securities. In exchange, the hedge fund would have had the right to sell the mortgage securities back to Merrill after one year for a guaranteed minimum return. However, Merrill didn't complete the deal after the firm's finance department determined it didn't meet proper accounting criteria. In addition, Merrill says it has accounted properly for all its transactions with hedge funds.

Now when I read something in the WSJ, I have come to believe that the story is truthful, well-researched and generally relevant. So when I cite the WSJ as a source in posts that I write I view it, from a factual perspective, to be correct. Well, I had given the WSJ my trust when I wrote the following post, only to be proven wrong and made to look like a jackass:

The Root Cause of Today's Market Turmoil?: It's a Matter of Trust

Trust in our government. Trust in our financial institutions. Trust in those who play the role of "trusted adviser," regardless of whether or not they are considered fiduciaries by law. After taking a big step back and asking the question "Why are the markets trading so poorly, and why are financial institutions in particular getting crushed?" the answer boiled down to one word: trust. Or the lack thereof, as seems to be the case today.

The last few days the buzz has been about Merrill Lynch, and the possibility that they've been trying to engage in cosmetic balance sheet transactions to make things look better than they really are. From today's Wall Street Journal:

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

********************

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.

In a statement, a Merrill Lynch spokeswoman said, "We don't comment on specific transactions and we are confident in the appropriateness of our marks."

Whoa. Now as one who has trafficked in the world of structured transactions for the bulk of my career, I can tell you that this type of "creative balance sheet management" has been going on for decades. No joke. And in the wake of Enron, things were supposed to have changed, where "sham" transactions (those without true economic substance, or where the transfer of risk didn't truly take place) were supposed to go the way of the buggy whip. Well think again, friends. There is a fine line between risk retention and true risk reduction, and if what's described in the WSJ is true, these deals are all about balance sheet presentation and have nothing to do with risk reduction. And FYI, Merrill Lynch shareholders, your firm is paying money, your money, to effect this optical illusion. So not only is there a breach of trust, you are paying for it, too.

Breach of trust? Tell me about it. I'm pissed. Really, really pissed. I had the title right but the subject wrong: Media: It's a Matter of Trust. And my trust and those of millions of others has been breached. The New York Times had their own problems with the Jayson Blair fiasco, and many other breaches across mainstream media have recently come to light. So the next time someone from MSM blathers on about how the user-generated content is a bunch of garbage and that MSM is the only source of truthful and authoritative news and events, I'm going to pull up this post on my Blackberry and promptly say "SHUT UP."

Comments

[David Harper]

Roger,

I just added your blog yesterday. I didn't mean: you (generally) give fin'l blogs a bad rap. I did mean: this is an example of why fin'l blogs get a bad rap. I have no comment on your broader blog. I wanted to illustrate the irony of trashing your only source (and to say: if your article is almost wholly derivative of a single source, it should, IMO, also take ownership for the error). My reasoning isn't personal/emotional/broad, that I'm aware.

[Roger]

David, deep breath. Calm down. So first, read my blog. I do, in fact, sometimes use articles in MSM for the basis of certain of my posts. This is not regurgitation. There is generally significant additional commentary and analysis provided that enhances, adds to or critiques the article in question, and sometimes brings the discussion in a different direction. I also write a lot on topics and issues that in no way refer to MSM sources. So if you don't like this, too bad. Don't read my blog.

I am not a journalist and have never purported to be one, either. Some bloggers are and put themselves forth as such. I am not and have never pretended to be. So there.

The post I wrote on November 3rd did qualify the WSJ story, saying "...and if what's described in the WSJ is true..." Also, the Merrill claim was particularly poignant given the abundance of similar transactions done in prior years for similar purposes. As I am not a journalist, the whole retraction concept is anathema to my blogging. I made my readers aware of the issue, discussed it and shared my thoughts. Again, like it or not. It's my blog and this is what you'll get if you read it.

Sorry if you feel I am a cause for giving financial blogs a bad rap. I respectfully disagree. You clearly don't understand why I blog, and if most of my readers felt like you they wouldn't read me. But they do.

[David Harer]

Baloney.

This is exactly why the financial blogosphere gets a bad rap; i.e., as merely derivative of the real press.

You cited a single article as your source, without any verification, corroboration or journalistic fact-checking. The WSJ made an error, and so did you. Two errors, not one. Felix Solomon added value by being skeptical, by adding his analysis. You parroted the article. By my analysis, the WSJ was 90+% accurate on 11/2 (i.e., 1+ errors out of of XX articles). Your error rate on this day was 25% or 50% or 100%, etc. (if you posted 4, 2 or 1 time)

The other difference is the WSJ retracted. You did not retract, you blamed your only source.

[Bill aka NO DooDahs!]

"Now when I read something in the WSJ, I have come to believe that the story is truthful, well-researched and generally relevant."

Good, the first step is IDENTIFYING the problem!

The next step is deciding what action to take.