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Asleep at the Switch?

Media correspondent Terence Smith explores how business reporters largely missed the impending implosion of Enron, the largest corporate bankruptcy in U.S. history.

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    Recent coverage of Enron's collapse has been exhaustive on television and in print.

    But weeks earlier when Enron declared bankruptcy on Dec. 2, most Americans and most reporters had no idea what the Houston-based energy concern did.

    The largest corporate bankruptcy in U.S. History merited only mentions in the media that December night and was not front-page news in most of the next morning's papers.


    Enron was especially well connected in the White House and in Congress.


    But now it's Enron all the time, thanks largely to the company's ties to the Bush administration and its showering of campaign money on Capitol Hill.

    The mere possibility of a political scandal and the convening of 13 separate congressional hearings into the matter have catapulted the star of the business pages to the front pages.


    This is an exclusive report, and it will come as a big blow publicly to Enron…


    But should those big blows to Enron have come sooner? Were reporters asleep at the switch?

    Since January, journalists have been forced to play catch-up on this story of financial chicanery. Enron's accounting slight of hand concealed and buried in dense financial statements went largely unnoticed until the end.

    One reporter who did try to examine Enron's suspect books was Bethany McLean of Fortune magazine, who questioned Enron's stock value last March.

    McLean says the lesson reporters should take away from the Enron collapse is quite simple.


    It's a really important lesson for reporters to keep in mind, as well as other supposedly sophisticated people, that sometimes the most obvious question really is the question. In Enron's case: How do you make money? It's such an obvious question that you almost feel stupid asking it.


    From the tone of reporting on Enron before its collapse, very few in the media asked that question.

    Instead, former CEO Kenneth Lay, now disgraced, was lauded as a visionary; his company showcased as a cutting-edge giant of the new economy. Not until the house of cards came crashing down did the true picture emerge in the media.


    Joining us to examine the media role in the Enron story are three business journalists who have been monitoring it closely.

    Correspondent David Faber covers Wall Street for CNBC, and hosts the "Faber Report" on the cable channel. Jeff Madrick writes a column for The New York Times, and is also editor of Challenge magazine, an economics journal. And U.S. News and World Report assistant managing editor Jodie Allen edits the business and technology section of the weekly magazine.

    Welcome to you all three. Jeff Madrick, how would you rate the coverage of Enron, the media coverage of Enron before the scandal broke?


    Well, I think I have to be a little extreme about this. I think it was pretty outrageous. The idea of saying the media were asleep at the switch mischaracterizes what happened.

    The media in many ways told the biggest whoppers about this company that could be told. They tended to be credulous about what analysts said. As we all know, Fortune magazine before the final report labeled Enron the most innovative company in America four or five years in a row. Fortune was by no means an exception.

    But what the media also did, Enron apart, was create an environment, an attitude about the new economy that was so enthusiastic and so beyond a true economic foundation, that you could believe almost anything.

    The media became a participant in the new economy, when its real mission had always to be something of a public watchdog, something of an observer leaning against the wind. Now it's blowing as hard or harder indeed than anybody else.


    Jodie Allen, complicity; that's a pretty serious charge.


    Well, I think that there is some reason to support it. There is no question that especially, and I'm sure David will want to argue with this, on the television cable networks, they thrived on the bull market. They got their popularity from touting stocks. They were part of the online trader ethos.

    On the other hand, I don't think it's quite fair to just broadly condemn all the media. Some people were following, were raising questions, but it has to be said that Enron discouraged the kind of simple question that Bethany McLean so rightly points to; that any reporter that asked them, "well how come your cash flow would be negative if it weren't for your tax breaks." "Oh, you just don't get it" they would say and they would call up as they called some of our sources, after we ran in US News a critical piece early in the spring, and they would go to the head of the firm, whether they went to Fortune and criticized McLean's article — they would go to the analysts and they would say these people are wrong; they're wrong all the time.

    So they made it awfully easy for the media, like the analysts, to become cheerleaders.


    David Faber, cheerleaders?


    I don't think so. I don't agree with that contention. There is no doubt that during the bull market CNBC and other television outlets as well as the general press in print were a participant to a certain extent, may have glorified certain members of management and the overall sense was certainly a positive one.


    Why? If they did, why?


    It was a function of the times, I think, to a large extent.


    And you know it's interesting because as a journalist, when you pursue a story, you look for feedback and you look to see what is the response. I did plenty of negative stories through the years on all sorts of things. We were very early talking about the conflicts analysts face on our show "Squawk Box." Six years ago we talked about it.

    And yet people, when you broke a big story, for example, about fraud at a Waste Management or a Cendant or a Rite-Aid or an Oxford Health, all which have occurred in the last five years, the response wasn't necessarily as encouraging as you might have expected to go after it even more. I think that changed.

    I think that Enron is a special case. It was not disclosed. It was not there for us to see. It has widely been described as one of the largest companies in the country, although that is not really accurate. Nonetheless, that added to it. The political ties are another key.

    And, most importantly, it came at the end of the bull market or in fact in the middle of a very brutal bear market when people's attitudes had changed.


    Jeff Madrick, is Enron an isolated case, or is it endemic, is there a coziness in your view between the business press and corporate America that goes beyond Enron?


    You know, I don't think there was ever a golden age in financial and business journalism. But I think once business journalists looked on themselves as public watchdogs. They were skeptical by nature.

    I don't think it is a good enough defense to say we weren't encouraged by our audience when we reported on these events. They didn't like it. That's the very point.

    What happened to journalism somewhere along the line, I think more so in TV, but certainly in print as well, is that they began to worry about the readers' reaction, the audience reaction, the corporate reaction, the so-called Chinese Wall in journalism between advertising and business, and what you reported as a journalist may have been violated somewhere along the line. So I do think it is endemic.

    Characteristically what has happened is journalists have come in after the fact. But in the meantime they've promoted the same kind of values that they seem to be decrying after the fact.

    So I find the lack of willingness to accept responsibility for this quite disturbing. I think there should be all kinds of soul searching in the boardrooms of the journalistic outfits right now because the fact is they contributed to this environment.


    Jeff, there were many, many stories that came out in the last years and in the bull market about the bubble we were in, to a large extent, about the incredible payments being made to corporate managements, the options packages.

    I would go on every morning and do these things I ended up calling annoying comparisons where I would say Yahoo's market value equals that of Viacom, Disney, and what was Time Warner at the time.

    Many of the media did do that. Whether or not it fell on deaf ears is not our fault, I don't think, and I don't think that's our responsibility.


    Let's let Jodie Allen have a word here.


    I think that's right. We ran, you know, a when is the bubble going to burst cover, I don't know, two or three years ago and we took a certain amount of scorn for it at the time.

    But, on the other hand, it is hard in this particular kind of scandal to draw attention to because it is a green eyeshade scandal.

    It is very hard to go to your executive editor and say, gee, we really want to do this piece about Enron's 10-K filing.

    It's hard if there is– look at Arthur Levitt's problem when he kept pointing to this built-in conflict of interest about accountants who do both consulting and auditing for a firm — never mind the fact that they're paid by the firm for both. And he couldn't get — everybody kept saying what's the harm?

    There was no colorful figure. It's not easy. On the other hand, we do love scandal, and given an opportunity, we are usually criticized for liking scandal too much, not too little.


    Jeff Madrick, is it reasonable to express– is it reasonable to expect the press to cover and report on that which the industry did not?


    I think it is reasonable for the press to start acknowledging that there are severe conflict of interests among their sources.

    And I think the defense is and always has been, look, we did six stories about this and two stories about this and nobody cared. Anybody who watches TV financial news, anybody who has been reading the press, the major magazines, and to some degree, a lesser degree newspapers, know that the environment in those newspapers and TV has been extremely enthusiastic. It has contributed significantly.

    Is it fair to say you didn't uncover Enron specifically? Maybe not. But in the context of what's been going on, I think probably yes.

    The press reported whoppers that analysts told and the press knew that analysts had severe conflict of interests — vested interests.


    David Faber, is there any news skepticism on your part, on your network, or is the in the business as you understand it, any reevaluation of corporate coverage?


    I'm sure that there is a new focus as there is now of course in the investing public overall with regard to any financial disclosures. I always have viewed myself as a skeptic in all of my reporting.

    If I could have found an Enron, would I have been so happy to have broken that story — of course, or any other fraud for that matter, if in fact that is what took place there, which appears to be the case.

    Those are very, very hard stories to find. They take an enormous amount of time, which is a resource that there isn't a great deal of when you're at a major news organization. So, sure, you know, would I have loved to, would any reporter have loved to? Yes. Do I approach things differently? No. I always have been skeptical. I think most of my colleagues on television and certainly in the press, in the print press, share that skepticism.

    Will we look even more skeptically? Yes, there is no doubt about it.


    Well, Jodie Allen, are there more Enrons out there right now that the press should be looking at, looking into?


    Well, Terry, that's the question right now, and you can be sure whether we're late to the game or not, that's what we're pursuing.

    There is the contrary danger though, too, and I have gotten calls from several firms saying, hey, wait a minute, just because we have an off-balance sheet partnership doesn't mean that we're an Enron. And what we're doing is perfectly legitimate. And our stock is getting killed.

    So at the moment, there's a lot of sort of loose kind of throwing around of allegations. It's going to take sometime to sort that out, but you better believe there is going to be at least, for a while, a lot more attention paid to balance sheets.


    Jeff Madrick, do you have any confidence in that?


    I don't have a lot of confidence in it because I don't see the press admitting what they've done. I've been in this press for a very long time. There are lots of good people. There were lots of exceptions.

    But the general enthusiasm, the ethos was not given to finding Enrons.

    As David said, indeed at the beginning in his first comments, he said there wasn't encouragement for this kind of thing. It's time to start assessing that. It's time to start assessing why.

    The fact of the matter is if you were a nay-sayer in the new economy environment, there is a threat of losing audience, a threat of losing readership, and a threat of losing advertising, especially high-tech advertising.

    It is time to face up to this stuff and I'd love to see US News and CNBC assign a reporter to talk about their own journalism, the quality of financial journalism across the board.


    In just a few seconds, Jodie Allen, you were shaking your head.


    I just wanted to say and repeat what David already said. And that is I think Jeff is wrong. If anyone could have found the Enron scandal, if we had been smart enough — and maybe we weren't — we certainly would have been delighted to write about it.


    All right. Jodie, David Faber, thank you very much, all three of you very much.