Debits and Credits

A.P. falls for McClatchy's hidden-ball trick; FT shines thrice, etc.

A debit to the Associated Press for getting spun by McClatchy Company on the fourth-quarter earnings of the country’s No. 3 newspaper publisher.

The AP headlined its story “McClatchy Swings to a Quarterly Profit.” Problem is, McClatchy issued its release before calculating a big charge that will more than wipe out that profit.

McClatchy reported preliminary fourth-quarter earnings of $30.1 million, saying these results didn’t include a charge for impairment of goodwill and assets.

The newspaper downturn has slammed McClatchy, especially since its disastrous 2006 acquisition of Knight Ridder, and its market value has been plunging. It will have to write down the value of the goodwill from the acquisition, something Alan D. Mutter, a media executive and former city editor of the Chicago Sun-Times, does an excellent job of explaining:

McClatchy said it would take a still-to-be-determined accounting adjustment to reflect the $602.2 million drop in the price of its shares in the fourth quarter of last year. Since the end of 2007, its shares have plunged another $173.4 million to close today at $10.54 per share. Thus, the market capitalization of the company has fallen in five months by $775.6 million from $1.6 billion on Sept. 30—a plunge of 51%…

Accounting rules require a company (like MNI) to take a charge against its earnings in the event the shares it issues to fund an acquisition (like KRI) fall below a certain level. The exact amount of the charge against earnings, also known as a writedown, remains to be calculated. It is possible that auditors will conclude the writedown should be less than the full drop in the price of the shares. If so, then the writedown of the KRI deal would be less than I have projected.

Now, the AP story’s second sentence does say that McClatchy will take a yet-to-be-determined charge, but it isn’t quite clear whether that charge will apply to the fourth quarter’s supposed profit and it certainly doesn’t give the reader needed context to understand that this seemingly good quarter was, in fact, terrible.

McClatchy’s press release is much of the problem here, though that’s certainly no excuse for the AP. The company put out its earnings without really knowing what they were, probably because markets don’t look too kindly on firms that delay their earnings reports.

Elaine Lintecum, McClatchy’s treasurer, tells us the charge calculation is complicated because the typical way of analyzing cash flow yielded no impairment at all so the company is having to use a different method that’s taking longer.

But Wall Street has so far been able to untangle tens of billions of dollars in losses and put out its quarterly earnings on time, and Gannett took a goodwill charge last quarter, but was able to make its deadline for the report.

McClatchy would have been better off delaying its report if it couldn’t get the math done on time.

Much credit to the Financial Times for getting the first sit-down interview with Mikhail Khodorkovsky—the oil oligarch who was once Russia’s richest man—since his arrest in 2003 on fraud charges.

Leaning against the bars, he looked gaunt and drawn on the ninth day of a hunger strike in support of an imprisoned manager of Yukos, the oil company he created.

He answered questions during a 40-minute break in a hearing related to new fraud charges against him.

Asked if he thought Mr. Medvedev, Vladimir Putin’s chosen successor as Russian president, could deliver the rule of law, the 44-year-old former oligarch said: “It will be so difficult for him, I can’t even imagine… . Tradition, and the state of people’s minds, and the lack of forces able to [support] any movement towards the rule of law, everything’s against him. So … may God grant him the strength to do it. All we can do is hope.”

Readers get a nice package to put the story in context. There’s a small biographical sidebar and a box with information about Chita, the “city of exiles,” where he’s being held. Online there’s a link to a transcript of the interview highlights, and there’s also an editorial about Khodorkovsky’s situation.

Well handled, well reported, well played.

Charles Duhigg at The New York Times has been doing engaging and extremely important investigative pieces on elder-fraud. But we give a debit to him and the Times for asking too much of readers in his story last Wednesday.

The story, about how Wachovia let telemarketers fraudulently access its customers’ accounts, jumps right into explaining how documents have surfaced in a lawsuit that indicate Wachovia knew about the illegal activity.

Documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims.

“YIKES!!!!” wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. “DOUBLE YIKES!!!!” she added. “There is more, but nothing more that I want to put into a note.”

The article convincingly reports that Wachovia acted in bad faith, but we’re told little about what the scams are and how they work. That’s a critical element of the story that should have been well explained up high.

Perhaps the Times thought its well-educated audience would recall the particulars of Duhigg’s fantastic original story on the scandal—a piece that brought about some much-needed changes in the industry.

But that story was published on May 20, too long ago for mere mortals to remember the details.

Asecond credit to the Financial Times for Martin Wolf’s column on the financial sector’s incorrigible habit of getting itself—and the rest of us—in big trouble.

Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward. …none of the financial crises of this period has gravely damaged the world economy, although some have devastated individual economies. But it is probably just a matter of time.

Wolf points out that those who cry “interference!” when regulation is mentioned benefit tremendously from the market interference that governments run for them all the time. Ever heard people say these Wall Street banks are “too big to fail?” How many other industries have the Federal Reserve essentially give them cash when they get into trouble?

A couple of numbers in Wolf’s column also stand out:

The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007, even though their share of corporate value added only rose from 8 to 16 per cent. Banking profit margins have been strong, until recently. Now, at long last, earnings per share and valuations have collapsed.

And here’s his takeaway, which we second whole-heartedly:

Optimistic opponents of regulation argue that the banks have learnt their lesson and will behave more responsibly in future. Pessimistic opponents fear that legislators might create a Sarbanes- Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse.

“Dream on” is my reply to the optimists. To the pessimists, I respond: yes, the danger of over-regulation is real, but so is that of doing nothing at all…

A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run.

The FT completes the hat trick this week with this story on what we consider a somewhat non-traditional recession indicator—the snub of London’s fashion week this year by U.S. luxury retailers. Yes, the impact of the fall of the American economy is showing up in even the most chichi sectors of global business.

American buyers from stores like Saks Fifth Avenue and Barneys are dissing the Brits because they say their designers’ products are too expensive, in part because of the decline of the dollar.

Buyers from flagship department stores such as Saks Fifth Avenue and Barneys are planning to make Paris their sole European fashion destination as the weak dollar and transatlantic economic worries force them into tough choices.

When Saks and Barneys start protesting “exorbitant” prices, you know we’re in trouble.

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Anna Bahney is a Fellow and staff writer for The Audit