Readers know errors are a fact of newspaper life, and business-press readers are no different.

Errors are to be regretted, of course. To the reporters and subjects involved, they’re no laughing matter. But, to the rest of us, let’s face it, they’re basically a nonevent, right? We expect them. We understand. I usually don’t read them, except for their Onion-esque qualities:

An article in Business Day on Friday about favorite gadgets of executives referred incorrectly to the video game Gran Turismo 5. It has not yet been released, and thus is not a best-selling game.

That would follow logically, yes. Anything else?

The article also referred imprecisely to the game Halo 3. It is the first game in the Halo series designed for the Xbox 360; the earlier games, though playable on the Xbox 360, were designed for the original Xbox.

Ah. Thanks.

The chip in the Xbox 360 also was misidentified. It has a Xenon chip, not a Cell processor.

Hey! Stop that!

And the article also misstated the price of the Sony PlayStation 3. The PlayStation 3 starts at $399, not $299.

Finally, the reporter who wrote the article has not been incinerated by the new death-ray feature of the PlayStation 3; there is no such feature. He was in fact digitized by Apple’s Transmogrifier VII and fed into Gran Turismo 5,where he was tragically struck and killed by a virtual garbage truck.

Okay, we all have bad days.

But there are corrections, and then there are corrections. Some errors and the news organization’s response can point to larger problems.

A month ago, The Wall Street Journal ran a page-one story that said Merrill Lynch & Co. had engaged in off-balance sheet deals with hedge funds designed to hide mortgage losses, or delay their recognition.

“Deals with Hedge Funds May Be Helping Merrill Delay Mortgage Losses,” read the headline.

The story said the deals—plural—are “likely” to be “examined” by the Securities and Exchange Commission.

A summary box said the investment bank has been “off-loading” some of its mortgage-related assets to hedge funds. The story raised a parallel to Enron Corp., one of the worst criminal white-collar fraud cases in U.S. history, and said:

At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors.

This raises the temperature, as we’ll see below.

Last week, the paper ran a 120-word correction on page A-2 that said that, in fact, there were no deals, or any that it could document. Merrill proposed a—singular—deal that matched the original story’s description but never consummated it. The proposed deal was stopped after Merrill’s own finance department found it didn’t meet accounting rules, the correction says.

In attempting to meet its obligation to deliver reliable information of significance to its readers, the Journal, in my view, failed twice—first with the error, and then by publishing a correction that was inadequate to the scale of the mistake.

So, before we close the book on this one, it’s important that the Journal doesn’t fail a third time by drawing the wrong lessons from the episode.

A couple of thoughts on the story itself:

This was a high-risk, investigative story about a complex subject involving an important Wall Street player. As a general matter, these stories are to be encouraged. The story itself, if it had held up, was reasonably important and interesting. On a scale of one to ten, it was about a seven, and, so, worth taking some risk.

If Merrill had been hiding its mortgage risk through off-balance sheet deals, that would be important to its investors, but for the rest of us, too, since the deal would raise the question of how many of these deals Merrill had done, whether other banks had done the same, and whether the bottom of the mortgage crisis was deeper than even pessimists had thought.

Also, it should be said, the Journal story breaks the news that Merrill was in fact shopping such deals with hedge funds.

Why only a seven, then? To me, the likelihood that the practice (even if Merrill had completed the deal) was widespread seems low. More likely, the story is fighting the last war, the Enron scandal. Plus, in the end, this is an accounting story that, even if it were true, aimed at the margins of the crisis. We are learning that the predatory practices and boiler-room mortgage operations that could impoverish hundreds of thousands of middle- to lower-middle-income strivers—many of whom will lose homes they already owned before letting mortgage snakes in the door—is largely a creation of Wall Street. The subprime story is bad enough, all by itself.

The error was a reporting and editing screw-up, without a doubt. The story was based on a “person close to the situation” who turned out to be wrong. The fact that the story relied on a single source is problematic. Two sources are better. The paper took a risk. But, then, sometimes a single source really is that close to the situation. There’s no rule. I’m confident that the author, Susan Pulliam, an experienced and distinguished reporter, and others involved, tried hard to get it right, and just didn’t. In the end, it was an honest mistake, albeit a bad one.

To leave it there, though, seems wrong. Reporters and editors don’t operate in a vacuum. Journal staffers, I would argue, have been operating lately in a vacuum cleaner, an Oreck of uncertainty and generalized chaos, almost entirely of senior management’s making.

The subprime story broke, I’d say, on March 2, a Friday afternoon, when New Century Financial Corp., one the new breed of subprime giants, slipped an announcement onto the wire that Wall Street had cut off its credit and that federal prosecutors had opened a criminal probe of its accounting and the trading of its stock.

At the time, remember, the Journal was in the middle of an unnecessarily protracted and, apparently, bitter contest to succeed Managing Editor Paul Steiger. In March, a new editing team on the Money & Investing section, which had the main responsibility for subprime, was announced but didn’t take over until later.
In mid-April, Marcus Brauchli was named to succeed Steiger and began to reshuffle the main newsroom. So, they were busy.

Two few weeks later, Rupert hits the fan. News Corp. announced its bid for the Journal’s parent, Dow Jones & Co., touching off a tumultuous summer of front-and-back stabbing among senior managers and editors, and creating fear, loathing and uncertainty for everyone else.

That went on until the end of July, when Dow Jones’s controlling Bancroft family agreed to the News Corp. deal. Meanwhile, the subprime story is about to engulf the financial world in mid-August.

The trouble with being the Journal is that there are certain stories you have to own. Subprime is one. I’d argue, subprime is the Big One.

Add to mix the long-term story: the Journal’s parent has been in a decade-long decline, underperforming even its media peers.

The talent train at the Journal has for years generally headed in one direction: outbound.

Now, The Audit has learned, Polk-Award winning Michael Hudson, who was reporting on subprime back when most business reporters thought it meant a tough steak at Smith &Wollensky, has left the Journal to write a book, among other projects. Too bad.

All of these factors have not created a lively, carefree atmosphere, put it that way. Tense organizations press.

Well, maybe now things will calm down. Whoops! There goes the C.E.O.

These, Audit readers, are institutional issues. Creating a stable environment for journalism, having the right people in the right place at the right time, allowing them freedom to maneuver, that’s what senior management is supposed to do.

As for the correction, read it yourself; it’s short enough.

Corrections & Amplifications:

This article was based on incorrect information that the Merrill Lynch & Co. 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.

To readers who are not partners at Gibson, Dunn & Crutcher, the correction suggests that a single fact in a story published three weeks earlier was wrong. In fact, the main premise of the story collapsed. To say a story “was based on incorrect information” is a lawyerly way of saying it is “baseless.” This highly engineered correction is really a retraction in disguise.

The issue is precisely the one the WSJ presented in the original story: how does that phrase go?—“whether there was an attempt to sweep problems under the rug through a private transaction kept out of view of,” in this case, readers. I’m not sure readers were put first here.

And, by the way, I give zero credit to the fact that Merrill was apparently satisfied with the wording. That outfit is in no position to play the victim publicly, and its media staff is smart enough to know it. Its interest is in keeping the S.E.C. off its back. Beyond a carefully worded internal memo,
the bank is wisely laying as low as a snake in a stampede.

Okay, what are the lessons?

First, no more big mistakes, if you can help it.

Second, if you make one, be confident in the correction; err, if you will, on the side of clarity, especially in stories actually about transparency.

Third, as News Corp. takes over, the Journal has two choices: to pull back on financial investigations or to increase its commitment and devote even more resources to them.

I say, double down.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014).

Follow Dean on Twitter: @deanstarkman.