the audit

Debits & Credits: the FT Investigates

Welcome to the fight, FT; Awol on Ranieri; counter-intuition discharge, etc.
May 27, 2008

A Credit to the Financial Times for a rare investigative piece, a well-executed probe into a bungled debt rating by Moody’s Investors Service and the subsequent cover-up by the firm.

According to the FT investigation—words we don’t see strung together often enough—a computer bug led Moody’s to give AAA ratings to something called (stay with us, now) constant-proportion debt obligations that didn’t deserve them, even by the already shaky standards of rating debt derivatives. The worst part, Moody’s knew its ratings were bad and didn’t tell anyone, and the FT has the documents to prove it:

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.

The FT’s story made waves immediately. Moody’s promised an investigation and the Securities and Exchange Commission said it would take a look, urged on by politicians.

To add to the journalistic excellence, the salmon sheet tacked on an in-depth look at the background of the ratings firms debacle that is a key factor in the credit crisis and reports more on CPDOs themselves (a side Credit to Money Week for this perceptive and on-the-money article about them way back in 2006).

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The package provides the kind of deep, confrontational reporting too often missing in the FT, which is usually content to post 400 words and be done with it. The Moody’s package is especially welcome at a time when The Wall Street Journal, which historically has used (and indeed, been the exemplar of) the American long-form approach much more, may be on its way to becoming FT II, in what Audit honcho Dean Starkman calls “the Anglo-ization of The Wall Street Journal.

If that’s the case, investigative efforts from the FT are especially needed. And even if it’s not, an FT investigative capacity is a welcome addition to the American journalistic landscape and a sign that the British paper intends not just to report but to lead.

Ranieri’s CA record: down the memory hole

A Debit to the financial press for its coverage of Franklin Bank Corporation naming an interim CEO after the company revealed “improper accounting” in its mortgage lending numbers. The company made its chairman Lewis S. Ranieri acting CEO.

It’s interesting news, and The New York Times reported it on its Business Day cover with the angle that Ranieri had been a sort of subprime Cassandra, “warning anyone who would listen that the housing market was about to collapse.”

The Wall Street Journal wrote about it on C2, and gives a bit of background, too, noting that Ranieri was a key figure in the classic Wall Street book “Liar’s Poker” who basically invented the mortgage bonds that led to the current crisis. Reuters mentions that, as well.

But none mentioned a germane piece of data for someone taking over a company in the midst of accounting woes: Ranieri has experience with accounting scandals. He was on the board of Computer Associates when it put itself through its long, crippling ordeal earlier this decade and was nearly shut down by a federal indictment in the $2.2 billion accounting fraud. is the only publication we can find that even mentioned his association with CA (in 2006 it renamed itself like most accounting frauds do).

One big shareholder filed suit last fall against CA alleges that Ranieri and former New York Senator Alfonse D’Amato “knew of and directed the cover-up of the fraud” and that Ranieri specifically met with an executive to tell him to lie. The exec is now in prison.

This is all information that readers should know.

Counterintuition runs amok

A Debit to Wired for its burn-the-village-to-save-it cover story on global warming in its June issue.

We know Conde Nast has got to sell magazines and all, and barring pictures of celebrity cellulite, nothing accomplishes that better than the Everything You Thought You Knew Is Wrong piece, but this is ridiculous. We’ve just about had it with this know-it-all journalism of unconventional wisdom.

The story is based on the highly questionable proposition that all that matters is cutting carbon to reduce global warming. Even if that were true, its recommendations seem tailored to be counterintuitive rather than, you know, for real. For example, Wired devotes a page to the notion that we should “farm the forests,” cutting down old-growth trees and planting new ones because it says trees start losing their carbon-dioxide absorbing abilities once they reach fifty-five years old.

After that, its growth slows, and it takes in less carbon. Left untouched, it ultimately rots or burns and all that CO2 gets released.

What to do with all those chopped-down old forests, like say the entire Amazon? Wired‘s answer: landfills. Really. We’re no climate scientists, but we imagine that wood rots in landfills, too, releasing gas that goes into the atmosphere. And where are we going to get landfills big enough? This is dumb stuff, folks.

We like a response from a commenter on Wired‘s Web site best:

J: what will you do with all that lumber? WIRED: ya know, build stuff.. we like technology!! J: but what? WIRED: um…a wooden shade circumscribing the whole earth to reflect the sun’s rays! J: oooh, a coffin.

Other recommendations from Wired: organics are bad, genetic engineering is good, etc. There are a couple of intriguing points, like driving a used car is better than buying a new hybrid (because of all the carbon emitted producing a new car) and air-conditioning desert homes uses less carbon than heating ones in cooler climes, but they’re undermined by the overall package.

Those of us on the lookout for this kind of thing can see this eye-roller coming a mile away (and not just because of the garish orange and green cover) with the cover headline “Attention Environmentalists: Keep your SUV. Forget organics. Go nuclear. Screw the spotted owl.”

But what about the general reader just picking up a mag for a long flight? We suspect pieces like Wired‘s just have the effect of sowing confusing and a throw-up-your-hands inertia in readers, and that’s a big disservice not just to its circulation but to everyone.

Perez-Pena’s strong WSJ coverage

A Credit to Richard Perez-Pena of the Times for continued good coverage of the turmoil at The Wall Street Journal. Perez-Pena has been ahead of the competition on the story with a number of scoops, including one last week about upcoming changes at the Journal and its stepsister, the Dow Jones Newswires, while at the same time maintaining a critical view of Murdoch and his intentions.

Going forward, Mr. Thomson will make cosmetic changes to The Journal soon, and will expand the newswires staff, particularly the number of reporters overseas, according to a person briefed on his plans, who insisted on anonymity because the News Corporation had not approved the release of the information.

While the Journal itself has slipped at times (though reporters Shira Ovide and Steve Stecklow did a good job of covering the Thomson news last week), Perez-Pena consistently has been on his game, as he was in holding Murdoch to account for breaking past promises (in nice, neutral New York Times-style language, of course) here in the same story, about the anticlimactic announcement of Richard Thomson as its top editor:

In an interview more than a year ago, two days after Mr. Murdoch’s bid for Dow Jones became public, he said he did not plan to transplant any of the editors of his other papers to The Journal and that he admired those who were already running the paper. But he added that he would call on Mr. Thomson, the top editor of The Times of London since 2002, for advice in running The Journal. The Times of London is also owned by the News Corporation.

Long form as we like it

A Credit to Fast Company for publishing Richard Behar’s twenty-two-page special report on China’s resource-grab in sub-Saharan Africa this month.

It’s a tale of economics, politics, and environmental degradation on the continent of Africa, full of incredible details (already more Chinese live in Nigeria than Britons did at the height of its empire) and rich writing (it’s hard to top a lede in which the writer’s own intestinal parasite from the Congo is a metaphor for what China is doing to the sub-Sahara).

While America is preoccupied with the war in Iraq (cost: half a trillion dollars and counting), and while think-tank economists continue to spit out papers debating whether vital resources are running out at all, China’s leadership isn’t taking any chances. In just a few years, the People’s Republic of China (PRC) has become the most aggressive investor-nation in Africa. This commercial invasion is without question the most important development in the sub-Sahara since the end of the Cold War—an epic, almost primal propulsion that is redrawing the global economic map. One former U.S. assistant secretary of state has called it a “tsunami.” Some are even calling the region “ChinAfrica.”

The piece is comprised of six parts, four of which are focused on individual nations: Mozambique, Zambia, Congo, and Equatorial Guinea.

In sub-Saharan Africa, the Chinese seem to be everywhere: clearing trees in Mozambique, drilling for oil in Sudan, digging in copper mines in Zambia, opening textile factories in Kenya, prospecting for uranium in Zimbabwe, buying cobalt in the Congo, laying expressways in Angola. They have launched a satellite from Nigeria and built phone networks in rural Ghana and a dozen other countries. Hospitals, water pipelines, dams, railways, airports, hotels, soccer stadiums, parliament buildings—nearly all of them linked, in some way, to China’s gaining access to raw materials. A $5 billion, 50-year government fund to encourage Chinese companies to invest in Africa. A $9 billion loan package for Congo. A $5.6 billion stake (20%) in Standard Bank, the biggest on the continent. And in April, $40 billion—plus in export-credit guarantees to help fund investment in Nigeria, Africa’s biggest oil producer.

As the editor’s note says, this is the kind of long-form journalism that creates a connection between a writer and readers. Good for Fast Company.

Portfolio vs. candor

A Debit to Portfolio for an insipid editor’s letter (a redundancy, we realize) that deems it uncivilized for former bosses to criticize their successors.

The Commentary uses Jack Welch’s pummeling Jeff Immelt, his successor as GE CEO, as a jumping off point for its misguided advocacy of “civil discourse.” Why would a business-journalism magazine hold up a prominent elder statesman of capitalism as crass for speaking the truth? All Welch said was that Immelt had a “credibility issue,” he didn’t say he had a loathsome disease. Portfolio approves of the “basic chivalry” of Welch’s untruthful—as even the magazine acknowledges—next-day retraction of his comments.

“So look for predecessor-successor noblesse oblige to fade away and for the start of an era in which a graceful departure at any rung of the corporate ladder becomes a quaint relic, an option rarely embraced. All this makes for terrific copy, but also for the most unwholesome theater.

These may be Manhattan dinner-party rules, but business is rough and tumble. Business journalism should be to a certain extent, as well.

It certainly shouldn’t advocate for self-censorship of the all-too-rare criticism we get out of corporations.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.