Reporting the crisis….the media + the Valukas report

into Lehman’s bankruptcyEwald Engelen, Sukh Johal

+ Karel Williams

Overview

• Try to understand more about media reporting of the financial crisis by focusing on media coverage of the Valukas report on Lehman

• Two parts • (1) what we now know about prelude to

Lehman’s bankruptcy from the Valukas report ( 2,200 pages from the court examiner, released 12 March) + the immediate reactions of those criticised

• (2) the role of media reporting …what they did and didn’t do? News, analysis, op ed, editorial etc etc (mainly from the FT 13 March)

(1) What we know(after Valukas)

background….

“Just the facts, M’am”(Joe Friday, Dragnet, 1951)

• Release of Valukas report into collapse of Lehman Bros (3 am GMT on Friday 12th, March too late for FT on Friday…)

• Central charge against Lehman senior management (with collusion of auditors and lawyers)

• Lehman entered into undisclosed repo transactions which reduced leverage/dependence on borrowing at ¼ end

• Lehman window dressed its balance sheet by up to $50billn + deceived credit raters and investors about its risk taking + solvency

How a Repo 105 is used to reduce leverageHow a Repo 105 is used to reduce leverage

Or how to hide liabilities of $50bill.Or how to hide liabilities of $50bill.

Lehman Lehman BrothersBrothers

CounterpartyCounterparty

sell 105% of the assets of cash received

Pay cash

Tra

nsa

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to

acco

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tin

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per

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d Lehman assets transferred to counterparty

Counterparty cash used to

reduce liabilities

Transaction used to reduce leverage

(Different accounting period to Lehman)

Lehman Lehman BrothersBrothers

CounterpartyCounterparty

Cash plus interest

Assets returnedT

ran

sact

ion

af

ter

the

acco

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tin

g

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en

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Counterparty paid cash for the assets

plus interest

Cash + interest paid for return of

assets

Transaction reversed

(Different accounting period to counterparty)

“it wasn’t me” excuses from those criticised

• FT of Saturday 13th ( 21 hours after Velukas) :

• Dick Fuld CEO: either didn’t know or didn’t understand: e mail trail? His lawyer claims Fuld had no computer + couldn’t down load attachments on his Blackberry

• Linklaters; now claims its legal “opinions” of English Law were not “ wrong or improper” (repo 105 was definitely not a true sale under US law, hence Lehmann came to London… )

• Ernst and Young: did not query or challenge 105 but now claims that 2007 accounts were “ fairly presented in accordance with US GAAP” (the worst of the window dressing was in 2008….)

So what… from “bad bankers” to fraud ?

• Will excuses save reputations or keep senior players out of jail/ safe from consequences?

• (a) senior Lehman execs (eg Fuld + CEOs)+ non excs on board: see no evil…

• (b) advisers like E + Y or Linklaters following rules and

• How should we understand all this? internal differences in FT

• (a) Lex column 13th March “ another Enron style accounting scandal”( what did Sarbanes Oxley achieve)

• (b) FT editorial 13th March Lehman chose to “ kee trading in the hope of resurrection”

(2) The role of media reporting

through lens of

FT, Saturday 13th March…..

What the journos did do(after Velukas was published)

• What were the sources for the 13 March page 6 analysis story by Guerrera et al.; when did they start working on this story ? How long did it take start to finish? Was it desk research, phone/interview or archive? Is it tentative or know it all in tone? What will the journos be doing next week (G’s last credit on March 9th story about PE buying banks).

• What does the Linklaters story 13 March p 7 by Murphy et al add; what are the sources: what did they do before writing? Whose world does it describe. What does it tell you?

What the journos didn’t do(before Valukas published)

• Why did no journalists get to the repo 105 story before Valukas published ? (emails show pre crash Lehman insiders discussing repo 105 as a “drug” etc) :

• Separately consider different sections of the press:• (a) prestige Anglo American business newspapers +

weeklies eg Wall Street Journal + FT + Business Week + Economist

• (b) rolling business news eg Bloomberg + other service providers eg the Deal ..

• © liberal crusaders eg the Washington Post or the Guardian

Why do editors limitinvestigative time and money ?

• How is reporting affected by media business model issues (ie decline of advertising, falling circulation, difficulty of charging for web content)

• How is reporting affected by the political relation of business to power; how much of the press/ the business press wants to be a fourth estate?

• What are the costs of getting it wrong and being successfully sued? What are the rewards for getting it right? What proportion of investigations succeed in generating major stories?

• If the political reach of the old media exceeds its grasp, what if anything should be done? Will new media and bloggers change the balance? Or should the old media be subsidised ?

“Me too….” as everybody now joins in

• Why is Repo 105 now an attractive story for everyone? Looking at the average story in prestige business newspapers + weeklies eg WSJ + FT + Business Week + Economist, (a) how much of Valukas will the journo read (b) what other primary sources are used © how much depends on clippings

• How much effort or risk is required this week to cover the Velukas/Lehman story for Le Monde or Le Figaro, Die Welt or Frankfurter Allgemeine Zeitung to cover Valukas on Lehmann?

• Everywhere else? is this a big story in small peripheral European countries? If not, how and why not? Is geography important ? Is Eastern Europe different from Western Europe

What do editorials and op ed columns add?

• Newspapers like the FT carry signed op ed columns as well as traditional anonymous editorials: is free opinion + comment a good substitute for investigative news reporting?

• The FT’s Lex column of 13th March on “Enron redux” written for fund managers versus the FT’s first editorial on “ trading in the hope of resurrection” with a more general audience; what ‘s the difference of line? how and why do Lex and the editorial writer disagree? Do their positions predate the occasion? Are their views changed ist disagree?

• Are the columnists doing anything more or different from the commentators on a tennis match? What is a good or bad commentary? Can you follow tennis on tv with the sound turned down?

What about the big picture? where’s the map of the crisis?

• Does journalism provide the big picture ? in op ed + opinion columns if not in news stories or features?

• Is there any clear connection between the Valukas/Lehman story and all the other stories about crisis (eg week before last on Geithner and the Europeans disagree about reform)

• If we don’t have a big story (a map of the crisis), how can the media explain to threst of us what’s gone wrong./ going on?

• If editors won’t give journalists, three weeks of time to research what’s interesting, don’t journalists need a (big) story before you write the news story; wouldn’t a box diagram help?

Mapping the crisis… 1. State

Cause: political intervention: Community Reinvestment Act, Ownership society

Solution: more market, less state

Who: Taylor 2008; McDonald & Robinson 2009; Clark 2009; Friedman 2009

3. Sell side

Cause: Bonus driven bankers > complex products + hidden fees and risks

Who: Tett 2009

Solution: higher capital adequacy ratios, ethical standards, lower bonuses, claw back facilities, Volcker rule, utility banking

Who: Heemskerk 2009; Kay 2009; Williams et al. 2009; Commissie Maas 2009; The Warwick Commission 2009; Reijngoud 2009

5. Not enough rationality

Cause (a) greedy financial elite (b) < info, transparancy,

Solution (a) end neoliberalism, cage finance (b) more markets + financial innovation

Who: Auger + Tett 2009, Shiller 2008; Akerlof & Shiller 2009, Kay 2009

2. Market

Cause: too much deregn. Iberalization, reliance on self-regulation and perfect markets

Solution: more + stricter regulation

Who: Borio 2008; FSA 2009; EC 2009; The Warwick Commission 2009

4. Buy side

Cause: macro imbalances, Asian savings (commodity prices, demog. + export surpluses), low interest rates + chasing alpha by instns + SWF, PEF, HF..

Solution: balanced FX rates, > dom consumpt in BRICS, higher household savings + financial infrastructure

Who: Fox Gotham 2009; Clark 2000; Toporowksi 1999; Blackburn 2006; Wolf 2008; Münchau 2009

6. Too much rationality

Cause: unintended consequences + bricolage by incentivized agents

Solution: humility and prudence; complex agency requires simplified finance

Who: Engelen et al. 2010; Williams et al. 2009; Velthuis & Noordegraaf-Eelens 2009; Tett 2009; Kay 2009; Friedman 2009