It seems to me that the folks at Forbes magazine and The Wall Street Journal have a deficiency in their headline-writing departments. Both in the past week have filed stories under headlines that are simply needlessly inflammatory. To the savvy -- I would include anyone with half a brain who actually reads the articles -- these types of articles can in no way burnish these journals' positions as honest brokers.
I call it the Woodwardization of journalism. To become famous as a journalist, the quickest path is to take down a giant. Woodward and Bernstein at The Washington Post
Unfortunately, it also attracts other journalists who see taking down something big as the way to write their meal tickets in life. It means that the rich and the famous are always at risk of taking shots from the Fourth Estate, even unfair ones. Whether those shots are fair or "sexed up" is left to the reader to discern. It should also be noted that the big scoop is the stock in trade of the newspapers as well -- for-profit enterprises all. Dow Jones
That foot is me
It seems that even simple news stories have to have extreme-sounding headlines on them to attract readers. Today I did my everyday scan of the news and noticed this "bombshell" from Forbes:
"McDonald's Option Expensing to Pressure Earnings"
It wasn't a very long piece, but it noted that McDonald's
Yet the headline reads as if something bad, or even economically meaningful, is going on at McDonald's. It isn't: The company is just making its financial statements more useful for investors. There's no sense that this is an accounting change rather than an economic one, and there is no sense in the headline that stock option expensing is optional for companies. McDonald's is doing something that I think is positive, yet Forbes' headline cites pressure. This is completely bogus, but it is clearly in Forbes' interest to ensure that people read the article.
Someone has beaten a giant
In this environment, for every aspiring giant-killer reporter, as well as for every media outlet in America, the defrocking of Hank Greenberg, the imperial CEO of American International Group
I'm of course talking about Warren Buffett and Berkshire Hathaway
And here, I've watched The New York Times
The headline implies that General Re and AIG knew that there was something nefarious about the transaction and that there was a risk of detection. If this is true (and let me say here, there may turn out to be evidence that General Re employees knew they were breaking the law), we would have to conclude that parties on both sides of the transaction recognized that they were involved in committing a fraud. Then we get into the "did Buffett know, what did he know, and when did he know it" that could inevitably lead some enterprising journalist down the rabbit hole that would take down a legend.
But way below the fold we come to the real point of this story: People at General Re told AIG that they did not think that there was enough risk transfer for this to qualify as insurance, thus meaning that it didn't meet the test to be considered for accounting treatment as such. In other words, General Re told AIG at the time how it thought the transaction should be properly accounted for. They "knew of the deal's risk" in that they didn't believe there was enough of it in the transaction to call it insurance, and they said so.
This is a very, very different thing from what the headline implies: that General Re actively assisted AIG in its own commission of fraud. One would think that before the Journal sent something out under this headline, it would have considered what it was implying. It colors what I consider to be an extremely well-written and informative article in a way it should not have; and for people who do not bother to read down past a few paragraphs, such impressions would not be corrected. That's a shame.
I guess that I should not be surprised, though. It's simply too juicy to let Warren Buffett off the hook, damn the journalistic excess. I don't think there's any question that Berkshire Hathaway has made an error in judgment in taking on this policy, and there may well be other finite policies that did not have enough risk transfer to be considered insurance.
But Berkshire Hathaway has written as many as several thousand finite policies, and contrary to how these are being discussed in the media, they are generally legitimate products, not ones that are specifically designed for accounting manipulation. Finites are simply insurance policies where the insurer's potential loss, while unknown, is significantly capped in some way. Most of them have sufficient risk transfer to qualify as reinsurance, but the problem for ones that fall into the gray area is that they are open to interpretation for accounting purposes.
The problem lies in the fact that, at their roots, every single type of insurance is a tool for smoothing earnings. A company wishes to avoid a potential catastrophic loss, so it takes on a bunch of smaller guaranteed expenditures. Those who are at this moment castigating Warren Buffett for playing a role in "helping" other companies "hide" losses run the risk of missing this simple point. Properly treated, this is what insurance does in the first place. It would be nice to see some balance on this issue. But balance doesn't sell newspapers and magazines as well as sensational headlines and muckraking do.
There's nothing to the McDonald's story that suggests a problem. There may be something to the Berkshire one. But headlines that are not supported by known facts, or even by the content of the articles to which they are attached, help no one.
Bill Mann holds shares in Berkshire Hathaway and McDonald's. He is serving as guest analyst for four months in the Motley Fool Hidden Gems newsletter. Afree trial is but a click away. The Motley Fool isinvestors writing for investors.
Bill is appearing as a panelist at a special screening for The Smartest Guys in the Room, a new documentary about the Enron collapse, at 7:30 p.m. Monday, April 18, at the Landmark Bethesda Row in Bethesda, Md.