28 December 2007

"Welcome to the helm, Mr. Murdoch"

This summer, News Corp. (the corporate parents of Rupert Murdoch's various newspapers and the Fox broadcasting properties) agreed to buy Dow Jones, the famous keeper-of-stock-indexes, and publisher of the Wall Street Journal. The price tag was $5.6 billion.

Months elapsed, though, between agreement and the closing of the deal. The latter took place earlier this month.

Anyway, the WSJ may have decided to welcome him with a bit of controversy, because November saw a memorable screw-up in a front-page story in which the Journal accused the giant broker-dealer Merrill Lynch of accounting shenanigans, then had to back down, issuing a correction.

On Nov. 2, the Journal alleged that Merrill had participated in transactions with hedge funds designed to cover up and delay the reporting of its losses on collateralized debt obligations. That article's only specific example of one of the supposed off-balance-sheet deals had been a deal in which the broker-dealer allegedly sold mortgage securities to a fund, while providing that the fund would have the right to sell the securities back to Merrill after one year for a guaranteed return. This deal did have the smell to it of the old "Nigerian barge" transactions of Enron scandal memory. Class-action lawsuits by and on behalf of Merrill stockholders have since prominently referenced that publication.

Merrill Lynch's stock price (NYSE: MER) as of the close of business Nov. 1 was $62.19 per share. By the end of trading on Nov. 2, it was at $57.28. Merrill's price continued to fall through two and a half more weeks, closing at $51.81 on Nov. 21.

The following Monday, good news arrived, in the form of a "correction and amplification" by the Journal, in which the paper acknowledged that its Nov. 2 article had been based on incorrect information. The correction focused on the only specific instance the original article had purported to produce -- that sale and buy-back.

In its later note, the Journal said that while Merrill did "propose" such a deal, it was never completed, because "the firm's finance department determined it didn't meet proper accounting criteria." This has a much more hygienic odor, suggesting simply that some risk manager or compliance officer was on the ball.

Murdoch's detractors can say if they like that it was the dispiriting influence of his looming captaincy that created such a gaffe. His admirers can say, "this is the sort of thing that he's coming in to fix!"

Say what you will, it seems like a big black eye to me. And I think it might be time for those of us accustomed to a fix of market-oriented news each morning to switch to the Financial Times.


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Christopher said...

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.