Love the bearer of bad news
In Sophocles’ play Antigone, a sentry reports the burial of Polyneices to King Creon. The sentry acknowledges that no one loves the bringer of bad news, but is unprepared for the strength of Creon’s reaction. “What you say is intolerable,” the king expostulates. He threatens the sentry with hanging.
Now, 2,500 years later we still attack those who tell us things we find intolerable. Dick Fuld, the former Lehman’s chief, fulminates against short sellers, who – he claims – destroyed his company. Yet most of the copious material that has appeared since Lehman’s demise suggests the finger should be pointed, not at short sellers, but at Mr Fuld. At Enron, Jeff Skilling called a hedge fund manager who queried the balance sheet an “asshole”. He famously drank a glass of champagne to celebrate the news that his company could adopt mark to market accounting. It enabled Enron to take immediate credit for profits it hoped to make in years to come. Recently, Europe’s banks and some of the politicians who speak for them have taken a different view, treating the accountants who insist on marking values to market as Creon treated the watchman. Both the kings of old and the potentates of today prefer to create their own reality than to face the truth.
Conspiracies of short sellers can weaken sound businesses. But there are few proven examples, and more cases where sellers brought the bad news of lies and misrepresentations. David Einhorn, who led the attack on Lehman, wrote a book about his battle to expose malpractice at Allied Capital – a battle that led the Securities and Exchange Commission to investigate, not Allied, but Mr Einhorn’s own business. Events proved Mr Einhorn right. And when regulatory authorities attempted to ban short selling of financial stocks in the autumn of 2008, their objective was not to establish a better informed marketplace but to keep gloomy messengers away from the citadel until the panic had subsided.
Most recently, it is rating agencies that have been the bearers of intolerable truth. With the prescience that has distinguished these businesses throughout the crisis, Moody’s has just concluded that the junior debt of Anglo Irish Bank is junk. But you need not even be the person who brings the bad news: you can be vilified for repeating what has been in the headlines for weeks. That Gordon Brown’s premiership was a disaster, that Afghan president Hamid Karzai is weak, that Russia is corrupt is hardly new: the criticism of WikiLeaks is not even that it says these things – but that it says they have been said.
German chancellor Angela Merkel argues the case for new rating agencies with “an understanding of basic economic mechanisms different from the existing agencies”. The European Commission has added the suggestion that agencies might be required to give governments advance notice of plans to alter ratings of sovereign debt, which would give these governments an opportunity to “correct errors”.
But every journalist and columnist has encountered people who would like an opportunity to “correct errors” before they appear in print, and no one has any illusions about what is meant. The threat to the rating agencies’ independence gives urgency to more appropriate reform.
The role of ratings in regulation should be progressively eliminated. The scandal was not that they told people what they did not want to hear, but that they told them what they did want to hear. If official sponsorship of agencies ended, we could expect a competitive market to emerge with ratings judged for the value of the information they provide to users rather than to the issuers who fund the rating process.
Ms Merkel was brought up in a country notorious for telling its public the news its leaders wanted to tell – and for the contempt with which the public treated such news. She should be the last European leader to threaten to hang the honest messenger. The East German state, it is said, would even doctor the weather reports to make the population feel better. On reflection, perhaps that is not such a bad idea.