Why financial reporting is so damn awful

Riccardo thinks complexity has no appealing value. In thus extrapolating his own preferences over the population, Riccardo is mistaken; I, at least, enjoy complexity. And when it comes to complexity it is hard to find anything more pleasurable than reading the financial reports of monoline insurers (MBI, ABK).

These have been in the news lately, setting the whole reporting community – both newsmen and blogmen alike – abuzz. By and large the news has been Jeremaic: the companies are on the verge of spectacular collapse and they will take the whole financial world down with them, and, who knows, perhaps the world as we know it, too. Reading, talking, sitting in on conferences, and above all checking on the news reports, I have come to the conclusion that the news is bad, but not as bad as the newsmen – and the markets – made it out and bought quite a lot.

In the process of conducting my research I have discovered just how lousy and erroneous financial reporting is: quite often, reporters seem to latch onto a phrase and then give it an outsize interpretation which was not intended in the original report. Why would they do this?

There are three reasons.

First, the maths involved is difficult. It isn’t exactly rocket science – in fact, it is hardly anything such – but it isn’t third grade arithmetic, either. The reporters simply do not understand well what they are reporting, which is why their reports are so often so difficult to follow. (A murky explanation is a sure sign that the explainer is in the dark himself).

Second, as a human species we have a strong preference for the scary. We have scared each other with ghost stories since the beginning of all time, and with horror movies since the beginning of the movies. It just feels more relevant to entitle a story “MBIA collapse imminent” when “Trouble at MBIA” would have been a more accurate title. That scare mongering sells more newspaper copy doesn’t hurt, either, even if it is not the principal motivation.

Finally, newspapermen are relatively poorly paid and stand quite low on the Wall Street totem pole. This perhaps makes them a little more than ready to embrace with glee – and promptly pass on – any suggestion that the rich bankers and traders stand to lose their shirts. Such stories tend to emphasize how stupid (and greedy) these bankers have been in making their disastrous investments; this, of course, amounts to saying how smart (and morally tempered) we journalists, who have not made such bets, have been by comparison. In other words: we journalists may not be as rich, but at least we are smarter and more decent.

Journalists aren’t different from the rest of us. They too spend a great deal of their time inventing excuses for their inadequacy.