In 2005, at Minnesota’s St. Olaf College, the stirring peroration of that year’s commencement address advised the graduating seniors to observe three virtues acclaimed by Taoism: gentleness, frugality, and humility.
Despite what one might suppose, the commencement speaker was not a New Age prophet of universal love and communalism who had somehow escaped from the 1960s. She was, rather, a Pulitzer Prize–winning New York Times business reporter, Gretchen Morgenson, a woman who—week in, week out—spotlights the behavior of Wall Street capitalists and evaluates their actions morally for readers of the world’s most influential newspaper.
What principles of "fairness" guide Morgenson's evaluations?
In 2002, Morgenson won her Pulitzer Prize, in the category of “beat reporting,” for “trenchant and incisive Wall Street coverage,” and ten stories that she wrote in 2001 are posted on the Pulitzer website. These are presumably the very best of her early work, and examined closely, I believe, they illuminate the philosophy that guides her critique of business. Since September 2006, however, that philosophy has become far more explicit through a regular Sunday column that she calls “Fair Game.” Her columns presume that the world of finance ought to be a “fair game,” according to her personal conception of fairness, and that those who play the game unfairly are “fair game” for her attacks.
And what principles of “fairness” guide her evaluations? Two seem dominant: the virtue of putting duty above self and the virtue of subordinating self-enrichment to egalitarianism.
The Crusade for Duty
In recent years, anti-capitalists have tried to move our free-enterprise economy away from its individualistic orientation by pushing the idea that service professionals have an overriding duty to act solely on behalf of their clients’ interests. There is, of course, such a thing as a fiduciary duty, in which one party agrees to act in the interests of another; but in recognizing the special status of such relationships, we acknowledge that most business transactions carry no such duty. Ideally, fiduciary duties would exist only after explicit one-on-one agreements, because in the ordinary course of most business relationships our multifarious interests inevitably run athwart those of the other parties. That fact, however, has not stopped leftists from trying to extend the idea of duty to all market participants who sell their services.
Consider one of Morgenson’s Pulitzer Prize–winning stories, her May 27, 2001, article—“Buy, They Say. But What Do They Do?” In it, Morgenson took after stock analysts and their colleagues for selling stocks that their firm was recommending the public buy.
Morgenson elevates duty over self-interest as the proper standard for service professionals.
For example, the Irish company Riverdeep Group was taken public by Credit Suisse First Boston in March 2000. In November, CSFB analyst Jennifer Hayward was recommending purchase of the American Depositary Receipts, which were trading at $23. Hayward then “published two more positive reports in December and February. But of the roughly 60 shareholders selling restricted stock since November, a dozen were Credit Suisse executives or former executives. . . . Four of those executives sold on March 7, the day the A.D.R.’s reached their recent high of $27.25. . . . Hayward still [that is, in May 2001] recommends Riverdeep, which trades at $26.47.” Among the twelve CSFB executives implicated in this perfidy (they “filed to sell 20,000 shares worth $500,000”) was “Frank Quattrone, head of the firm’s technology investment banking group.”
Predictably, Morgenson sees a “conflict of interest” here. “Such sales create the perception, at the least, that these executives are benefiting from their firm’s analyst, whose reports may attract buyers to the stock and buoy the shares as they are selling.” Well, I suppose a person might draw that inference if his mind ran in conspiratorial directions. And if that is how he thinks, caveat emptor. At the same time, though, one must recognize that Frank Quattrone has his own life to live. There might be other stocks he likes better. Or other investment opportunities. Or, he might have personal expenditures or charitable donations to make.
That particular article ran to 3,500 words. Yet one must read through the first 80 percent of it to find Morgenson quoting a man who makes the obvious point: “‘I have to make a personal financial decision that may be consistent or different from what the rating system was.’”
Conflicts of interest were Morgenson’s theme again in a November 18, 2001, article about Salomon Smith Barney stock analyst Jack Grubman. The headline read “Telecom’s Pied Piper: Whose Side Was He On?” For a capitalist, the proper answer is: “his own side.” But by Morgenson’s lights, Grubman had a supreme duty to serve the people who used Salomon Smith Barney as their stockbroker and to eschew all other goals, such as the profits of his firm and his own salary. To make that point, she quoted a certain Jacob H. Zamansky as saying “‘Jack Grubman is the king of conflicted analysts. . . . A strong case can be made that he used his picks to generate investment banking business for his firm and abused investor trust in his picks.’”
And who was Zamansky? Morgenson identified him as “a securities lawyer who represents investors against Wall Street firms,” which one might think made him a bit of a “conflicted analyst” so far as judging Grubman. But Zamansky was even more conflicted than Morgenson’s story let on. Four months earlier, a Washington Post story reporting on a successful Zamansky suit against Merrill Lynch provided this information: “Zamanksy said he has 20 to 30 potential clients lined up for suits about alleged investment-banking conflicts involving [Henry] Blodget and two other well-known tech analysts, Morgan Stanley Group’s Mary Meeker and Salomon Smith Barney Holdings Inc.’s Jack Grubman.” About that conflict of interest, Morgenson failed to inform her readers. Pulitzer Prize–worthy reporting?
Conflict-of-interest allegations pervade Morgenson’s writing, because it is her way of elevating duty over self-interest as the proper standard for service professionals. The charge of conflict implies that the morality of a person’s service relationship is tarnished if he has any material interest other than that of enhancing the fortunes of his client.
This argument for service-as-duty goes back at least to Plato’s Republic, where Socrates says: “The physician, as such, studies only the patient’s interest, not his own. For as we agreed, the business of the physician, in the strict sense, is not to make money for himself, but to exercise his power over the patient’s body.” From a capitalist perspective, that makes no sense. It is like saying: “The gold miner’s business, in the strict sense, is not to make money for himself, but to exercise his power to optimize the mine’s production.”
The Crusade for Equality
The second of Morgenson’s principles—that egalitarianism should trump self-enrichment—finds expression in various ways. Most notably, in the last two years, Morgenson has made a name for herself through a relentless campaign against current levels of executive compensation. But her most interesting story in 2005 took a slightly different slant on the subject. It offered up for our adulation a “good” businessman: Ethan Berman, founder and chief executive of RiskMetrics.
What had Berman done to merit her approval? The story’s headline put it succinctly: “The Boss Actually Said This: Pay Me Less.” That, by Morgenson’s lights, was an achievement of American capitalism worth celebrating: personal abstinence as a means of promoting egalitarianism.
Morgenson has made a name for herself through a relentless campaign against current levels of executive compensation.
Here is how Morgenson described the Berman case: “One Wall Street executive atop a fast-growing firm is saying no to the piles of pay that make corporate America’s world spin so splendidly. In a remarkable two-page letter to the chairman of his company’s compensation committee, this executive requested that he receive no increase in salary, zero stock options, a smaller bonus than last year and a piece of the company’s profit-sharing pie equal to that received by all employees.”
Unfortunately for Morgenson, Wall Street Journal columnist Holman W. Jenkins Jr. had been offered this same story before her, and he had turned it down because there were personal and financial complications that cast doubt on the supposed message of self-abnegation. The most telling financial point was that “[RiskMetrics] is privately held; the CEO is a founder with a big equity stake that will lead to a lucrative payday if the firm goes public or is sold.” Therefore, Jenkins wrote, “I waved the story off—knowing the source’s next stop was the Times. . . . Not a word about any of [the complications] made it into the Times’s lengthy rendition, which simply quoted from the letter at length, treating it as a deus ex machina from the corporate world, a CEO spontaneously decrying the greed of his kind.”
Jenkins did not mention Morgenson by name, speaking only of “a reporter known for relentless but unanalytical execrations of CEO pay.” He then went on to analyze another Morgenson article typifying her credulity when pitched stories by anti-business types. Predictably, the Times reacted with fury, and executive editor Bill Keller sent the WSJ a letter to the editor. Said Keller: “As for Gretchen Morgenson, who is a particular object of Mr. Jenkins’s scorn, I’m not sure which is the best evidence of her immense civic value: the legions of Wall Street executives who read her with respectful dread, because she understands them so well; the testimony of ordinary investors and other readers who look to her as one of the markets’ shrewdest and most fearless guides; the Pulitzer she won for a body of work that Mr. Jenkins calls ‘relentless but unanalytical’ and the Pulitzer Board called ‘trenchant and incisive’; or the efforts of just about every business editor in town to hire her away from us.”
Well, we have seen just how “trenchant and incisive” Morgenson’s Pulitzer Prize–winning articles were. And if theexecutive editor of the Times thinks that Wall Streeters “dread” Morgenson “because she understands them so well,” it speaks volumes about the paper’s view of businessmen. But Keller’s last point is, if unintentionally, a mordant comment on Morgenson’s latest crusade: Marketplace demand measures the value of her skills? As it does the skills of CEOs, perhaps?
Onward and Downward
If Morgenson simply used her anti-capitalist premises to analyze American business in a serious way, she would be a far better commentator and a far more useful one. Many anti-capitalist economists do have interesting things to say about the capitalist economy and society. A diligent anti-capitalist business journalist could draw on like-minded economists to help him report from that perspective; those reports could become the subject of debates among analysts; and the journalist might in turn report on those debates.
But Morgenson does none of that. She merely draws upon her anti-self premises to craft anti-capitalist fables.
For example, in another of her ten Pulitzer Prize stories—“One Investor. Two Brokers. An Account Runs Dry” (July 22, 2001)—Morgenson narrates the woeful tale of Microsoft software salesman John Teeples, who had “retirement accounts and stock options worth roughly $700,000.” Teeples entrusted his largesse to two brokers at Morgan Stanley Dean Witter, Arun Sardana and Michael Moriarty. “Within 16 months, Mr. Teeples said, what had taken him years to build was gone. By this April, all that was left of his portfolio was $403.95 and a $40,000 tax bill due next April. Now he’s fighting back.”
Morgenson fails as a solid anti-capitalist journalist through her omission of evidence.
Both of Morgenson’s anti-capitalist premises shape her narrative. The first is egalitarianism. The mere fact that “investing was something he knew nothing about” was apparently no good reason for Teeples to fail in the stock market. Indeed, in Morgenson’s 3,000-word essay, I find exactly ten words tucked away in a subordinate clause conceding that Teeples had any responsibility for his loss, to wit, “for novices, investing is not as easy as it looks.” Very true. Her second premise is the primacy of duty: If Teeples lost his shirt, his brokers must have betrayed their overriding obligation to make sure that he prospered.
But even given her ethical premises, Morgenson fails as a solid anti-capitalist journalist through her omission of evidence. On May 22, 2002, the Wall Street Journal’s Holman W. Jenkins Jr. noted a major lacuna: “Overlooked in the Times’ rendition, however, is that much of [the Teeples’] decline came about because Mr. Teeples withdrew $280,000 to pay various expenses, including an alleged $68,000 down payment on a boat called ‘The Stock Option.’”
Another technique that distinguishes Morgenson as a mere anti-capitalist moralizer rather than a conscientious business reporter is her lack of follow-up. The only rebuttal to Teeples’s tale that appeared in her story came from a Morgan Stanley spokesman, who said: “We are very comfortable leaving the disposition of Mr. Teeples’s claims to the arbitration process he initiated.” A good reporter would have put the story into a tickle file and returned to it when the arbitration decision had been reached. But for Morgenson, it seems, the tale had been told and that was that: It was a drive-by shooting. A search of the New York Times’s archives for “John Teeples” yields only her initial story; neither she nor any other Times reporter apparently saw fit to mention the final outcome of the case by the New York Stock Exchange on October 26, 2005. But here is that outcome:
- The panel has determined that the underlying claims were clearly erroneous, that the registered representatives were not involved in any investment-related sales practice violations and that the claims and allegations pled in NYSE docket number 2001-009228 were false. The arbitrators hereby order that all references to the underlying claims alleged in NYSE docket number 2001-009228 be expunged from the CRD records of Arun Sardana and Michael Moriarty, subject to confirmation by a court of competent jurisdiction.
By this time, of course, Morgenson’s story had achieved fame as one of her ten Pulitzer Prize–winning entries. To record the outcome of the matter would have been, well, a conflict of interest.
A lack of follow-up distinguishes Morgenson as a mere anti-capitalist moralizer rather than a conscientious business reporter.
After Morgenson won her Pulitzer Prize, she and other journalistic groupies hung around New York’s then–attorney general Eliot Spitzer as he savaged brokerage houses and stock analysts. At one point, she did criticize Spitzer—for being too easy on Merrill Lynch. But in my research, I have not found that she ever “spoke truth to power” regarding the Merrill Lynch case, as did her Washington Post counterpart, Brooke A. Masters. In her book on Eliot Spitzer, Spoiling for a Fight, Masters said this of the e-mails written by Merrill analyst Henry Blodget, which lay at the heart of the case against Merrill Lynch: “A national regulator who has reviewed the full panoply of evidence against the analyst said there is some truth to Merrill’s arguments that the e-mails were taken out of context [by Spitzer]. ‘Even for the worst e-mails, there is an explanation that is not totally ludicrous,’ the analyst said.” Such an observation from a credible source would not have suited Morgenson’s horror story, however.
Predictably, in 2004, Morgenson spoke out on the case of the year—the prosecution of superstar investment banker Frank Quattrone . Here is how she introduced it: “Mr. Quattrone, an investment banker at Credit Suisse First Boston, is facing questions over his advice to colleagues that they shred documents about the faltering companies he helped finance.”
A search of the New York Times archive suggests that Morgenson has never mentioned the fact of Quattrone’s vindication.
From Morgenson’s description, one would never guess the actual facts of the case. To summarize the matter: On December 5, 2000, Quattrone sent an e-mail seconding another person’s recommendation that, before taking off for the holidays, employees at Credit Suisse First Boston follow the company’s procedures for cleaning up files. For this, implausibly enough, he was charged with obstruction of justice. As for the body of Morgenson’s article, it was just an adolescent sneer at capitalists and their defenders, using cheap irony. “Looking for fame, regulators often attack productive members of society. . . . The sooner securities regulators recognize this and stop harassing a highly productive executive, the quicker we can return to the good old days. Remember them, when no one asked questions and stocks only went up?”
That is Morgenson’s idea of being funny. But in the end, of course, all charges and accusations against Quattrone were dropped, both those lodged by the U.S. attorney and those lodged by the National Association of Securities Dealers. A reporter with a sense of shame—or merely a sense of justice—would have returned to the subject. But a search of the New York Times archive suggests that Morgenson has never mentioned the fact of Quattrone’s vindication.
The Crusade for Egalitarianism
In 2005, Morgenson stepped up the egalitarian crusade that has come to define her late career. It has two aspects. The first maintains that Corporate America, in its governance practices, is tyrannical (she has compared it to the USSR), arrogating to management powers that rightly belong to shareholder-owners. The second holds that Corporate America, in its compensation practices, is covetously greedy, arrogating to management money that rightly belongs to shareholder-owners. The answer to both problems, she argues, is shareholder democracy. By correctly redistributing power to the stock owners, shareholder democracy will, through the workings of self-interest, rein in executive avarice.
Since Morgenson began her weekly business column, corporate governance and executive pay have become her obsessions. In the five months since the column debuted, I calculate, she has written two columns on these subjects for every one on all other business subjects combined. Yet for all her devotion to the topics, she shows no signs of acquiring any insight into them.
She may have a Pulitzer, but Morgenson has yet to acquire a commitment to fair and factual reporting.
Her column of October 1, 2006, “All’s Not Lost, Disgruntled Investors,” exemplified her fabulistic way of telling tales about the fight against corporate power. It begins with a fairy-tale opening: “Sometimes the stars really do align for the greater good.” She then continues: “A case in point was last month’s landmark ruling by the Court of Appeals for the Second Circuit that opened the door to greater shareholder influence over director elections.” In the fourth paragraph, we learn the gist of the ruling: It “begins to establish a nominating process for shareholders to wage direct election contests if they are unhappy with slates of directors that corporations put up.”
But one must read nine paragraphs, and more than 500 words, to learn the name of the plucky little shareholder who brought this suit: It was the pension fund of the American Federation of State, County, and Municipal Employees, the country’s largest public employee union, which proclaims the mission of pursuing “social and economic justice,” in both the private and public spheres.
Might it be that the AFSCME wants, as a matter of “social and economic justice,” union control of corporate management, along the lines of sclerotic Europe’s “social compact”? No such suspicion troubled the usually suspicious Morgenson, who purported to see in the ruling only a victory for “shareholders who have been arguing for more influence in matters involving their investments.”
Then on October 15, 2006, Morgenson lit out after compensation consultants, finding them to be one reason that executive salaries are above her desired level. Her specific target that day was Frederic W. Cook. First, she established the magnitude of her enemy: “Since its founding in 1973, Mr. Cook’s firm has served more than 1,800 clients, including more than half the world’s 250 largest corporations.” Next, she established the magnitude of her enemy’s evil: “Mr. Cook’s willingness to attach his formidable name to the Business Roundtable’s study exonerating corporate compensation practices suggests that he is friend, not foe, to executives on the receiving end of lottery-sized payouts.”
But might Cook agree with the Business Roundtable study? That, of course, would be the naïve view. In the analyses of Gretchen Morgenson, pro-business sentiment is more likely explained by the temptations of cold cash. In this case, it turns out that compensation consultants like Frederic W. Cook & Company may have more than one relationship with a firm. And obviously, “any consultant that pushes back on executive pay packages runs the risk of putting other consulting contracts at risk.”
Clearly, there is something basic missing from Morgenson’s articles on executive compensation, as University of Illinois law professor Larry Ribstein pointed out on his website, Ideoblog: “Any rational discussion of the problem would have to start with the question of whether pay is, in fact, too high, before trying to determine the cause of any problem that might exist.” To begin answering the question—Is executive pay too high?—Ribstein cited an article, “Why Has CEO Pay Increased So Much?” written by two professors, from MIT and NYU, respectively. The authors concluded that their model “predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies.” Five months earlier, and in the Times itself, Professor Tyler Cowen of George Mason University had published a column weighing the pros and cons of exactly the same article. He concluded: “In any case, the debate over chief executives’ salaries has moved a step forward.” But that, unfortunately, is never true as long as Gretchen Morgenson is on the job.
Gretchen at Her Spinning
In a famous 1979 paper, “Toward a Theory of the Press,” Michael C. Jensen of the Harvard Business School explained that the mass media’s relentless portrayal of businessmen as evil arises from two forces: First, the mass media respond to a demand for entertainment, not information, and second, such entertainment must involve a simple clash between good and evil. But why should businessmen always be the bad guys? That is because the mass media’s customers assume that the proper standard for interpersonal relationships is the standard observed in the non-market environment of the family. In effect, people who turn to the mass media for their moral fables believe in Mario Cuomo’s vision of society as an extended family. Inevitably, then, the hard-nosed relationships of self-seeking traders, which are characteristic of the market, will be seen as immoral, especially when things go wrong and the expectations of the parties are disappointed.
Because of her anti-capitalistic premises, her post as a columnist at a paper of enormous prestige, and her undoubted abilities as a writer, Gretchen Morgenson has been perfectly positioned to take Jensen’s thesis and turn it into a highly successful career spinning horror stories about business. Her frightening tales of American capitalism, told with a tone of egalitarian righteousness and drenched in a mood of oppressive depravity, satisfy perfectly the demands of the New York Times’s self-righteously leftist readers. Every Sunday they can shiver with delight as Morgenson shares her stories of evil corporate monsters and their hapless little victims.
Best of all, they know, so long as Gretchen Morgenson is there to entertain them, such stories are always: “To be continued.”