The swinging door between financial journalism and banking
A couple of weeks ago mainland developer Country Garden reported its annual results, and the analyst community was unimpressed. Most brokers lowered their price targets on the company’s shares, pointing variously to a large inventory of unsold flats, rising debt and narrowing profit margins.
CLSA was particularly cranky in tone, taking Country Garden to task for issuing perpetual bonds ahead of a potential acquisition that did not materialise, a move that padded finance costs by 1.6 billion yuan for fiscal year 2015. “A costly misjudgment,” the report intoned.
This was slightly refreshing. Banks are not in the habit of criticising companies for their capital markets activities, for obvious reasons.
As a brokerage started up by two former financial journalists, CLSA has long tried to position itself as independent, even though a big French bank snapped it up soon after its founding in the late 1980s. Still, its research tended to be punchier than the usual fare, and thus some were concerned when a large mainland Chinese bank took over the group a couple of years ago.
If and when CLSA does become like everyone else, it will mark the end of an interesting era in Hong Kong, one which saw a mushrooming of independent brokerages amid rapid growth in the financial sector. For a short window, the landscape was not completely dominated by the big banks.
Spurred by the gradual opening of China and a banking deregulation trend in the West, Hong Kong saw explosive growth in the financial sector in the 1980s, and as a result a lot of “non-bankers” were instantly repurposed to meet demand.
“The challenge for investment banks was capacity,” recalls John Mulcahy, a prominent journalist in Hong Kong who moved to investment banking in this period. “This resulted in … a trawl into the accounting and law firms, and also the media, to find the skills needed for this financial market boom.”
Mulcahy held top executive positions at Peregrine Investment Bank (which collapsed in 1998) and Indosuez WI Carr (which quietly shuttered in quiet times in the early 2000s), among others. Other journalists who made the switch in those days include Cheah Cheng Hye, a co-founder of Value Partners Asset Management, and CLSA founders Gary Coull and Jim Walker (who have both passed).
While it once enlivened the sector, this pipeline from finance journalism to banking could compromise press coverage of the banking world. Let’s imagine, for example, that a local reporter is assigned to the covered warrants market; this reporter may be aware that the last person on the beat now has a much better-paying job at a bank marketing such products. Such a conflict luckily did not stop the local press from rebranding the “Accumulator” warrants to “I kill you laters” – but the risk is there.
Michael Lewis, the author of The Big Short, has speculated that the global “swinging door” between journalism and banking may explain why the financial press missed so many obvious stories of banking excess ahead of the subprime crisis.
In any case, declining profits in the media business means there is less cash to hire staff or underwrite investigative journalism.
“There have been seismic shifts in the economics of the world and of the region which have conspired to undermine the world of media, while simultaneously creating an unprecedented opportunity for investment banks,” says Mulcahy. “This has led to a continuing migration from media to the investment banking sector.”
One counterbalance can be seen in the rise of short-selling firms, such as Muddy Waters, who play a role in keeping investment bank analysts’ honest – if only to avoid the shame of having a glowing recommendation on a company which is revealed as phoney and corrupt by a short-selling investigation.
Yet short-sellers choose targets for profits not public interest, and are thus limited.
There are some rare cases where the door swings the other way, and bankers become muckraking journalists. Michael Lewis, for example, is a former investment banker who writes exposes about the sector.
And here in Hong Kong we have David Webb, an ex-banker who has became a corporate governance watchdog, and broken a number of stories in his non-profit Webb-site.
Cathy Holcombe is a Hong Kong financial writer