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Nov. 14, 2008, 1:35 p.m.

ProPublica argues they’re open enough

I just got off the phone with Dick Tofel, ProPublica’s general manager. He wanted to talk about my post this morning on the dispute between his organization and Portfolio writer Felix Salmon over a story ProPublica published Monday. You can get a recap of the basics over at that post. He raised a few issues I want to share with you, both to give his views an airing and to give my perspective. (Warning: Super-long post below.)

Tofel had, I think, two main complaints about my post:

— First, that I didn’t mention that he had left a comment on Salmon’s original post raising questions about the article; and

— second, that I didn’t call him (or someone else from ProPublica) for comment before posting it.

Let’s start with the first one. Yes, Tofel did leave a comment on Salmon’s post. Here it is:

This post quotes extensively from our story today. But readers should also be aware of two passages it does not quote:

“The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California’s deepening financial misery. In Sacramento, officials said they were concerned that Goldman’s strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers. ‘It could exaggerate people’s worries about our credit,’ said Paul Rosenstiel, head of the public finance division of the treasurer’s office.”

And: “Goldman ‘as a firm’ [is] no longer giving the trading advice to clients, [Goldman said].”

Tofel said he felt a reader of my original post would have gotten the impression that ProPublica didn’t respond at all to Salmon’s concerns, and that my omission of Tofel’s blog comment made ProPublica seem more closed-off than it really is.

Maybe I should have mentioned the comment. But from my perspective, it doesn’t in any way mitigate my point: that the only way traditional news organizations seem to feel comfortable interacting with critics is by pointing to the story as it’s been printed. As I wrote:

I know this has been the traditional route of news organizations — to say “the story speaks for itself, and we stand by it.”

Tofel and I disagree over whether just pointing to those quotes gets beyond “the story speaks for itself.” He argues that those two quotes are directly responsive to Salmon’s arguments and that, as a result, they should count as more meaningful a interaction than I seemed to imply.

I don’t think they are meaningfully responsive. To explain why, we have to delve into the meat of Salmon’s argument against ProPublica — something I didn’t do in my original post precisely because I wasn’t writing about the quality of ProPublica’s journalism, but instead about how it interacted with its audience.

(Warning: Hold on tight for a lengthy fugue on business stuff. And apologies if I’m misunderstanding anything here — I’m not a business expert. I’m trying to approach this as a reasonably informed reader would.)

Salmon’s main point, as I understand it, is this: The ProPublica article criticizes Goldman for (on one hand) helping California sell bonds as its investment banker and (on the other hand) preparing research for its institutional investors that suggest they should buy what amounts to insurance against California defaulting on those bonds.

Salmon argues that that criticism is a misunderstanding of the job a huge institution like Goldman has. It has two different sets of stakeholders in this case: the companies and governments (like California) for whom it issues debt, and the investors for whom it provides research into how best to make money. It is entirely possible — even common — that the two sides’ goals would not align. As Salmon puts it:

Banks are intermediaries: investors are just as much their clients as issuers are. Issuers want their banks to have this kind of conflict of interest, because it means those banks have good relationships with the investors who buy their bonds. It’s true that Goldman shouldn’t actively screw California, but I don’t think that putting out a [credit default swap] research product goes nearly that far.

Here’s another way to think of it: Say Goldman sponsored a company’s IPO. Then, a few weeks later, there’s a big scandal, the CEO is arrested for murder, the economy tanks, and the company’s business prospects suddenly look horrible. Are Goldman’s analysts then ethically required to keep a “Strong Buy” on the company’s stock because it had been a Goldman issue? Or is its ethical responsibility to provide what it considers to be honest advice to its investment clients and to say “Sell”?

In the dot-com bubble, some investment banks got into trouble choosing the first option: Issuing overly optimistic research about some companies’ prospects just because they were clients of the investment-banking side of the firm. The response from regulators and politicians seemed to be that firms like Goldman should keep their I-banking and research responsibilities separate. Which would inevitably mean there would be occasions when the firm is issuing debt on behalf of an institution while at the same time advising investors said debt may not be the best possible investment.

Salmon also points out that the Goldman research didn’t just call California a risky proposition: it also predicted trouble for “corporate junk bonds, European banks, the euro and British pound currencies, and U.S. municipal bonds,” plus several other states.

In other words, Salmon is saying, it’s unfair to criticize Goldman for being pessimistic about California bonds. Being honest with investors is better than telling an artificially sunny story to promote a Goldman-issued investment product.

If I’ve fairly summarized Salmon’s complaint, how does Tofel’s comment engage with it? Tofel’s comment tells us two things, both of them in the story:

— California officials didn’t like Goldman issuing negative research about its bonds, and they fear that it might hurt the state’s financial position.

— Goldman no longer offers the research in question to its clients.

For Tofel, that responds to Salmon’s argument. For me, it doesn’t.

On the first point, Tofel told me during our call: “The surest judge of whether a professional has a serious conflict of interest is that the client thinks they do. The client made it clear on the record.”

But one would expect California to be unhappy with the research. It criticized their debt! The issue is less whether California is unhappy and more whether they’re correct to be unhappy. As Salmon put it in response to Tofel: “No one likes being the subject of investment-bank research which puts any kind of sell rating on a credit or stock, and California’s treasurer is no exception. But Goldman should be allowed to put out its research without fear or favor, and had no obligation to inform California in advance.”

As for the fact that Goldman is no longer giving out the research: I can imagine any number of reasons why that might be the case. It’s possible the prospect of a front-page story in the LA Times made them stop giving it out. Since the research was issued in September, it’s possible it’s simply been overtaken by events; a whole lot has happened in the economy since September. It’s also possible, as Salmon suggests, that not offering the research could be the result of specific cutbacks in Goldman’s research division, which is something I know nothing about.

In any event, no longer offering the research certainly doesn’t seem to me like prima facie evidence that Goldman is somehow admitting wrongdoing.

(Okay, back to the journalism angle.)

Look, I’m 100-percent willing to be wrong on this stuff. As I said, I’m only a moderately informed reader. The ProPublica article may be completely right to criticize Goldman. But my original post wasn’t a criticism of ProPublica’s journalism. It was a criticism of how they responded to seemingly reasonable criticism.

Specifically, they responded by (a) relying on the traditional “the story speaks for itself” argument, and (b) when that didn’t seem to stop the criticism, having a conversation with the critic on the condition that it not be shared with the public. As Salmon put it this morning:

Dick Tofel had every opportunity to put certain things he told me on the record, but he didn’t do that. Instead, he called me, and the first thing he did was make clear that everything he was about to say was off the record, and that I was not going to be able to talk to the journalist who wrote the story.

(An aside: Tofel defended that last decision to me, saying, “I said to [Salmon] that we believe our reporter’s time is better devoted to additional reporting on the subject than to debating. That’s a resource decision we have to make. You may think that’s wrong, you may think that’s antiquated, but that’s the decision we make.”)

My counter-argument, which I advanced in my original post this morning, was that that old model doesn’t work too well any more. The audience has the power to talk back in a way it never had before. And news organizations will, increasingly, have to become part of that conversation if they want to be successful.

There was a time, not that long ago, when a news organization’s credibility was boosted by its voice-of-God tone, the sense of solidity in its stories and the distance it kept from its audience. All that played into its status as a Respected Institution. Those days, I think, are over. Now you gain credibility through transparency, openness, and a willingness to engage with smart people who have questions.

Finally, let me address the other concern Tofel raised in our conversation. He said he wished I would have called him or ProPublica before writing my post. He said I had a “‘shoot first and ask questions later’ approach, which I know is becoming more common” online. “Why wouldn’t you want to be better informed before you publish?” he asked me.

Here’s my answer: I was responding to the story as a reader would — to the publicly available record. My point was about how ProPublica was appearing to the public. Maybe I’m wrong, but I don’t think I needed to talk to ProPublica to criticize their doing what news organizations have done for decades — pointing to the story and saying, in essence, “that’s all we’re going to have to say on the subject.”

It’s my opinion that that’s not a smart path in the Internet era. You are, of course, free to disagree with me. What do you guys think? I’d be happy to publish any responses from Tofel, Salmon, or anyone else.

POSTED     Nov. 14, 2008, 1:35 p.m.
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