Another thought on Enron, following on my New Yorker piece.

One of the big points made by Jonathan Macey and others is that the Enron scandal is an example of “receiver failure” as well as “transmitter failure”: that is, that it wasn’t just the case that the company sent misleading signals. It was also the case that those who were supposed to be listening to and interpreting those signals didn’t do their job.

The exception, of course, were newspapers. The Enron scandal was, in large part, broken by the Wall Street Journal.

This is strange, no?

We operate with the assumption, particularly in our understanding of what makes financial markets efficient, that those with the best incentives to ferret out the truth are those who are partial—that is, are directly involved in the process—and those who are economically motivated, who have money at stake. So you’d think that hedge funds, shorts, arbs, and analysts—all of whom were massively partial and economically motivated—would have been the first to see the “real” Enron.

But they weren’t. Reporters were, a group who—at least in theory—you’d think were in the least advantageous position. They aren’t partial to the proceedings. They have no money at stake. (Compared to their Wall Street counterparts, in fact, they barely make any money at all.) They aren’t (relatively speaking) as well-trained as financial intermediaries. They have to serve a general audience, which disposes them against highly technical examination. There are real limits on how much space and time they can devote to a particular story, and their rewards for doing well are almost entirely internal and professional: good reporters are rewarded, largely, by having their status elevated among other reporters. On Wall Street, seeing truth gets you a million dollar bonus. At a newspaper, it gets you a slap on the back.

We’ve spent a lot of time, post-Enron, criticizing the flaws in the investment community’s gatekeeping activities. But I think we should also recognize what the Enron case tells us about the value of newspaper journalism. Maybe, in other words, we have underestimated the value of impartial, professionally-motivated, under-paid and overworked generalists in tackling the kind of information-rich, analysis-dependent “mysteries” that the modern world throws at us.

All of which, of course, points out the irony of what’s happening in the newspaper business right now. We are dismantling the institution of newspaper journalism precisely at the moment when it seems to be of greatest social value.