NOCERA on GLADWELL: To be sure, his central point is largely correct, though hardly the contrarian revelation he makes it out to be: Wall Street’s corps of analysts, hedge fund operators, ratings agencies and all the rest should really have paid more attention to Enron’s public disclosures.Nice piece from the NYT‘s Joe Nocera unpicking Malcolm Gladwell‘s ‘semi-defense of Enron’ in the New Yorker. I turned to Gladwell‘s essay on the advice of the generally reliable John Naughton. Alas, in a piece that seems to incorporate something half-written on WW2 intelligence, Gladwell pursues a tedious semantic distinction between a puzzle and a mystery, and then yokes it to a pretty disappointing attempt to argue – ‘contrarian stylee’ – that Enron was open about its finances, but investors failed to pay careful attention.

This is how Gladwell ends his piece:

In the spring of 1998 … a group of six students at Cornell University’s business school decided to do their term project on Enron … the group reviewed Enron’s accounting practices as best they could. They analyzed each of Enron’s businesses, in succession…

The students’ conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at forty-eight dollars—at its peak, two years later, it was almost double that—but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students’ recommendation was on the first page, in boldfaced type: “Sell.”

Describing that finale as Gladwell‘s coup de grâce, Nocera concludes his column thus:

Out of curiosity, I looked up the students’ work on the Internet. Their research report does indeed have a sell recommendation. But it’s not really because the students thought Enron had deep problems. Indeed, the report praises much about Enron and its business. The main issue was a “lack of upside potential in the near term.” Over the long term, the students had a neutral rating on the stock. The students put a price target of $42 — not exactly something you’d do if you suspected fraud.

As for that line about manipulating earnings, that’s in the report, too, but it is also not quite as Mr. Gladwell makes it out to be. The students used a complex statistical tool called the Beneish model, which helps investors detect whether there might be some earnings manipulation. Sure enough, that is what the model suggested. But then the students went on: “Further analysis of these indicators showed no cause for concern.”

Mr. Gladwell notwithstanding, my guess is that the students — and the rest of the world — would have come to a different conclusion if Enron had only disclosed what it should have. That it didn’t has a lot to do with why Mr. Skilling is behind bars.

Nice to see online literary fencing conducted with the épée rather than the meat cleaver! But let Gladwell have the last word from his blog:

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.