Tuesday, August 30, 2011

Media "Bias" in Israel is Our Own Damn Fault


Sick and Tired of Being Sick and Tired

Protests are legion and there are revolutions galore. There are a lot of good things happening in the Middle East these days.

And by "good" I mean, not "bad" on the face of it. We don't know if the nascent freedom movements in some countries will blossom into friendly, prosperous democratic societies or mad, oppressive, Islamic caliphates. Nor do we know if the protest movements in others will win out or be brutally crushed. All in all, it's a crazy time.

As you might imagine, the media has been working overtime to cover all of the happenings. At times they have shone brilliantly (like during the Libyan rebels' push into Tripoli) and at others then have been almost drowned out by social media's tidal wave of re-posted photos and videos from citizen journalists. (Think the confusion during Egypt's uprising.) And in some cases, there is little or no independent coverage because of journalist bans and media blackouts. (See: Syria)

All in all, though, I think that the coverage has been pretty good and as thorough as can be expected, especially by outlets like Al Jazeera, Sky One, the BBC and CNN. If nothing else, the sustained happenings in such an important part of the world have exposed the self-imposed deficiencies of American media as they have scrambled to keep up with events. More often than not their newscasts or cable affiliates' hourly updates are using footage and breaking news from their international competitors. Years and years of closing foreign bureaus and stripping the region of staff have resulted in a dearth of contacts and ability to react quickly to situations.

So why am I going on about the media? For one, I am very interested in the subject. (I majored in Journalism after all.) Also, I had a very interesting back-and-forth on Facebook last week with an old Frisbee buddy back in Boston.

He was upset that the media wasn't covering the hell out of Hamas' recent missile attacks from Gaza into Israel and the resulting escalation after an Israeli counter-attack ended with the deaths of some Egyptian soldiers. To a person who is a passionate supporter of Israel, who lives there or who is Israeli themselves, the sight of hordes of journalists flooding the streets of Cairo and Tripoli, and beating down doors trying to get into Syria, the utter lack of media boots on the ground in Gaza and Southern Israel has got to feel like neglect at best, or overt media bias at worst.

I didn’t like the sound of that. In today's fragmented landscape, consumers have more control than ever (some might say too much) over what gets coverage and what leads newscasts. I happen to think that a lack of media coverage/outrage over what's going on in Israel is because massive numbers of people simply tune out when it comes on in the West. Newspapers and other media outlets know exactly which headlines and stories garner the most interest these days. And while some events will always garner big headlines no matter what ratings/hit scores say, these days the seemingly-intractable dispute/conflict in Palestine no longer feels like "news".

Here's a copy of our exchange. I've omitted a few comments from people that didn’t speak to the topic and made a few edits for grammar and punctuation, but otherwise they are as-posted.

@Gideon: Why is the international press not uttering a word about the latest salvo of terrorist rocket fire out of Gaza today (let alone this week)? Oh wait I remember now... Israeli blood doesn't count.

@Joni: What even funnier is that Syria is murdering Al Falestina (ie Palestinians) by the truck load and no one is saying anything about how they're actually killing Palestinians! I guess it's only bad when the Jews are supposedly doing that (which they're not!). Syria is doing what Israel gets falsely accused of all the frikkin time!

ME: I'd go more with the fact that it's not really "news" that Hamas is attacking Israel, or that Israel is retaliating. Honestly, when faced with the choice, which would you rather pay attention to: Two children fighting incessantly and futilely over the same crap they've been fight over for ages, or the teenagers around the corner who seem to be growing up a bit and exhibiting some signs of maturity? I'm not saying that's the right attitude, (or even that the teenagers around the corner will be successful, or even that they are who we think they are) but you've got to at least admit that the desire to focus on something else is understandable. And not for nothing: Don't these Hamas attacks feel more than a little "Pay Attention to Us"-ish?

@Joni: I just think that's a bad analogy.

@Gideon: Well Mike, I totally get your perspective and would probably be merely disgruntled (rather then angry) with the media blackout if it was applied uniformly. Unfortunately it is not. This week alone the whackjob terrorists in Hamasastan have... lobbed scores of rockets at Israeli cities and sent "activists" with machine guns across the border who killed eight Israelis who were guilty of being in the wrong place at the wrong time. Yet the story is a flash in the pan. However, the moment Israel drops a bomb on a rocket squad and kills the would-be attackers, it's all across the headlines and the world explodes in furor. It's not the silence that I detest, it's the hypocrisy.

@Mike Kuznetsov: It's because Israel has a modern military that it uses to defend itself, while Hamas presents itself as a rag-tag group of "freedom fighters". I think it's similar to the propaganda from the mujahideen in Afghanistan in the 80's. This makes the Palestinians seem like the underdogs.

ME: You'll get no truck from me on that score. I think that Mike is right about the air of "underdogs"-ness that can accompany coverage of Israel bombing Gaza. But it's the same kind of undercurrent that exists when we see footage of us bombing Iraq or raiding a home in Afghanistan. It's not sympathetic; it's just stark imagery.

I want to emphasize that I think that your frustrations are REALLY misguided. And by that I mean, they are focused on the wrong people. In the West, our media is almost 100% market-driven. This means that coverage is dictated in large part by what people want to see and are interested in. Should national newscasts/cable outlets curate their news more and emphasize some judgment about what people SHOULD know rather than what they WANT to know? Of course. But that's a very different thing to be mad about than anti-Israel bias. I'm by no means an apologist for the US media (hell, I've all but abandoned them since my move overseas, save for NPR- I'm an RTV, Al Jazeera & BBC guy now), but when you get pissed off at them, you're missing the real issue: People don't care as much about this stuff anymore.

Face it, we've got 2 major wars on, multiple countries in some stage of revolution in the Middle East, a near-depression in the US and the real danger of a breakup of the EU/Euro Zone and all that implies for the Western & World economies. Oh, and China's on the march in the developing world. Straight away, Israel is up against some serious competition for (even completely unbiased) mental and editorial bandwidth.

Israel's biggest problem in terms of coverage of events in Gaza (and the West bank) is that people in the West are, generally, just fed up with things there. I know that I am. Nobody cold ever convince me that Israel doesn’t have a right to exist, that it shouldn't be defended or that it doesn’t have the right to defend itself. But you know what? In the US (and even here in Beijing) Arabs and Israelis and Jews of all nationalities live, work and socialize together with no problems whatsoever. So why can’t they do that there? (Simplistic, I know, but this is the perspective of most Americans and Westerners.)

I'm pissed that the Palestinians don’t just accept Israelis' right to live in a state of their own in Palestine and then go the non-violent route in massive ways to address specific concerns within that context. (Think thousands standing in place in an area where the West bank wall is going up, people going on mass hunger strikes, scores laying down in front of bulldozers, etc.) They'd win a lot of their arguments in short order if they did that. And if a bunch of psychos REALLY wanted to martyr themselves, there'd be plenty of ways to satisfy them… I'm also pissed at Israel for not just telling Jordan that they can have the West Bank back and Egypt that they can have Gaza back, acknowledging that it's a different world now and that the current situation is deplorable and unsustainable. I'd also like them to adopt an idea that Alan Dershowitz had 10-15 years ago: After re-establishing the 1967 borders, they pledge to re-take -permanently- some measurable plot of land for every terrorist attack or missile fired.

These are just ideas. But the point is that neither side would be willing to consider them because the extreme whack-jobs on both ends control the debate. And after a while, the sight of both parties even refusing to agree to a process for talking about things makes people like me throw our hands up and say "to hell with these fucking children!" My gods, it's been 20 years since the 2nd Intafadah and every time there are "serious" talks, one side or the other pulls out/sabotages things when measurable progress starts. How long am I supposed to carry the fire in my belly? Even the Northern Irish got sick and tired of the violence after 20 years.

So don't get sucked into the trap of blaming the media for the lackluster/unenthusiastic coverage of Israel and its environs. Blame Israel and its environs.



Wednesday, August 3, 2011

China's Madoff Scandal: The Biggest Fraud Being Perpetrated Against US Investors That You Haven’t Heard About (and why it's the best thing to happen to Chinese businesses in a decade)

Back in early February I tweeted about a phenomenon that I had noticed was gaining steam in the run-up to the 2010 year-end earnings season. I'd been noticing an awful lot of Chinese companies delaying their filings or even announcing that they would be delaying their 2010 numbers AND re-stating their 2009 numbers. A few were forced to disclose investigations into their accounting practices by their trading boards (AMEX, NASDAQ, etc.) and/or the SEC. It seemed ominous.

"Biggest story that the media isn’t writing about: The growing number of Chinese companies under investigation for fraud."

I didn’t post anything else about this, but I watched in morbid fascination as things got more and more crazy with each passing week. Company after company delayed their earnings or announced investigations. Accounting firms started dropping their Chinese clients amid allegations that they could no longer vouch for the numbers on earnings reports that they had already certified and that they were being stonewalled by Chinese CEOs and boards of directors. Markets started suspending the trading of companies.

There was even one night when one of our clients needed to get an emergency press release out to disclose the freezing of their stock, but nobody could find the US-based CFO. The CEO had NO IDEA where he was and the release couldn’t go out without his OK. It was just insane. (The CFO eventually surfaced for a few days – back in China. He has since left that company and was immediately hired on as the CFO for another troubled Chinese company. Revolving door, indeed.)

Fraud. Apparent money laundering. Payoffs. Corrupt IR firms. Losses to investors totaling in the billions. A crisis in confidence was brewing in the world's largest developing economy and it was just screaming for attention. But it was getting only whispers in investment industry trades and blogs.

Until now.

What's Going On?

This past Sunday The New York Times ran a fantastic piece on what's been happening with these Chinese companies. In it, David Barboza and Azam Ahmed spell out how dozens of Chinese companies have basically snuck onto the US markets (via "Reverse Mergers" - buying defunct or dummy corporations in the US that are already listed), their meteoritic rise and spectacular crashes once their Chinese practices ran headlong into Western accounting and disclosure requirements.

And today, Reuters ran an amazing story on the subject that spotlights the grand-daddys of Reverse Mergers: Timothy Halter and Zhihao Zhang. The process that they pioneered has lead to an unprecedented opening of the Chinese market to US investors and, ultimately, to tens of billions of dollars in losses.

These stories are very well-written and go into great detail about what has been happening but they don’t really talk about why this all happened in the first place.

Why Did This All Happen in the First Place?

China is booming. We all know this. What most people in the West don’t realize is that, for the most part, China is a pretty closed financial system and there aren’t a lot of ways for people to invest and make money in the ways that we would think of as normal in the US.

There are no mutual funds, 401Ks or brokerage firms that are available to the general public. While a majority of middle class people in the US are participating in the markets in some fashion, very few Chinese have access to what we would consider typical investment vehicles. Liquidity for domestic businesses, therefore, has to come from state-controlled banks or a small cadre of ultra-rich oligarchs.

China's domestic stock markets, excluding Hong Kong, are erratic at best, filled with companies whose SOPs are even worse than those of the companies currently being kicked out of US markets. China's regulatory system is a joke; it's inadequately staffed and funded, obsolete and so corrupt as to be completely self-serving.

Strict controls on the Yuan prevent private money from flowing out to foreign markets. Most of the major investments in American companies and real estate that you've been reading alarming press accounts of have been made by sate-owned companies, the super rich or China's government-owned foreign investment fund.

Essentially, the only way for business people and mid-level party guys (the ones who don’t control entire sectors of the economy themselves) to start really growing their wealth is to build a company that can actually succeed in China's cutthroat economy or just build something that can attract tons of foreign investment, and then set that company up in a trusted foreign market where they will then have access to trillions of dollars of private capital.

(An aside: This closed-off system is a BIG reason why China's real estate market continues to be red-hot. Middle class Chinese families really have no other way to save/make money than by buying real estate. Bank interest rates are so low as compared to inflation [4% on a CD vs. 10% inflation – food is up almost 100% in some places in the past year alone] that banks are not an option. So, since they can’t buy into foreign markets without special permission from the government, and their domestic markets are swamps of corruption, the money all flows into homes.)

As far as investors were concerned, Chinese companies showing up on Western trading boards a few years ago were like manna from heaven to nervous investors. With markets jittery about deficits, housing crises, sovereign debt and wars, money managers had been looking for better growth bets. BRIC countries (Brazil, Russia, India, China & South Africa) have been great places to go, but China has shined among them as the best place to park your dollars and make the biggest profits.

When Chinese companies started arriving onto US markets with stellar balance sheets, impeccable-looking business plans and smooth-talking executives at investment conferences, buying in seemed like a no-brainer. And with the safety net of US trading regulations, it appeared safe. So the money flooded in and nobody asked any questions. For a while, anyway. (Sound familiar?)

Hearing the Tree in the Forest

China's economy has developed almost completely independently of the West over the last 30 years. Its near-reckless embrace of capitalism has mixed with its unique culture and system of government to form a murky, near un-navigable business environment. The entities that have grown out of this swamp to reach into the markets of the West were like nothing we have ever experienced before. Consider some of the practices that are commonplace in China:

  • Business here is ALL about relationships - Deals just don’t get done unless a relationship exists or is developed over time. Companies that have boards of directors will pack them with Party people or loyalists/allies/relatives of Party people. This ensures that the right relationships exist to grease the wheels of bureaucracy.

  • Corruption is a part of life - There are kickbacks on top of kickbacks with just about everything that you want to do here. While that can actually provide a bit of certitude (i.e. you KNOW that things will get done once you've paid off the right people), you're also in danger of falling victim to the always-shifting political winds. If your "sponsor" is on the outs one week you could find your whole deal scuttled, no matter how good it is.

  • It's all about the Benjamins – There is an unprecedented amount of cash floating around in China. This is as a result of having such a closed monetary system and it fuels he rampant inflation. It's looking for places to go and you can never be 100% sure if investments are legit or laundering schemes that the government (or some high-level official) has set up to hide their "hot money".

Enter Muddy Waters. This is a research firm dedicated to ferreting out bad Chinese companies and bringing their frauds and shady accounting practices to light. They started blowing the whistle back in November of 2010 and the drumbeat of reports kept coming all through the next few months. No incredible history of hyped earnings was safe, it seemed.

But for all of the chaos that they have caused back in China, and all of the losses suffered by US investors as a result, this collapse is really the best thing to happen to the Chiense economy in about a decade.

So What Now?

Currently, investigations are still ongoing. Many companies are slinking back into the wilds of the Chinese market by going private. Others are allowing themselves to be "taken over" by a rival, their assets swallowed up and recycled. Still others will just cease to be, their owners and backers moving on to other things, their windfalls intact and untouchable by US courts or creditors.

A few, however, are different. Some are vowing to fight the fraud allegations. Some are re-submitting earnings numbers for the past 3 years and having them vetted by large, internationally-recognized accounting firms. I've even seen a few companies submitting earnings reports for the current quarter that are pretty bad compared to what they've posted over the past couple of years. Instead of folding, they're soldering on.

These companies are the game-changers. They'll set the stage for a new era of Chinese corporate governance. In the end, it will be the companies that decide to adhere to the rules of the Western game that will be successful. Their success will breed imitators here (it's what the Chinese do best, after all) and just as Big Macs and blue jeans helped to conquer to Soviet Union (sorry, sweetie), the Chinese's own drive to get rich and access Western markets will drive them ever further towards our way of doing business.

Conversely, one hopes that investors, fund managers and financial institutions in the US will stop seeing China as a get-rich-quick scheme and just dump money into anything that waives a pretty Excel spreadsheet in their faces. As much as we need China to grow, they need us just as much. Start demanding more from them and they'll deliver. Just you wait and see.