Tuesday, May 23, 2006

The Wall Street Journal Gets it Half-Right

Journalists are an interesting bunch. Since I have been on this blog, I both have a new respect for the craft of journalism and a general bad taste in my mouth for how it is typically practiced.

The Wall Street Journal had an interesting called “Schools for Scribblers” in their May 19th edition (I don’t usually link to their articles because you have to pay for an online subscription). This article talks about the masses of people being churned out by journalism and communication schools, even while newspapers are cutting staff. From the article:

“So what do aspiring journalists learn in school… there’s a heavy emphasis on process and theory (of journalism)… the running theme is an emphasis on process and the ‘craft’ of journalism… yet this seems a waste of time. Schooling is expensive… instead of educating journalists on the nuts and bolts of journalism – it would make more sense simply to teach them things Facts, it turns out, are useful.”

The article goes on to talk about Columbia university and their attempt to inject core facts into the curriculum. Really, this makes a lot of sense. It doesn’t take much to learn the theory behind being a journalist. But to actually be an effective journalist, you need to understand the topic at hand, do research, and be able to get your point across effectively.

The advantage lots of bloggers like myself have over typical journalists (especially people right out of school) is that we KNOW THINGS. On this blog and many, many other good blogs we talk about what we know, and we are well versed in these topics because it represents items we have experience, opinions and facts on. If we talk about something where we have direct experience, our challenge is really to get our point across, not to 1) determine what the point should be 2) research the point, then get our point across. Part of the reason anyone can start a political blog is that most political research is a vast wasteland once you get beyond the mechanics of research and behavior… there still are a million Democratic activists and bloggers that are scratching themselves wondering how Bush won in 2000 and 2004.

OK, so the Wall Street Journal gets some “brownie points” there for calling out journalists (they are journalists themselves, after all) and point out via constructive criticism how they can improve.

But then… they go about disproving the theory by manifestly NOT knowing what they are talking about.

In an article titled “Lenders, Borrowers Hook up on the web” on Saturday, May 20th one of their writers describes a new online site where individuals can request non-secured loans (borrowers) and other individuals negotiate with them (through the web) and “bid” on at what rate and what amount they are willing to send the money (lenders).

This site is interesting, although I instantly saw these unsecured loans (secured loans are tied to the value of property like a mortgage or a business, while unsecured loans are just based on the creditworthiness and ability to pay of the other party) as HIGHLY risky investments. You can sue the person to try to get your money back but typically the rate of repayment is very low (and uncertain) but the high legal fees and general pain-in-the-ass elements of going after a deadbeat borrower across state lines are very certain.

Thus the author goes through the site, noting what rates are typically charged and what kinds of loans no-one wants to touch, such as wedding loans. The writer doesn’t say what is obvious… loans that don’t go to expanding a business or improving service of a business or personal cash flow (paying off high interest rate credit card debt, for example) are very risky – you shouldn’t loan money if it is going to be used for consumption. Probably, the author just doesn’t make this connection (too busy studying journalistic structure in school, perhaps?)

Finally – the crowning achievement of not getting it. From the article:

“So far, I have made more than 300 small loans at an average rate of about 21%. After factoring in Prosper's fees and the anticipated default rates on my loans, I hope to earn about 13% on my portfolio. In the three months since I began lending, no one has defaulted, although eight of my borrowers are late in their payments”

Uh… if 8 loans are late after 3 months, then they probably aren’t going to pay at all, and there are going to be many, many others joining. Typically, buyers don’t call you 5 minutes after the loan is closed and say “F**K paying you!” which is what you’d have to do to get a default in 3 months. Dead loans pile up over time, and you may get spotty payment, and then no payment at all.

I remember reading about debt issuances and they had a group called “NCAA”. This is an acronym everyone knows, obviously – but in this case it means “No coupon at all” or that the borrower defaulted before they even made the first interest payment.

In the end this person’s portfolio could turn out great – who knows. But debt repayment is a complex game, and they aren’t all going to bail out day one. No one knows what the return will be…. Also the fact that people who DEFAULT don’t just drag down the average interest rate you receive overall, they can drag the rate negative, because you not only are missing out on interest you also lost the principal, plus any costs of going after the deadbeat borrower.

I’d give the Wall Street Journal a 50% glass half-empty for this weekend…

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