Sino Forests and a puzzle for media analysts

The Globe and Mail (a mainstream Canadian newspaper) has published a piece confirming the core allegations of Muddy Waters research re Sino Forest. The deals that Sino did in one area are it seems - grotesquely overstated. By implication Sino is not to be trusted and the Muddy Waters allegations are likely to be substantially correct.

This does not surprise me. I was convinced by the Muddy Waters report after reading it and cross-checking just with the annual accounts. (The business model described was bizarre and major fraud was the simplest explanation consistent with the facts.)

However my view of this was hardly important. When the Globe and Mail prints it is important. I got several emails that pointed to the article and said "game over". And they are right. Despite collapsing revenue and declining importance the "Mainstream Media" still matters. They are to some extent trustworthy - have a reputation for telling the truth about major matters - and they are selling that trust.

Blogs may be right more often than not. (So far - touch wood - this blog has made very few mistakes...) Blogs may be more adventurous (and there are plenty more adventurous than this blog and I express stronger opinions than much of the mainstream media).

But the mainstream media matters. They do have more authority and the reaction to the Sino Forest article in the Globe and Mail is about to prove it.

So here is a puzzle for the media analysts: how do you continue to monetize trust and truthful media? How does alternative media get that trust and monetize it? Or is there no way of monetizing media trust and hence is all media likely to become (more) untrustworthy?

I really do not know the answer. But if there is no way of monetizing the truth in the media then the world is becoming an altogether more dangerous place because there are plenty of ways of monetizing lies...



John

PS. The Globe and Mail was only last week squibbing on Sino Forest. They published a bizarre editorial which suggested that Muddy Waters inflammatory rhetoric reduced their credibility. I thought that Muddy Waters rhetoric (if they were right) was if anything understated. I wrote this letter to the editor which they did not publish:

Dear Sirs 

In your editorial dated 14 June you suggest that Muddy Waters Research's relentless comparisons of Sino Forest to Bernie Madoff reduces their credibility. 

Au contraire. 

Muddy Waters allegations are far from proven but if true they suggest that in excess of a billion dollars has been raised from Canadian markets to buy forest and forests were not purchased. In other words the money has been stolen. 

Further insiders and related parties have probably sold a further billion dollars in Sino Forest shares. 

This alleged theft is probably in excess of $2 billion. 

Bernie Madoff took money from Peter to pay Paul. The amount of money stolen for Bernie Madoff's personal use was probably less than $300 million. Sino Forest is six times bigger and if the Muddy Waters allegations are correct is probably the largest straight theft in human history. 

The Globe and Mail's suggestion that comparisons to Bernie Madoff are credibility reducing is just an extension of the jelly-backed tradition of apologizing for Canada's inept and faithless investment banking and stock promotion community. 

John Hempton
Sydney, Australia

And that is right. Sino Forest raised the better part of $2 billion in bonds and related parties probably sold huge amounts of stock. All that money was - if the Globe and Mail and Muddy Waters are right - stolen. That is (if the allegations are correct) the biggest theft in human history.

Comparisons with Madoff are unfair as Madoff only lifted a few hundred million for personal use. This is maybe six times bigger.

--------------------------


Later addendum: I figure that if the allegations are true then this theft was over $2 billion. That is money that went from the victims to the perpetrators net. Madoff had bigger money but Madoff got much much less than that net.

Some people have objected to me characterizing this as the largest theft in human history. I understand but can they please suggest one that is larger? I have yet to find one but the best candidates are things like the Albanian Ponzi and the Spanish Stamp Ponzi. Both were organized crime and in both cases the victims were a substantial portion of the population.

The recognized loss number from the Albanian Ponzi is about $1.2 billion... Some numbers for the Spanish Stamp Ponzi are in the 5 billion euro range - but I think the net losses are less than half that and the net-gain by the perpetrators is thus smaller than Sino Forest.

The dispossession of the American Indians or the Australian Aborigines are bigger thefts... I should limit myself to modern financial market thefts. Thefts in war (including things like Iraqi reconstruction funds) are likely bigger.

Thanks.

John