Monday, September 15, 2008

The United Rumor & The Power of Aggregated News

I should note before diving into this topic that it's related to the post below this one on the financial crises.... but since I haven't posted on the blog yet, I figure this is worthy of its own thread. :)

Through reading news and talking with my roommates today, I learned that last Monday, a report that United was filing for a second bankruptcy made its way around news websites across the U.S. and caused the company's stock to plummet (from $12 a share to $3 a share) in the early hours of market trading on Sept 8. The only problem? United never filed for a second bankruptcy! By the end of the day, the rumor was cleared up and the share closed at $10.92, which was only a 11 per cent loss. But with a loss of $1 billion recorded at one point throughout the day, this clearly shook up both United and the markets. The full NY Times story is here:

Of course, the big question afterwards was: Who was to blame for all this? The story goes that an Chicago Tribune article (about the first and only United bankruptcy filing in 2002) was posted to The South Florida Sun-Sentinel Web site and included in a report by Income Securities Advisors, a business research firm, on company bankruptcy filings for 2008 (because the date when it was reposted was fresh). This report was posted to a Web page on Bloomberg News, and the headline was included in a news alert (text, E-mail, etc. I'm guessing) for Bloomberg subscribers. I think it's pretty safe to assume that many people on Wall Street did not fact check that headline before plunging into trading action.

I think this example raises a lot of issues with the lightning speed spread of news around the world. I can't even begin to fathom how many minor headlines are picked up each day by Google (thanks to software that aggregates keywords and relevant information) and circulated around the country and world. I've participated in many conversations in past journalism classes about the importance of fact-checking all information before relaying it on to an audience, even if you risk being the last source to report that story or information. (Better to lose a few readers than lose your credibility!) Of course, the Chicago Tribune claimed the 2002 story can only be found in the newspaper's online archives, and nobody has assumed full responsibility for starting the rumor. So perhaps credibility doesn't even become an issue anymore, if the information goes through so many different sources?

Just some things to ponder. The American economy is very sensitive to the news of major U.S. business collapses (sorry, not very savvy with the business/economic lingo!) these days, and rumors like that have the power to do notable damage to the stock market once people accept them as fact... which can happen almost immediately. What kind of power does this give Google? Could this kind of crisis happen again, or have investors and news aggregators/analysts learned their lesson? What impact could a false news rumor like this create in the future? I should probably stop here-- I have a tendency to write a lot-- but thoughts on this are very welcome!

1 comment:

Jeremiah said...

Reading this piece on the fall of Bear Stearns, a similar pattern emerges. It wasn't a sudden collapse in some of Bear's assets that lead to its fall. Instead, it was a series of rumors which, in the words of the author of the aforementioned piece, "would grow into a tidal wave of rumor and speculation that would crash down upon Bear Stearn."

In the case of Bear, it wasn't the media that started the rumors like the United case, instead, the media simply gave credence to the rumors and amplified their underlying message. Specifically, CNBC first gave credence to the rumors by making them public on their network. Then, two commentators for CNBC later openly challenged whether or not Bear could survive; one saying he didn't think Bear could make through another day while the other reporter questioned Bear's very existence as a trader. Both of these actions by CNBC had the effect of increasing and amplifying the rumors, even though they were unfounded and untrue, until other firms and banks on Wall Street began acting like the rumors were true.

In the case you mentioned, United was lucky enough to be able to weather the storm. However, it's clear that the media can spread and propagate rumors faster than it's self-correcting mechanism works. If United were replaced by a large bank in the situation you wrote about, the consequences of such a rumor being spread about the bank's solvency could cause a run on the bank which would have an enormous trickle-down effect on the market potentially even devastating the economy.