Hugo Dixon

Reuters Breakingviews is more used to commenting on other organisations’ behaviour than to having its own actions put under the microscope. But in the last week, as a result of retroactive disclaimers we made to a series of articles in order to clarify potential conflicts of interest, we have rightly been under scrutiny.

We have now completed our inquiries and I wanted to explain to you what happened and how we plan to act in future.
Reuters’ Handbook of Journalism forbids journalists from dealing in “securities about which they have written recently or about which they intend to write in the near future”. It also requires them to notify their manager before writing about a company in which they have a financial interest. The purpose of these rules is to avoid actual or apparent conflicts of interest.

Late last month, a journalist told one of our editors that he had acquired BP shares near their trough following the Gulf of Mexico blow-out. The columnist had written about BP around the time he bought the shares. After further inquiries, it emerged that he had traded in six other stocks (of which four involved taking up his rights in rights issues) within one month either side of writing about them. He also disclosed that he had written about another eight stocks in which he had a significant financial interest. In total, 15 stocks were affected and 39 stories were re-filed with disclaimers. Although we found no evidence that the columnist had abused his journalistic position for financial gain, we view this as a serious matter. The journalist resigned.

All other Breakingviews columnists have been asked whether there were any potential conflicts of interest. As a result, we re-filed stories with disclaimers by two columnists. In one, the journalist dealt in securities once within a month either side of writing about them, although the size of the investment was not significant. In the other, disclosure was made to the journalist’s then-manager — complying with Reuters policy — but an inconsistent approach was taken in disclosing this to readers.

The process is now concluded and, where necessary, appropriate action has been taken. Reuters as a whole is reviewing its own procedures and training to minimise the chance of anything like this recurring. In the meantime, Breakingviews will enforce the existing code vigorously.

Hot money is the bugbear of policy makers in many developing economies. Just ask Brazil or, indeed, Thailand, which has just imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds.

One worry is that booming currencies will become uncompetitive; another is that easy-come, easy-go money will make economies vulnerable to booms and busts.

But not all inflows are bad. Provided capital can be locked in at cheap rates and turned to productive use, it can even be good. One of the best ways of doing so is for companies to take advantage of the current IPO boom.

If international investors want to throw money at Indian coal, Malaysian chemicals or Asian insurance, the issuers — who are often governments — would be foolish to say no.

After all, money invested in an IPO can’t be that easily ripped away. Sure, investors can sell their shares. But in doing so, they will be cutting off their own noses rather than those of the issuers.

Money invested in IPOs has two characteristics that make it much healthier than other types of hot money. It is equity, and it is long term.

The least healthy type of hot money, by contrast, is short-term debt, especially if it is issued in a foreign currency. When that cash flows away, the borrower is left high and dry. This was the main problem of the emerging market crises of the 1990s but, fortunately, it is not a problem today.

In between the two extremes, there are ordinary portfolio flows in the secondary market — not as good as IPO money or direct foreign investment, but much better than short-term foreign currency borrowing.

Of course, even the inflow of IPO money still boosts the currencies of recipient countries. But if the capital is deployed in productive investment, at least there is a silver lining. What’s more, in a few cases, notably AIA’s mega listing, the money will immediately flow out again — to its parent AIG and, ultimately, the U.S. government.

In other cases, where the seller is the state, cash could even be put aside in rainy-day funds and invested in the developed world. That might seem odd. But if developing countries really think hot money from abroad is inflating their markets, it would be a profitable trade.