Q&A Part I: Interview with Michael Rapoport

Next four postings will be a Q&A series with an award-winning business columnist Michael Rapoport, Dow Jones News Wires. How does he find story ideas, how to build and keep his sources, and what reporting tools he recommends to use.

Q1. Take one story you've done and describe how you came up with the story idea.

A: The most efficient way to come up with story ideas is to have a good grounding about the topics. It is important to know how to look at balance sheets and how to read financial reports because companies will always try to put things in the best light, with a spin favorable to them - they'll downplay bad news, or not frame it in a way that would allow investors to fully understand its implications.

For example, I did a story a few weeks ago on Freddie Mac's tax assets. Freddie Mac was saying the company didn't have to write down some of their assets because the losses were temporary and were going to be recovered. Therefore, the company will still be able to use the deferred tax credits in the future.

But I knew it was BS because they had already endured for long periods and because a lot of them were associated with mortgage-backed securities and other bad assets that are very unlikely to recover soon.

So when I heard it, I knew it was worth writing about. I knew Freddie Mac certainly needed to write down its $18 billion deferred tax assets even though it interpreted laws in their own likes.

Q2. What will be one piece of advice that you would give to business journalists?

A: Always be suspicious when you look at numbers. Three years ago, there were a lot of mergers in telecom industry. In a story I did on SBC Communications Inc. (SBC)'s acquisition of AT&T Corp, I was comparing the savings the companies were touting with their combined total annual operating expenses, and pointing out that it would be virtually impossible to save, say, $15 billion in expenses on day one after the merger when the combined companies' expenses were $62 billion - you don't cut nearly 25% of your expenses overnight.

So you had to do your own calculation. I do my own calculation a lot. Sometimes it turned out to be something, sometimes not. But my advice is always aware that the company is not going to tell you everything.

In terms of what "tools" I used in looking into it, I think all I did was note that the companies had said that their savings were on a "present value" basis, and start asking questions about exactly what that meant. As noted in the story, it appears to be something that sophisticated professional investors would understand and take into account, but not necessarily something obvious to the layman or the average small investor. I suspect that sort of thing happens a lot - companies speak in their own language and cut corners in their explanations, and gloss over things that are important for investors to understand. And average investors don't press them on it, which they should - it's the equivalent of needing to read the fine print before signing a contract.

The company is not going to tell you any more than it's required to, and when it's in a press release they will try to spin things to their advantage. They'll bury the negative stuff on page 19 of a 20-page press release, or tell you that a gigantic charge against earnings isn't important because it's non-cash. The more you know about how to read financial statements and what's important in evaluating a company, the better you'll be able to let them know that you're not falling for their BS and get to the real story.

To be continued...