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Business media missed the moment on GFC

BusinessmagsThe press, like so many of our institutions, fell short in the years leading up to the worst financial crisis in 80 years, writes Ryan Chittum.

13 March  2011

Predatory lenders ran amok and were fed by a Wall Street machine that soaked up profits by soaking borrowers. And the press, with notable exceptions, looked the other way.

Media coverage after the crisis commenced was better than in the years before it, in part because of the reactive nature of the press: the stories were largely already out there. Millions of Americans were losing their homes.

A breaking-news story like the collapse of Wall Street in September 2008 showed the press at its finest, covering the story aggressively while not furthering a panic, all while imparting to readers the historic import of what was unfolding.

But what’s most important is not what happened in September 2008; it’s what had happened in the years leading up to the collapse and what’s being done about it. What were the conditions that caused it? Who did what to whom and why?

On that crucial front, press coverage was less than successful, resulting in the ability of someone like CNBC’s Rick Santelli to spark a popular uprising, blaming neighbors rather than bankers. If the press had really told the story of the predatory lending and the machine behind it, such an argument would have gained far less traction.

As the Columbia Journalism Review’s Dean Starkman (my editor) put it in an essay pointedly titled “Boiler Room” in September 2008—the month Wall Street melted down—was this a natural disaster or was it a crime scene?

David Brooks, George Will, and other cultural conservatives—let’s call them behavioralists—have felt free to blame the unraveling of the financial system on some sort of spontaneous mass deterioration of public morals.

Structuralists like myself, meanwhile, argue that people didn’t change, the marketplace did. Most journalists, I would argue, retreat to the mushy middle: the there-is-plenty-of-blame-to-goaround school, a theory of more generalized cultural decay that includes undisciplined lenders as well as irresponsible borrowers.

The trouble with this debate is that all the evidence is on my side. All they have is lazy musings about Woodstock and tattoos.

This argument should be over by now, and I honestly believe if these cultural commentators (and everyone else) had better information, it would be.

That a wide swath of public opinion could blame borrowers for defective mortgages—and it was hardly just conservatives making such arguments—points to serious press failures in digging out and explaining critical components of the crisis. For the media, coverage often implied or directly stated that the whole thing was beyond anyone’s control.

The natural-phenomenon presentation was taken to its absurd epitome by one of the most widely praised journalistic accounts of the crisis, Too Big to Fail, a book by the New York Times’s Andrew Ross Sorkin.

A six-hundred-plus-page Great Men of History account of executives (and former executives like Treasury Secretary Henry Paulson) scrambling to save Wall Street in the dark days of 2008, it hardly pauses to point out that its stars, like Lehman Brothers CEO Dick Fuld, were instrumental in creating the very mess they were scrambling to clean up.

It’s a wholly Wall Street–centric view of the world, presented with hardly a nod toward placing these views in context—like talking to the criminals for a heist story and skipping the victims and police.

Too Big to Fail exemplified a critical issue in journalism: all beat reporting has an access problem. The pressure to deliver news and inside information is at odds with the imperative to cover powerful institutions and their leaders without fear or favor.

Governments and businesses use the promise of access to prevent reporters from writing too negatively. To do so is to risk losing access to inside information, getting scooped, and being unable to fully perform one’s job.

If anything, access is a bigger problem when covering business, which isn’t subject to open-records laws or electoral pressure and has more money to create lobbying, marketing, and public relations campaigns that flood the system with its message.

Coverage is tilted toward how businesses’ actions affect their stocks or other corporations’ businesses. This is the financial version of the horse race predilection of the political press. Corporate impact on society, consumers, or the company’s employees is primarily an afterthought.

Of course, the business press is primarily read by businesspeople. It has to write for that audience. But the press shortchanges its business readers by not reporting well on the conditions affecting their customers—and how these businesses’ decisions affect them.

The run-up to the recent crisis is a perfect example of this, when the hollowness of the economic expansion wasn’t fully explored. And while the press has upped its efforts in the wake of the crash, it’s still missing some of the root causes.

Let me say upfront: examples of great work can be found in areas the press has covered poorly, just as bad work populates areas it has covered well. The criticism that follows here isn’t to say that all coverage is one or the other.

It’s easier to find perfectly fine stories than demonstrably wrong ones, especially in the top tier of the financial press. But the hardest part of journalism is the picking of priorities. A news organization can only cover so much.

What was left out or under-covered is as much a part of the story of how the press performed as what made the papers.

Moreover, the financial difficulties of the press itself should not be forgotten when assessing its coverage. At a time when it could least afford it, the press not only was hit by the plunging economy but also by a secular decline in the business itself—one that shows no signs of turning around and which poses an existential threat to its once-mighty institutions.

It’s impossible to tell what the coverage would have been like with a healthy fourth estate, but it surely would have been much better.

At the same time, the very idea of “the press,” as understood at the time of the last stock market crash, which bottomed just five years before the current crisis began, had changed irrevocably in the interim.

The Web, which pulled the plug on the old business models, and which was in its infancy during the tech bubble, gave rise to new sources of information that enabled readers to hear from and talk directly to expert sources, to become presenters of information themselves, challenging the fusty conventions of just-the-facts-ma’am journalism and injecting a new dynamism into the public conversation.

The story of how the press covered the crisis is still unfolding, as is the financial wreckage itself. There’s no precise start date for the credit crisis; you can take your pick.

Housing started to decline in 2006. Spreads on soon-to-beinfamous credit default swaps were widening early in 2007. Hiccups in the credit markets started appearing in the spring. New Century Financial, a giant subprime lender, went bankrupt in April.

But the collapse of two Bear Stearns hedge funds in the early summer signaled that the fallout from subprime would not be “contained,” as Federal Reserve Chairman Ben Bernanke had predicted that March.

Reporter Matthew Goldstein’s groundbreaking BusinessWeek story in May 2007 showed that Bear was trying to unload the funds’ subprime securities onto an unsuspecting public via a stock IPO announced a few days earlier, a scandal that had gone unnoticed by the rest of the press, and a glimpse at the bucket-shop mentality that prevailed among the banks.

Three weeks later, the Financial Times finally picked up on the story, and markets shuddered as the Wall Street Journal reported in mid-June that Bear Stearns was scrambling to sell its subprime securities as their prices collapsed.

The first Wall Street domino was set to fall. Frustratingly, the press periodically did outstanding work but failed to follow up thoroughly enough to change the narrative.

The Journal’s “Debt Bomb” series, for instance, in the summer of 2007 still stands as some of the best reportage on the causes of the crisis. Michael Hudson wrote an all-too-rare story tying Lehman Brothers and Wall Street directly to the subprime mortgage industry, noting that “Wall Street firms helped create the mess by throwing so much money at the market that lenders had a growing incentive to push through shaky loans and mislead borrowers,” which hit the core of what had gone wrong.

Ruth Simon and James R. Hagerty wrote about the broker boiler rooms that conned borrowers, and Greg Ip and Jon E. Hilsenrath wrote the following in August, as part of a story examining the roots of the easy credit that fed the bubble: The financial system has absorbed the latest shock.

So far. But credit problems once seen as isolated to a few subprime-mortgage lenders are beginning to propagate across markets and borders in unpredicted ways and degrees.

A system designed to distribute and absorb risk might, instead, have bred it, by making it so easy for investors to buy complex securities they didn’t fully understand. And the interconnectedness of markets could mean that a sudden change in sentiment by investors in all sorts of markets could destabilize the financial system and hurt economic growth.

That December, a fourth story, by Carrick Mollenkamp and Serena Ng, told the tale of an especially toxic collateralized debt obligation (CDO) called “Norma” created by the hedge fund Magnetar.

The press would blow this story wide open—nearly two-and-a-half years later—when ProPublica’s Jesse Eisinger and Jake Bernstein showed how Magnetar’s bid to short housing perversely, and nearly single-handedly, kept the bubble inflating longer than it would have.

If you happened to read these four Journal stories—which were printed months apart—in isolation, you would have a good start on understanding the root causes of the financial crisis.

But amidst the wave of words written, how many truly remember such work? The press has done a decent job in the three years since explaining the Ip and Hilsenrath easy-credit story but a poor one of investigating the Wall Street–boiler room nexus that implemented what happened in the neighborhoods.

This was particularly evident when the press presented home owners as being just as culpable for the housing bubble and fraud as the financial institutions that aggressively lent to them.

Plenty of stories have focused on the huge amount of debt piled onto households in the last thirty years. But relatively few of them focus on why households took on so much debt in the first place.

The conditions of the crisis were created by the decades-long struggles of the middle and working classes, which became especially acute in the Bush years.

As Wall Street fired up its money-making machine in the middle part of the last decade, churning out subprime mortgages at a torrid pace in 2005 and 2006, real median incomes were stagnating, lower in 2006—which, remember, was supposedly a boom year—than they had been at the start of the decade.

Americans were borrowing more in an attempt to stay afloat. In the backdrop, the incredible amounts of wealth flowing to the very top concentrated wealth and power in the hands of a few in ways not seen since the twenties.

Whether concerned about class warfare or liberal bias, the press all-too-infrequently made explicit the deteriorating financial condition of the average American family. The ideology of Wall Street—the deregulatory, business-knows-best mantras—had so infiltrated it that talk of an oligarchy still smacked of class warfare even while bankers, whose machinations had sent nearly 9 million Americans to the unemployment lines in two years, were back at the trough in 2009 paying themselves record or near-record bonuses, and three years into the crisis, Congress couldn’t find the wherewithal to institute basic financial reform.

Occasionally the truth peeked through, and sometimes from nontraditional business-news sources, as it did when an establishment figure, the former chief economist of the International Monetary Fund, Simon Johnson, wrote a compelling piece for the Atlantic in May 2009 called “The Quiet Coup,” in which he describes a finance industry with its hands around the throat of the country: Elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.

More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.

The government seems helpless, or unwilling, to act against them. Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China.

Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common.

Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.

Johnson sounded like a radical for speaking the obvious truth.

Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages or would we like to at least buy cars and buy houses in foreclosure and give them to people that might  have a chance to actually prosper down the road and reward people that can carry the water instead of drink the water?

-          CNBC on-air editor Rick Santelli

When CNBC on-air editor Rick Santelli exploded on television in February 2009, the housing bust was in its fourth year. At the time, stocks had crashed by half just since October 2007, and Americans were losing their jobs by the hundreds of thousands every month.

The government had bailed out Citigroup, AIG, Bear Stearns, Goldman Sachs, and a host of other mega corporations.

But what got Santelli going was a modest proposal to help struggling home owners. Santelli and many others missed the whole epidemic of fraudulent inducement that overtook mortgage lending in the middle of the decade.

The point is, if you have someone—a bank, no less—telling you that you are eligible for a $425,000 mortgage that will be your entrée into the middle class—and anyway, if you can’t afford it, you can sell it in a few months and make $50,000—you’re going to take that deal. You have less information than the other side. All you know is they must know what they’re doing.

This is the very definition of predatory lending: when one side has so much more information than another that it tricks people into making decisions contrary to their own interest.

This blame-the-home-owners anger hadn’t come from nowhere. The press enabled it—and indeed, fed it, in many cases—by not aggressively reporting on the predatory roots of the housing crisis—one of the great press failures of the last few years. (There were exceptions that prove the rule: Mara Der Hovanesian’s BusinessWeek story, for instance, on how the frenzy for subprime loans to package and sell devolved into sexual favor trading, was excellent).

Stories about home owners “trashing out” their homes competed with those about banks and brokers trashing home owners. Borrower fraud got a disproportionate amount of column inches compared to lender fraud.

In no small part this is because of the failures of regulators and prosecutors to aggressively investigate the scandals. But that’s no excuse. How many faithful readers of the business press knew that Citigroup was built from the ground up on a subprime foundation?

How many had heard much about Ameriquest, settler of two massive class action suits for its predatory lending to hundreds of thousands of borrowers that included “hefty upfront charges, interest rates that were higher than promised by nine-tenths of a percentage point or more, and loans with variable rates when fixed rates were promised,” and who “deceived borrowers, falsified loan documents and pressured appraisers to overstate home values”?

How many knew that the Bush administration gutted protections from predatory lenders with rules that superseded tough state laws? How many knew that the subprime boiler rooms were not just financed by Wall Street, but in many cases owned by them?

The top fifteen subprime lenders included names like Citigroup, Washington Mutual, JPMorgan Chase, Wells Fargo, General Electric, Lehman Brothers, and HSBC. The Center of Public Integrity reported that of the twenty-five biggest subprime lenders, twenty-one received bailout funds.

How many knew that at the peak of the bubble, some 55 percent of borrowers who got subprime loans were eligible for lower-interest prime ones?

That last fact is particularly interesting—and disappointing—because it came from an excellent enterprise story by Rick Brooks and Ruth Simon in the Wall Street Journal in December 2007, which spelled out what it meant:

The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans.

They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals—and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms.

It’s the kind of story that could have been a turning point in coverage. But it wasn’t. That core fact—prima facie evidence of the corruption that fueled the bubble and Wall Street profits—is barely known. The Journal itself explored the issue just one other time.

Even when excellent subsequent stories delved into related matters, that revealing Journal statistic rarely showed up, illustrating a larger problem with connecting the dots of this sprawling, complex story.

The Seattle Times, for instance, wrote about hometown predator Washington Mutual a year after its demise without taking into account the Journal’s previous reporting:

The worse the terms were for borrowers, the more WaMu paid the brokers. A WaMu daily rate sheet obtained by the Seattle Times shows how lavish the rewards could be. On an option ARM, WaMu would reward brokers as much as 3 percent of the loan amount—more than triple the standard commission at the time.

Brokers would get an additional point—1 percent of the loan—for roughly every half-point in higher interest the borrower paid. So the broker would get 3 percent of the loan if he could get the borrower to pay 1.5 percent above the market rate.

The inability to connect dots—to tie, for example, high broker compensation for subprime loans to the fact that many potentially prime customers were put in them—is not a simple problem to fix.

Reporters have always faced pressure to produce bylines, and with the industry in freefall, this pressure only increased. At the same time, the amount of information to sift through has become exponentially greater.

While the crisis has eased, its impact will be felt for years—probably decades. While it is top of mind, it’s not too late for the press to pick up on some of the stories it has left under-covered.

With Wall Street up off its knees and again wielding enormous political influence, it is vital for the press to lead in gathering the facts that will help Americans form a coherent narrative of what happened and why.

It is essential, for instance, to continue to dig into how Wall Street stoked the predatory lending that stoked the crisis, captured regulators and politicians with its hands-off agenda, how this played out throughout the system all the way down to the mortgage brokers, and how, near the end in 2007 and 2008, the great investment banks ramped up the machine just before it blew up.

These stories are sitting there waiting to be told.

Bad_NewsRyan Chittum writes about the business press for the Columbia Journalism Review’s The Audit. He is a former Wall Street Journal reporter and has written for the New York Times and other publications. He lives in Seattle with his wife and twin daughters.

This is an edited extract from ‘Missing the Moment’ by Ryan Chittum (Copyright © 2010 by Chittum), which originally appeared in Bad News: How America’s Business Press Missed the Story of the Century edited by Anya Schiffrin (Copyright © 2010 Anya Schiffrin), published by The New Press. Reprinted here with permission.

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