We’ve seen some pretty good panels on the financial collapse, but the one we hosted the other night on its lessons for financial journalism was, if we do say so ourselves, a cut above.
Convened by The Columbia Journalism Review, with support from The Nation Institute, the panel asked a simple question: “What Now?”
What set the panel apart had something to do with its cast: William Ackman, the noted investor; Gretchen Morgenson of The New York Times; economist and author Jeff Madrick; and our Dean Starkman, CJR’s Kingsford Capital Fellow who runs our business-press operation, The Audit, and just wrote a lengthy critique of pre-crash business-press performance. Bill Grueskin, a former deputy managing editor of The Wall Street Journal and now the dean of academic affairs at the Columbia Journalism School, moderated.
But mostly it was the ideas that emerged: Ackman on how the access game distorts business news and leads to a pro-management bias and the reflexive dismissal of alternative viewpoints, most glaringly, those of short sellers; Madrick on reporters’ and especially editors’ internalizing prevailing ideological biases; Morgenson on the failure to question conventional wisdom and on finding alternatives to the access-oriented approach; Starkman on the press’s failure to take on big financial institutions and the good things that happen when it does. Grueskin stirred the pot with provocative question, and audience members chimed in with their own.
Excerpts are below, but it’s well worth a listen. To download an mp3 of the conference,
Here’s the video, but be forewarned, the audio quality of some parts is not excellent. In fact, it’s pretty bad. We’re working on a better version:
Here are excerpts from the panelists’ opening remarks:
Gretchen Morgenson is an assistant business and financial editor and a columnist at The New York Times:
I think that this economic crisis and the way the press covered it…is not so unlike the way the press approached other past bubbles that burst. This one just seemed a lot bigger because it involves people’s homes, which is generally speaking, people’s biggest asset…and, certainly, much more money was lost in this debacle…but I would say it’s been similar transgressions in the years leading up to this.
The first casualty in any kind of a boom is a predilection of the press to really buy into the conventional wisdom…When I worked at Forbes magazine, I worked for an irascible editor whose name was Jim Michaels … and he was a guy who was very demanding, and one of the things he taught me how to do was to question the conventional wisdom. That is a very, very important thing to do for journalists, particularly journalists who are at all covering Washington, and I think it is exceedingly difficult because Washington is very much an access-journalism beat, and a lot of this story did emanate from Washington because housing finance is so very heavily regulated that a lot of what really drove this crisis and drove us off a cliff [came from there].
So there there was a real desire to buy into this concept that home-ownership was good for everyone, that you don’t need a down payment because it will be okay because housing prices will go up. So there was a lack of questioning of conventional wisdom that was very problematic this time around. And that’s sort of the big picture [problem]. In terms of smaller-bore problems, I would say this particular crisis, because it involved very complicated securities, structured finance products, collateralized debt obligations, residential mortgage-backed securities—these are things that are not necessarily as transparent as, say a share of common stock in a public company. It’s hard to really research what’s in a mortgage pool. In fact the very investors who own these things don’t know exactly what’s in the pool. So for a reporter covering these things, it’s very hard to know how many of these loans were no-documentation, NINJA loans, no-job, liar loans, those kinds of things…It was a failure to question the conventional wisdom as sort of the big picture but then a smaller, closer to the ground viewpoint it was very hard to cover some of the securities that were really at the heart of this problem.
Jeffrey Madrick is a regular contributor to The New York Review of Books and a former economics columnist for The New York Times. He is editor of Challenge Magazine, visiting professor of humanities at The Cooper Union, and senior fellow at the Schwartz Center for Economic Policy Analysis, The New School:
It’s probably endemic to popular journalism to always be a little bit behind the story because in many respects popular journalism pretty much defines conventional wisdom. It’s pretty hard on a regular basis to defy the conventional wisdom for a publication as a whole. I think I’ve spent much of my career trying to defy the conventional wisdom, and it’s not always a very profitable business. So how to get off of that?
To me the best illustration of that was the New Economy, quote-unquote, the New Economy, of the late 1990s. I’ve been in and around journalism and now looking from the outside journalism more these days, and I’ve never seen popular acceptance of an unambiguous and probably incorrect idea as I have in the espousal, promotion, and advocacy of this thing called the New Economy. What did the New Economy do in the late 1990s? What was the advantage of it? Well of course it justified crazy stock-market speculation. What happened by and large, was that while there were stories about unusually high stock prices, there was an underlying current that this time it was different. There are a variety of people throughout history who said beware of those words: “This time it is different.” It gets repeated in bubble after bubble and eventually journalists and particularly the editors—and if I’m going to blame journalism, I do want to pin it more, in fact, on the editors than the reporters. But I think the editors want to go with the flow and they went with the flow in the late 1990s.
What was the flow in the 2000s? We can go through the history of this over and over. Since the 1970s, there was an acceptance of this market ideology we were all talking about that also permeated the journalistic community. There were exceptions. But, [it was] the acceptance of this idea that the market is generally right. And I think in retrospect there was a remarkable lack of questioning of the under-tenets of the economic boom of the 2000s and, also, in light of this ideology, the economic boom of the 1990s. Almost nobody in retrospect was talking about the cause of economic boom of the late 1990s as debt-inspired consumption. And again in the 2000s, despite the extraordinarily high levels of borrowing, nobody was talking about debt-inspired consumption. I’m fairly certain it was an ideological issue in the end: that the debt made sense; it was merely a reflection of high house prices, and high house prices I do not find were questioned all that much mainly because we trusted the market, and journalism glommed onto it.
There an old saw in journalism: You’re only as good as your sources, and journalists’ sources were pretty confined. Where were [the warnings of] mainstream economists during this boom? Almost nowhere to be found. Where were, of course, the Wall Street economists in this crisis? For the most part, not unanimously, but for the most part justifying their existence. But, finally, in the end it is the journalists’ responsibility and the editors responsibility to get the story right.
Hagiography is my last point. There has long been a tendency to raise these people like [indicted ex-Bear Stearns executive Ralph] Cioffi… on a pedestal and idolize them. It became a contest. In 2002, someone called Bear Stearns the most admired securities firm in America. There is this contest time and again to [engage in] hagiography with our business people, and I think it’s had pretty bad results.
Dean Starkman is managing editor of The Audit, an online critique of financial journalism of the Columbia Journalism Review, and the author of “Power Problem,” a critique of business coverage in the runup to the meltdown:
The subhead of the piece was, “The business press did everything but take on the institutions that brought down the financial system.” I’ll save you reading 6,400 words. What was lacking was, for want of a better word, muckraking reporting.
But I wanted to dwell actually on the successes. What struck me when I was doing this piece, one, is that journalism is actually a lot more effective than you think, and two, what a crude and blunt instrument it actually is.
You [don’t want to] be too subtle about it—This is the lesson I’m learning. Because time after time when the press went after the brand name, by name, with a full-on, straightforward probe of their lending activity or where the money was coming from, change happened. Reform happened. It happened enough that it became apparent that, well, it was too bad it didn’t happen more often. The example that comes to mind was a 2000 story by Diana Henriques and Lowell Bergman in the New York Times about a now-closed outfit called First Alliance, which was then a big notorious lender out in California backed by Lehman Brothers. They did a long story on both the predatory practices of this company and where the money came from—in this case Lehman. And by God, First Alliance closed within weeks of that story and was the subject of successful private litigation that was ultimately upheld in the appeals court.
The Times and [The Wall Street] Journal did excellent work on another now-defunct dinosaur called Associates First Capital, a notorious outfit back then, and same thing happened—the Federal Trade Commission hit the successor company, an outfit called Citigroup you may have heard of, with a record fine. Forbes did wonderful work on Household Finance, now HSBC, and state attorneys general hit them with an even larger fine, $484 million—a [new] record. Last one was one the L.A Times did, in part by a fellow in the audience, Mike Hudson, who did some freelance work for the L.A. Times. And these were scathing probes of Ameriquest’s lending practices. This was in 2005 and, by golly, in 2006, they were hit with a $325 million fine, and the next year they were closed. I’m an old investigator, so to me the lesson is fairly clear. You really have to go straight at these institutions. And the maddening part of reading back over all this coverage was that just as subprime lending was really taking off, in 2003, when it [began to] hit levels we’ve never seen before and hopefully never will see again, and securitization was doing the same, the business press’s investigative capacity went into hibernation. And I don’t think it’s an accident that we are where we are today. That was my big lesson.
William Ackman is founder at Pershing Square Capital Management, best known for his longstanding and prescient critique of bond-insurer MBIA, a critique that warned of looming problems in the mortgage market:
I attribute the housing bubble largely to the fact that until 2006 it wasn’t possible to short housing. So the whistleblowers that typically look for overvaluation and fraud weren’t able to play. So there were no short sellers. The most powerful journalist—claimed to be a journalist—that was driving securitization and housing prices, the journalist I refer to was Moody’s and S&P, which claim a First Amendment, journalistic exception for what is effectively part of the underwriting process. And what’s interesting, just to prove Moody’s and S&P are not newspapers, just look at their profitability compared to newspapers’ (laughter)… Moody’s as a stand-alone rating agency was the second-most profitable company in the S&P 500 on a profit-margin basis; the only more profitable company was MBIA, the bond insurer that they helped to create.
Number three, and here’s where I hold the real press accountable: I believe there is a general bias toward management by the press. And management in this case, you’re looking at Wall Street. It’s only after Wall Street falls that the press gives Wall Street a hard time. And while Wall Street is booming there… is the hagiography of the investment banks. And there is a general derision of short sellers. I’m on occasion a short seller. And I actually believe short sellers and the press should be best friends. The best sources talk to some of the best reporters. I won’t mention anybody on this panel… but also I’m good friends with Bethany Mclean, and many of her best ideas that got her where she is, stories on Enron, came from short sellers. Short sellers, scourge of the market, have to do better work, more thorough, because they’re generally taking a very contrarian view…
I look at my experience dealing with MBIA and trying to get the press interested in the story and [seeing it initially] rebound against me.
There’s this huge bias against short sellers and bias in favor of management. Part it comes from the issue Gretchen mentioned is access. If you want to able to write stories about CEOs, you’ve got to stay friends with the company. There’s general bias to take the company’s point of view. Shorts sellers are always viewed as having an agenda, but what journalists miss is that the CEO of Lehman probably has 98% of his net worth in Lehman stock, and so he is enormously biased from a financial point of view. The short seller might have a 7% short position as in the case of David Einhorn. So yes, he had an economic point of view, so yes, but David could choose which stocks to short, and the CEO of Lehman was stuck with one to be long….That’s a very important thing to think about. I would expect everyone you’re talking to when you’re writing story in the business press to have an incentive. The most important thing is to understand what it is, and consider what they have to say. But don’t discard one side of the story because they have an incentive for the stock price to go down and [listen to] the other side—management—because they have an incentive for the stock price to go up.