Audit Interview: Jesse Eisinger

"We're grappling with our own failures about how, by and large, we missed this"

Before joining Conde Nast Portfolio, Jesse Eisinger had already compiled a record of skeptical reporting on and analysis of Wall Street as a reporter and as a columnist for the The Wall Street Journal.

His time at Portfolio has roughly coincided with the financial crisis, which has only increased the need for Eisinger’s arms-length approach.

In his first column for Portfolio, in March 2007, Eisinger called derivatives a “$300 trillion time bomb” and said “When it comes to the really big stuff—such as global market collapses—derivatives could turn from vaccine to contagion.”

The summer the storm broke, Eisinger blasted the credit-ratings firms, said we were likely in for a crash two months before investors caught on, and wrote a remarkable piece predicting the end of Wall Street, five months before Bear Stearns went under.

This year, he questioned Lehman Brothers’ books in March, has kept the heat on Treasury Secretary Paulson, and went digging into the advent of the credit-default swap, an instrument that has amplified and in large part caused the collapse.

At The Wall Street Journal, where he wrote for seven years, Eisinger started the weekly Long & Short column and the daily Ahead of the Tape column, which still runs daily on the front of the paper’s Money & Investing section.

Eisinger recently spoke with The Audit about the crisis and how the media have performed anticipating and covering it.

The Audit: It seems to me that in the business press, institutionally, there’s just not enough— not necessarily skepticism—but aggressive skepticism. Is it in short supply and why is that?

Jesse Eisinger: I do think it’s in short supply. Clearly it is.

I think that the people who have gravitated to business journalism didn’t get into journalism for the same reasons that people in political journalism tended to get into journalism, which was this sort of vestigial post-Watergate sense that we should be a check on power. I don’t think that people in financial journalism gravitated there because of that.

I sort of stumbled into financial journalism, having no knowledge of anything to do with finance or really the ability to distinguish between a stock and a bond. But I did have this sense that what I wanted to do was be a check on power in some sense and to hold people responsible for their decisions. And so, I just don’t see that as the modus operandi of the business press… questioning authority in a fundamental way. It’s not necessarily fired by a sense that we should right society’s wrongs.

That’s what motivates me—and I think that’s a little bit arrogant, so you’ve got to check yourself and be humble in that process. But the fundamental reason why we should be journalists is to hold people accountable and be checks on power. We have to have a questioning, skeptical, adversarial mindset.

TA: Is it harder to do that in business reporting?

JE: We lived in a period where the operating ethos was that business was efficient; that markets could solve our problems; that the imaginative people in our society was entrepreneurs, and it was very easy to be disdainful of government. There were critics of government from the left and the right, and we disdained government as sort of a cesspool of incompetence and corruption. It was very easy to write critical stories about government in that context.

It’s much harder to write critical stories of companies when we’re celebrating these people as innovative, as entrepreneurial, as groundbreaking. And they also appeared to be very successful, so it was very hard in the late 1990s to be skeptical about the tech bubble.

And then we had this next wave where hedge fund managers and private-equity firms and Wall Street banks were making so much money it just seemed like they knew what they were doing. The level of incompetence is even shocking to me and I was pretty skeptical about it. But these people at the heart of it, especially on Wall Street, were just incompetent.

TA: I notice that you use past tense. Do you think this is an epochal shift? That this is all over—the dominant narrative over the last twenty-five to thirty years that commerce was triumphant and that government was just in the way. Is that era at an end?

JE: This is one of the major questions we’re going to be addressing in our industry over the next several years. The death throes of this market ideology and what rises in its stead and whether the market forces can beat the forces of regulation, to use a word that has to mean a lot. Are they going to beat them back? Are they going to be successful? They were successful after Enron and WorldCom—business went on more or less as usual.

But the era is coming to a very loud and unpleasant end. I think we haven’t fully grasped how epochal the change is and how significant the failures of the marketplace have been, but I do think the media is starting to realize the scope of the failure.

TA: Could the press have prevented or at least moderated the impact of the crisis with better, more skeptical, more aggressive reporting, or is that pie in the sky? Is it fair to expect the press to be a fortune teller almost or is it something we have to document in real time?

JE: We’re grappling with our own failures about how, by and large, we missed this and even the people who saw it coming—and I saw aspects of it coming—we just totally underestimated it.

My current thinking, subject to change, is that the media did a pretty good job on the housing bubble. We really warned over and over about the housing bubble. I wrote columns about it, Paul Krugman at the Times was writing columns about the housing bubble, The Economist was putting out covers on it. BusinessWeek did stories about aggressive lending practices. The Journal had some coverage of it. So I think that permeated…;

TA: If you didn’t know about the housing bubble, you just weren’t paying attention.

JE: Exactly.

The media did a very good job on (the housing bubble) part of it and a terrible job on the financial end of it—what was driving it on Wall Street. The proliferation of securitized products, the complex collateralized debt obligations and the rise of credit derivatives and the leverage in the system, we just didn’t cover that at all. We were totally overmatched.

What we should have done was just asked very simple, stupid questions about why investment banks were making so much money, why banks were in their most profitable period ever. And if people had written those stories from a skeptical point of view we would have done a much better job of figuring out where the fault lines lay.

Part of being a journalist is asking simple questions that are dumb. You have to be very humble as a journalist because you have to ask stupid questions and have people make fun of you and feel disdain for you.

TA: But how important is expertise in good business journalism? In talking to Jon Weil, I asked about learning to read balance sheets. You can talk to shorts and analysts and things like that, but isn’t that a key skill for somebody reporting on a company to have?

JE: I completely agree with that. The question of expertise is a very interesting one. Jon really knows how to get into the numbers and I admire him for that. I know a lot less about accounting than he does. It matters, but it also matters to get sourced up with people who understand what’s really going on and to have them walk you through things.

I would say my expertise is not in delving into documents that no one has read and finding the one incriminating footnote that explains everything. What I am good at is finding the skeptics and trying to understand their arguments and whether they make sense or not, then going to the other side and really trying to understand their point of view as well, and trying to make a decision about it—having some instincts.

I go back and forth thinking about whether journalists should have expertise in their subject matters or not. Obviously expertise helps but our job at the base of it is to go to these priesthoods and ask basic questions and try to figure out what’s going on. And these priesthoods turn out to be very important for society. Wall Street is this area that cloaks itself in sophistication and complexity, and that’s not an accident. They do that to prevent people from asking questions.

So we needed to ask a lot of simple questions that had complicated answers. The main question was why are these guys making so much money? And it turns out it’s because they’re taking much more risk and they’re much more levered. What did that mean for the financial system? And it turned out that it meant that the financial system was getting more and more fragile.

We did a terrible job of doing that. If you want to fight the last war you have to answer that question, but I think that actually helps us fight the next war, which is when we see profit, always ask why.

TA: How do you figure out who to talk to?

JE: This is the key question for journalists: sourcing. Source development, constantly expanding and culling your Rolodex to get to the people who are the most thoughtful, who will spend the time for you.

One of the things you do when you talk to these people is you honor them by being serious minded about the task. Seriously trying to understand it, so you’re not just calling them for a quote, you’re not just calling them for one conversation but you want to develop a relationship with them over time. And you want to devote yourself to understanding what the issue at hand is, whether it’s the credit-default swap market or a company’s balance sheet.

How you find these people is they’re talking to people in the market too, and they’re talking to ex-employees. You try to find the skeptical longs, you ask them who they’re talking to; constantly ask people you’re talking to who they’re talking to. I think we all know that ex-employees and suppliers and competitors and short sellers can be great sources—and they all have to be treated with enormous skepticism.

That’s why when you talk to these people you want them to show you documents, demonstrate it in the numbers, tell you anecdotes so that other people who were there can verify these things.

TA: One of the criticisms I had this spring after this was clearly unfolding was that the press wasn’t saying what this could become. Now it surprises me is a lot of people think this started in September, and I’m not blaming the press at all for that, but I didn’t get the sense there was enough urgency earlier this year.

JE: I think you go back to last year. Most people date this from the summer (of 2007), roughly from the Bear Stearns hedge-fund problems, but the subprime ones were emerging much earlier. UBS had problems I think in February ‘07.

The subprime market had blown up to smithereens in the late 90’s but was back raging and started to implode in late 2005. All the stocks got crushed. In fact, the stocks got crushed so much—I wrote about a column about this in 2005 and I sort of thought I was late to the party, which is why I moved on to option ARMs. I thought that everybody knew that the subprime market was going to implode. So that was a mistake on my part, obviously.

There’s no question that the press was way, way too lax all throughout 2007 and the early part of 2008. We should have been tackling those Bear Stearns hedge funds, for instance, much more aggressively.

TA: It seems the press didn’t want to call “fire” in a crowded theater, even though the theater was clearly on fire.

JE: I agree with that completely. The press needed to be much more aggressive when this was going on. To figure out what the hell Bernanke and Paulson were doing late last year. They were completely fiddling while Rome was burning.

TA: Outside of Portfolio, who do you read? Who’s doing the best journalism?

JE: I’m reading Jon Weil, I think he’s great. I’m reading tons of blogs. I think Krugman was on top of this from early on. And I think Steve Labaton’s byline is something I gravitate to in the Times. Carrick Mollenkamp has been a great reporter at the Journal. I hate to have these lists because I always drop people who are really great. I think Bloomberg has done an excellent job.

TA: What blogs do you read?

JE: The best financial blogs out there are experts and they’re explaining a lot of things. There’s some traders that explain the workings of financial markets in ways that journalists don’t and then there are economists that explain the economy and there are professionals like Calculated Risk. Those guys were professionals in the mortgage market.

Felix Salmon, our blogger at Portfolio, I think he’s great. I don’t always agree with him, but I think he’s incredibly smart and thoughtful and provocative about the financial world.

This new blogger from Australia, John Hempton at Bronte Capital, is really good. I’m just amazed at the plethora of blogs and you even see a lot of news breaking at blogs, too, like Dealbreaker and Clusterstock are getting all these documents and hedge-fund letters. That stuff I pour through. I think the blogosphere has really emerged just in the time i’ve been at Portfolio.

TA: What should the financial press be doing that it’s not doing? What should the heavy guns be focused on next? Not to give away your story ideas, but in broad strokes.

JE: Well, we’re going through the biggest bailout in American history, and I think that we don’t understand why yet. And there are some very big questions we don’t understand about why this is being implemented in such an inconsistent way.

Why did we save Bear and not Lehman? Why did we rejigger the terms of the AIG bailout to make them more lenient? Why did we just bail out Citigroup? Why are we buying preferred stock instead of common stock? Why are we in some cases protecting bondholders, and in the case of Lehman, why did we not protect bondholders? What’s exactly going on with Fannie and Freddie? If the government has nationalized them why are we buying their securities from them?

I just don’t think we have any sense of what the operating idea of the financial bailout is, how it came to be, and why it’s so incompetently applied. And if there is this wide consensus that we did need some kind of bailout, then is this incompetent bailout better than nothing? I think those are difficult questions to answer. We should really, really be looking at Paulson’s and Bernanke’s and Geithner’s records over the last year and a half or even longer to figure out why this has been so poorly implemented and what they’re thinking.

And then the next big story is going to be the fight to keep the financial system the same or to change it. We should all be focused on that. There’s gonna be a lot of palms greased and a lot of loopholes and there’s gonna be a lot of defeats and victories.

Is the Obama administration going to remake the financial regulatory architecture so that this can’t happen again? And then the follow-on question is what the next war is going to be. Are people going to slip the knot on regulation in some way and get it around it? I’m skeptical about this, but are we going to over-regulate in some way that stifles the market?

I think we should have a nice little round of over-regulation, and if we go too far in that direction I’m fine with it for now.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.