We’re going on two years into this still-unfolding crisis and most of the financial press has yet to cop to not doing all it could in the years leading up to the crash.
So, it’s refreshing to see Lionel Barber, the editor of the Financial Times, be so forthright in his analysis of what went wrong. And he hits on themes near and dear to The Audit’s heart—though certainly not all of them.
Barber points to the crucial fact that this was a debt bomb, something the press is ill-structured to deal with. As he puts it:
Its origins lie in the credit markets, coverage of which in most news organisations counted as a backwater. Most reporters working in this so-called “shadow banking system” found it hard to interest their superiors who controlled space and who were more interested in broadcasting the “good news” story of rising property prices and economic growth.
I’ll say in Barber’s defense that credit-markets are covered in the FT as well or better than anywhere else in the mainstream financial press. But to expand on that, I’ve said many times that a key problem with why the press failed here was that it’s set up to focus almost all of its attention on the equity side of business. That despite the fact that debt markets are orders of magnitude larger than equities.
There are reasons for this situation. Debt stories most of the time are boring and arcane. The stuff is just harder to understand—for reporters and readers. How many times have your eyes glazed over reading about collateralized debt obligations and structured-investment vehicles? And that’s after you know they’ve caused a meltdown. Imagine trying to pitch a 2,000 word CDO story to your editor back in 2004.
But I’ll disagree with Barber that editors weren’t that interested in negative stories on housing and the economy during the bubble. That certainly wasn’t true in my experience, and it just doesn’t make much intuitive sense. Since when are journalists positive types?
Here he expands on the reporting-on-credit problem:
A second related problem with the credit derivatives story was that it took place in an over-the-counter market with little disclosure and very little day-to-day news. Inevitably, the temptation was – and still is – to run with the stories that are much less opaque such as public company earnings.
That’s right. I think an undernoted story has been the role of the ABX (asset-backed securites), CDX (credit-default swaps) and CMBX (commercial mortgage-backed securities) markets in pulling the last Jenga piece out before the crash. Those came online in 2006 and allowed a broad swath of investors and journalists to get a clear idea of how these assets were being valued in the markets and, critically, allowed investors to bet on or against them, creating prices for the illiquid assets that holders of the assets would be forced to use as marks on their books.
Barber then gets to a biggie: the Access Problem.
Journalists routinely face tensions between relying on their sources and burning them with critical coverage. Think of the White House press corps, the British “lobby” press that covers parliament or sports journalists assigned to a team. The incentive to “go along” to “get along” is always present, in competition with a journalist’s instinct to speak truth to power.
You can’t underestimate the power of this issue when you’re wondering why so much press coverage is milquetoast, he said/she said, and down the middle. Good for Barber for bringing up something that much of the press either doesn’t like to acknowledge or doesn’t like to admit to itself.
Jeff Bercovici wrote about the remaining points the other day, but a couple are worth revisiting, as Barber expands on them:
First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.
This is most certainly the case. Especially for those of us who grew up in the Reagan era, regulation tended to be a dirty word.
And this is spot on:
Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, its relationship with the pro-cyclical Basle II rules on capital ratios, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.
Barber misses some stuff here—he should have pointed out the whiffing on the Wall Street/mortgage industry nexus, the “boiler rooms” The Audit’s Dean Starkman and others have written about.
But we’ll take what we can get.