Nieman, Galbraith on the Power Problem

Nieman Watchdog asks “Where’s the reporting on the fraud that led to the crash?”

Funny, The Audit, and especially Audit Lead Prosecutor Dean Starkman, has been wondering that for a long while now.

John Hanrahan writes that economist James Galbraith of—I can barely bring myself to write this on such a week—the University of Texas is calling the press on the carpet for not reporting out the crimes associated with the greatest financial crisis in eighty years.


“The press as a whole used [Ponzi-schemer] Bernie Madoff as the emblem of wrongdoing, but compared to the wrongdoing in the housing sector, the Madoff scandal was small-bore,” Galbraith told Nieman Watchdog in a recent interview. “The press has tended a bit to treat this issue [mortgage related fraud] as a kind of boys-will-be-boys phenomenon. The press has not been aggressive in investigating this the way they should, to point out to readers the extent to which we’re talking about fraud — criminal, felonious behavior — that will end up with people in the penitentiary.”

Galbraith said last year’s economic collapse “was the product of wide-scale criminal fraud,” just as was the case in the savings and loan scandal of the late 1980s, which produced thousands of criminal charges against S&L officials and loan officers.

No kidding. What’s that stat? Sixty-one percent of all subprime mortgage borrowers qualified for prime mortgages in 2006, according to a Wall Street Journal analysis. Think there was any trickeration going on there?

But even when the press details the chicanery, the results can be downright dispiriting.

For instance, we know what happened at Beazer Homes—“a veritable crime wave” in the words of Floyd Norris. That scandal was broken by the Charlotte Observer’s Binyamin Appelbaum (now at the Washington Post). The Justice Department recently settled with the company for $15 million and nobody went to jail even though, as Norris wrote:

The company defrauded buyers, particularly poor people being sold homes they could not afford. It defrauded the federal government by getting government-guaranteed mortgages for those buyers. It created subdivisions now dominated by dozens of foreclosed homes.

And while it was at it, Beazer lied to shareholders about how much money it was making. First, it lied by claiming it was making less than it was. Then it lied by hiding losses when the housing bubble began to burst. To keep the lies going, the government says, the company prepared fraudulent documents to mislead its auditors.

And the CEO and board at Beazer are still in place.

Galbraith points out that the FBI, post-9/11, doesn’t have the manpower to ramp up white-collar-crime investigations. I’d point out that our newspapers, historically the source of the vast majority of all investigative journalism, also don’t have near the manpower they once did—especially on the metro level.

That doesn’t excuse its performance (the Observer’s series is one of the few exceptions that proves the rule), it’s just context.

And at least the Observer got some results. As Dean detailed exhaustively this summer, the press’s failure in the financial crisis and in the years preceding it was largely due to not taking on powerful individual companies, like, say, predatory-lending empire Citigroup.

It’s not too late.

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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.