There are limits to the investor-oriented approach to journalism. Carter argues that investors have been fobbing off risk on the public for years.
It may be hard to believe, but investors have been making this bet for decades. Throughout much of the 1980s the Federal Reserve and other bank regulators bailed out all eight of the nation’s largest money-center banks—banks like JPMorgan, Bank of America and Citibank—after all of them got in over their heads making unaffordable loans to developing nations. In the ’80s regulators used accounting tricks and funneled taxpayer money through the International Monetary Fund to save the banks, rather than going to Congress for a direct bailout, but the effect was the same, and investors know it. A year after the Great Crash of ‘08, investors also recognize that the “too big to fail” problem has actually gotten bigger, after emergency mergers designed to stave off collapse turned already giant institutions into great banking beasts.
Actually, I think it’s quite a bit simpler than that.
It’s important to remember the degree to which many of the firms that today are the worst basket cases were for many years earnings machines. Take Citigroup. Its earnings power was staggering. During the five years between 2002 to 2006, its annual net income was $15.3 billion, $17.9 billion, $17 billion, $24.6 billion, and $21.5 billion, respectively. Those are huge numbers, for any industry, by any standard. For a while it was in Exxon-Mobil territory (before the oil company’s earnings just hit the stratosphere; its net was $11.4 billion, $21.5 billion, $25.3 billion, $36.1 billion, $39.5 billion, during the same years).
Here’s a chart, courtesy of Bloomberg, of Citi net income from 1995 to 2006.
That’s impressive, until you think about it.
As we know from “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” the Polk-award-winning story by Mike Hudson from the summer of 2003, the period in question was one in which Citi engaged in its worst behavior toward borrowers, including documented, mass-scale predatory lending, and along the way piled up incredible risks that would cost taxpayers $50 billion in TARP money and put them at risk for another $301 billion in guarantees.
Point here is that Citi did very well by its shareholders over the short, medium, and it could even be argued, looking at the chart, over the long term.
It’s true that in the even longer run, yes, shareholders could and did pay, and so, would, on some level, have an incentive to step in and police managerial missteps and misdeeds.
But many profits were reaped, stock gains booked, and risks piled up in the interim. It’s doubtful shareholders would have wanted to rein in management even if they could have. For investors, Citi was working.
This is simply to argue for a business journalism that looks beyond the investor perspective. It is not a surprise to me that the alternative media, the muckrakers, actually had an advantage in the runup to the crisis, as Alyssa Katz, wrote here in September.
First and foremost, we looked for the real-world impacts of business practices. Financial journalists tend to focus on the internal benefits (to investors and bankers) of economic activity, without accounting for external social costs. We indies [independent journalists] saw benefits and costs as inextricably linked.
The muckrakers didn’t know of looming dangers to the global financial system (although this 2002 Nation story by Bobbi Murray certainly does put its finger on it); they just knew that what they were seeing was wrong. For journalists, that should be enough. As it happened, the effects of abusive lending was amplified via secruritization and its derivatives, so everyone paid, including buy-and-hold shareholders.
So, the broad view was the right view, even for shareholders in this case. But the broad view is always smarter. I’ve written that the business press, with rare exceptions, sees insurance profits over the moon and assumes that that’s a good thing. And it is, unless you’re a policyholder.
So a lesson of the meltdown for the business press: the investor’s perspective is valuable, but narrow. Pull the camera back.