This occurred to me while reading the extensive coverage leading up to, the live blogging of, the video, and next-day stories this morning about Ken Lewis’s testimony before the House Committee on Government Oversight and Reform. (It was yesterday but it seems like a month ago already.)
I have no problem with the coverage, much of which was quite good, especially stories based on leaked emails sent by torqued-off Fed officials castigating Lewis for balking on his decision to have BoA buy Merill Lynch after the full extent of Merrill’s financial horrors began to revealed themselves late last fall. And I have no problem with the hearings themselves. More information is always good.
It’s a good question, and certainly of keen interest to BoA shareholders, to ask when Lewis learned the extent of problems and whether government officials had undue influence on his decision to go through with the deal.
A lot of the coverage dwelled on how seriously BAC (its ticker symbol) contemplated using its MAC (the “material adverse change” clause in takeover contracts) to back out of the deal and whether Ben Bernanke’s Fed would have forced Lewis out if he did. This apparently was in the cards if BoA later tried to come back to the government for more money (it had received $25 billion in TARP money in October) without Merrill in its portfolio. In the end, BoA did buy Merrill, got $20 billion more to cover its losses in January (just typing these numbers is nauseating), and Lewis stayed as CEO (though angry shareholders stripped his chairman’s title in April).
It strikes me, though, that this is a fairly narrow slice of the credit crisis to focus so much legislative and media firepower on, and that the taxpayer interest here is actually somewhat academic. In the end, the second bailout went to BoA, but it just as easily could have gone to ML directly or to some other institution dragooned into buying it. As far as taxpayers are concerned, it appears the Fed in the end may have saved the government money by fobbing off losses onto BoA shareholders, with the understanding that the Merrill unit would help earn some of it back later.
The problem, though, was the losses in the first place, no matter how you shuffled them around. I think it is becoming clear that, of all the bad actors leading to the crisis, Merrill might just have been the worst. For more, read this amazing WSJ story from December 2007 and this strong NYT piece from November:
“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy,” said William Dallas, the founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago. “They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”
That’s why the week-long drama of the hearings struck me as a bit of a waste of resources.
Rather than sporadic, one-off hearings about various moments in the crisis in more or less random order, how much better it would be to have a systematic investigation and presentation, one that would form a single narrative, told chronologically, to educate the public (and, I have to say, the press) about how this crisis brewed and blew.
Make it bipartisan. Throw in Fannie, Freddie, Clinton, Bush, Gramm, Reagan, Rubin, Summers, Greenspan, Paulson, my personal favorite, the financial sector, the Chinese, whatever is relevant.
And that’s why it is a good thing that in the Fraud Enforcement and Recovery Act, a bill President Obama (surprisingly quietly) signed last month, there indeed contains a provision for the creation of a Financial Crisis Inquiry Commission.
Among its functions:
(1) to examine the causes of the current financial and economic crisis in the United States, specifically the role of—(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;
That’s a good start right there.
Here’s some more:
(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;
For retro-Democratic sympathizers looking to the past for guidance - not always a bad impulse, but widely denigrated in the abstract - I'm starting to expect articles suggesting that the big bands and six-day bicycle races are due for a comeback. Reform suggestions like this one remind me of the wag who noted that Lincoln Steffens' "Shame of the Cities" muckraker didn't help improve the cities - it just made them more ashamed.
#1 Posted by Mark Richard, CJR on Fri 12 Jun 2009 at 02:26 PM
Mark, It's a good riposte that made me smile. But I still want to see these hearings if for no other reason than for something to do while working out with my medicine ball.
#2 Posted by Dean Starkman, CJR on Fri 12 Jun 2009 at 02:55 PM
I agree that Merrill Lynch is only a small piece of the puzzle that started the economic crisis America is currently in.
-Nikki-
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#3 Posted by Nikki Thomas, CJR on Fri 12 Jun 2009 at 03:05 PM
Mark's post is a funny one. Also a silly one: Anybody who knows anything about the history of urban politics knows that the work of Steffens and other reformers did much to clean up the political machines and the on-the-ground rackets and venality that dominated the lives of cities. Yes, there's still much corruption in today's big cities -- but it's nothing compared to the wide-open plundering and officially sanctioned crime of the late 1800s-early 1900s.
#4 Posted by mwh, CJR on Sat 13 Jun 2009 at 02:28 PM
Dean, thanks for the good-natured response.
mwh, I do know something about the history of urban politics, and in fact work for a sizable municipality. I stick by the sentiments expressed in the quotation. Muckraking didn't do anything about Tammany in New York, James Michael Curley's cronyism in Boston, Boss Hague of Newark, the Kelly-Nash machine in Chicago, Boss Crump in Memphis, etc. - all which continued to flourish through the 1930s and 1940s. After World War II, urban-political dysfunction started chasing the middle-class tax base to the suburbs - policies far more disastrous to the cities than anything done by the robber barons, who may have been ruthless bastards, but who also created the wealth that raised my own family from the coal mines to the bourgeoisie in two generations. My own counter-intuitive take is not a new one; reformers frequently cause more damage through their 'good intentions' than is caused by actual malice, greed, the rest of the laundry list . . .
#5 Posted by Mark Richard, CJR on Mon 15 Jun 2009 at 12:42 PM
Mark, I fear you have a narrow understanding of how reform works. The idea that "muckraking didn't do anything" about Tammany et al suggests that unless a reform effort or muckraking crusade abolishes corruption overnight, it is an abject failure or a handmaiden of unintended bad consequences. The truth is that entrenched political and economic corruption takes decades to root out -- and then constant vigilance is required to ensure that it doesn't return to full vigor. The muckrakers of the Progressive era had an huge, tangible impact -- As C.C. Regier wrote is his book, The Era of the Muckrakers (1933): "The list of reforms accomplished between 1900 and 1915 is an impressive one. The convict and peonage systems were destroyed in some states; prison reforms were undertaken; a federal pure food act was passed in 1906; child labour laws were adopted by many states; a federal employers' liability act was passed in 1906, and a second one in 1908, which was amended in 1910; forest reserves were set aside; the Newlands Act of 1902 made reclamation of millions of acres of land possible; a policy of the conservation of natural resources was followed; eight-hour laws for women were passed in some states; race-track gambling was prohibited; twenty states passed mothers' pension acts between 1908 and 1913; twenty-five states had workmen's compensation laws in 1915; an income tax amendment was added to the Constitution; the Standard Oil and the Tobacco companies were dissolved; Niagara Falls was saved from the greed of corporations; Alaska was saved from the Guggenheims and other capitalists; and better insurance laws and packing-house laws were placed on the statute books."
Other reforms -- such as direct election of Senators -- helped set the stage for the 20th century-long battles that eventually helped destroy many urban politicial machines and dramatically reduce the level of corruption on the state and local levels. Check out the (relatively) clean government in places like Minneapolis, which was the first city that Steffens took on in his "Shame of the Cities" series.
Yes, corruption is still a force on all levels of government and commerce -- one good example is the interplay of local, state and national economic and political forces that have turned us into a nation of exburbs, smog-spewing traffic jams and withered public transporation systems. But if corruption lingers on, it because the forces of corruption have been very good at mainstreaming the cynicism/sound bite that reformers "good intentions" do more damage than good.
#6 Posted by mwh, CJR on Mon 15 Jun 2009 at 10:58 PM
What he said.
#7 Posted by Dean Starkman, CJR on Tue 16 Jun 2009 at 11:02 AM
mwh, I appreciate the amount of effort you put into your post. You make a formidable case. My skepticism would be based on my perception lot of what you write has to do with the intention of laws rather than their practical outcomes.
Post-reform-era New York began to see an exodus of population to other states when many of the very reforms you cite kicked in, because those reforms were job-killers. It wasn't the affluent who were leaving; it was the common person looking for better opportunities in life. Robert Moses was a classic product of the Progressive Era in urban planning, but today's progressives generally regard him as a tyrannical destroyer of the very New York that reformers deplored, of tight communities and strict but warm social structures. New Deal power projects, regarded as progressive in their time, are now disliked by environmentalists who want to tear down some of those dams. Sinclair is mechanically given credit for purer food and drugs; contrarian research has indicated that reform usually comes when the specific conditions are improving, and that meat-packing conditions were improving when Sinclair wrote his book, and would have continued to improve in response to consumers, not muckrakers or their political allies. It's analogous to smoking; it gradually became unpopular with an increasingly health-obsessed newer generation of up-market consumers, and only became a big political issue because the practice was actually in decline. The movies and exposes of tobacco industry perfidy didn't case the decline in smoking; they were a product of it. (This may be why there has been no comparable cultural jihad against alcohol - as there was during the Progressive Era - because the urban bourgeoisie still likes to drink.) The most innovative and 'progressive' areas of our economy, most obviously informations systems such as online commerce, telecommunications, have been among the least regulated and litigated. According to the credo of the Progressive Era, that good laws make people better, this should not be the case.
To take some specifics - I'm aware these posts are not research papers - I doubt that there is evidence that prison reforms of the Progressive Era reduced recidivism rates, to take one measure. Child labor and women's eight-hour day laws follow the narrative I've proposed above; the laws followed spreading practice, didn't lead it. Ford didn't raise wages at his assembly line during the Progressive because he was big-hearted; he wanted to make cars as cheaply as possible, which you would think would cause him to keep wages low; he wasn't being hounded by lawmakers or unions. He raised wages because he wanted to reduce turnover and had a theory that he wanted his workers to make enough money to buy the product. (Ford also initiated company social services, as did many big industrialists, long before the government got into the act.) Besides which, labor laws had marginally negative outcomes for family income in some cases; women and children had always worked long hours, in agricultural settings, but the more affluent middle-class mind was offended at having such sights brought into photographical cities, so extra family income was proscribed. Today, rigid labor laws are the #1 reason that western Europe has had chronically high unemployment, especially among young second-generation immigrants, and why our most unionized industries are also the sickest; after the Progressive Era, these sorts of laws, without, of course, intending to do so, had their biggest negative impact on recent immigrants to the cities, mainly from the cotton South.
In terms of democratic reform, in the Progressive Era, it was 'the west' which was regarded as radical - four western states were the earliest in giving women the franchise, and Wyoming and Texas had female governors before more urban, eastern states were prepared to consider such a thing. These were the areas least aff
#8 Posted by Mark Richard, CJR on Tue 16 Jun 2009 at 01:34 PM
Mark, Thanks for these spirited posts.
Allow me to pick up for mwh.
You suggest that Progressive-era reforms were either ineffective, counterproductive, or would have happened anyway. I'm sure you will find many who will disagree.
But from a journalism standpoint, I think it is a common mistake--one made too often by journalists themselves--to suggest that muckraking reporting itself is ineffectual, no matter what one thinks of the reforms that result. Muckraking reporting in the WSJ, NYT and elsewhere didn't cause the rollback of the power of Big Tobacco and the decline in smoking's popularity, but it's difficult to argue that it played no role at all.
I'm not as familiar with the historical record as mwh, but one of the things that struck me in writing "Power Problem" -- on failures of pre-crisis financial press coverage (link: http://www.cjr.org/cover_story/power_problem.php) -- was that in the instances when influential news outlets did turn their attention to rogue financial institutions, reform happened. After the NYT wrote about (the Lehman-backed) First Alliance in 2000, the lender closed (and later lost a jury trial in a verdict upheld on appeal). The NYT, WSJ and others probed the notorious Associates First Capital on the occasion of its 2000 purchase by Citigroup, and the Federal Trade Commission followed with a $240 million deceptive-lending penalty in 2002. Good reporting by Forbes and others was followed by a larger penalty against Household International (now HSBC). The LAT's probes of Ameriquest in 2005 was followed by a $325 million fraudulent lending settlement with state attorneys general the next year.
Some may not like these outcomes, for whatever reason, even at this late hour. But for journalists it is inescapable not only that investigative reporting has impact and is valuable, but that an information vacuum, as we have seen in the financial crisis, is dangerous.
#9 Posted by Dean Starkman, CJR on Tue 16 Jun 2009 at 04:44 PM
Dean, thanks for your post. You brought it back to Square A - i.e., the role of journalism in uncovering corruption. Of course, the Pecora Commission was a committee of Congress, and the 'corruption' unearthed was only reported upon by journalists. Most of what the Pecora Commission 'revealed' happened to be perfectly legal, like J.P. Morgan's tax deductions.
My concern is that the terms of what constitutes muckraking are politically loaded and partisan, and for this reason ultimately either ineffective or harmful. I think that more harm has been done to the cities by their politicians than by their business leaders. There is an unspoken conviction in orthodox muckraking that money is the only really corrupting element in society - which is why I think politics has changed so little that 'progressives' are reduced to advocating 1933-vintage policies and laws. This excuses investigations of people who use their public political authority for self-aggrandizing reasons, such as to have one's son in a position to inherit one's Senate seat - as legal as J.P. Morgan's tax deductions, but somehow not worth investigating in detail. What is 'money' compared to such glory? People pay big money just to have their names on a plaque on a seat in Lincoln Center. Money is just a means to an end. Sex can be a corrupting influence, too - men will pay money for it - but that's another story.
I think the model for 'muckraking', with its implication that political action is the solution, downplays situations in which postitive political action is the problem. I know Steffens wrote about corrupt politicians, but they were 'corrupted' by private money; the idea that private businesses can be 'corrupted' by public money and politics is not taken as seriously, in spite of evidence that all those lobbyists in Washington are there because the politicians initiated the shakedown practices, not because businesses like having to hire high-priced consultants to represent them. The growth of much-deplored lobbying was a direct result of the Progressive and New Deal-inspired regulatory state, since the people who know the most about, say, auto emissions, are people who actually make cars. You can assign a green lawyer to write the regulations, but if he doesn't know much about how exhausts work, smart companies can get around them. So he has to call in the people who actually make the things he wants to regulate. In some cases, they write the regulations. The agencies become 'captured' by their biggest industries - they are locked in a symbiotic relationship. And the most heavily-regulated industries have turned out to be the sickest as time goes on, partly because of this effect. This is the deal that big business, big labor, and big government have made in western Europe - which, living off the wealth created in a more capitalist age, has been stagnating economically for years, with no solution in sight.
California's economy is a mess right now. Who's to blame - businesses that left the state and eroded its tax base, or the 'reformers' who have, in the interest of increasing their own power over consumption and production, made California toxic in terms of new business formation and job creation? This didn't happen yesterday; voters recalled an inept governor six years ago, and two years earlier the state had suffered embarrassing rolling electrical blackouts. Politicians are in the business of professing 'good intentions' and get a pass even when the outcomes cause real suffering and dislocation; capitalists are candidly trying to make money, so they are at a rhetorical disadvantage. So the outcomes produced by 'good intentions' politicians (whose subtler motives, such as greed for power and glory) are not examined with the critical eye reserved for shady business people. Where was the 'muckraking' of The New York Times leading up to the city's traumatic bankruptcy of 1975, or the 'muckraking' of The Los
#10 Posted by Mark Richard, CJR on Wed 17 Jun 2009 at 02:29 PM
Mark, you've convinced me. Why have laws when enlightened self-interest serves as an infaliable corrective to all the dark drives of human nature? I know understand that if only those pesky reformers and sleazy politicians were out of the way, the market would cure all our social ills: child labor would have been eliminated without legislation, food safety would have been enforced on a voluntary basis, etc. All one needs is to step aside and allow the market to work its self-correcting magic. Just like now. Some correction, right?
#11 Posted by mwh, CJR on Thu 18 Jun 2009 at 12:02 PM
mwh . . . OK, by your logic, Bush's post-9/11 regulations have kept the U.S. from further attacks; otherwise, there would have been more. We may owe our very lives to Bush. Of course, there are complicated side issues . . . the Iraq war, the Afghanistan war, things like that. Undoubtedly they have ended up costing more in blood and treasure than did 9/11 . . . but, hey, it is undoubtedly true that the United States has not been attacked on its own soil again, so critics of Bush's argument have no leg to stand on . . .
Most liberal-minded people actually accept my argument. I know they accept it because they are skeptical of the utility of a lot of regulatory matters having to do with the police and the military. And don't even get them started on the dangers of 'political interference' in their own power centers - higher education, the legal profession, the arts, or mainstream corporate journalism. Bush argues that his post-9/11 security/regulatory state has kept us safe. Maybe - it's a valid argument, and we'll never know, because it's an all-or-nothing case. But in the case of most regulation, as I've tried to indicate, there are bases for comparison, and by no means to they show the superiority of political regulation vs. regulation by consumers in the marketplace. Believe it or not, life longevity, product safety, nutrition standards, and other measures of well-being were improving when the Progressive Era occurred - due to the Industrial Revolution, not due to political regulation.
Typically, regulation movements latch on to existing trends, then start taking credit for them in politics. Our food would have improved even if Upton Sinclair's parents had never met, because consumers were demanding better products. This was also true in the case I cited of tobacco consumption. People used to smoke to control their appetites; smoking has declined for good reasons, but obesity is up for a variety of reasons including the one that people don't smoke to control their appetitites anymore. I have no doubt that some future historian will assert that we would all be smoking, say in 2040, and dying of lung cancer, unless the government and the trial lawyers had not started regulating smoking. And there were no negative trade-offs at all. And some star-eyed readers vaguely hostile to people who actually produce things for a living you can drive, eat, drink, wear, live in, etc., will believe every word of it. Including journalists.
#12 Posted by Mark Richard, CJR on Thu 18 Jun 2009 at 01:02 PM