The business press can always be counted on to explain in authoritative detail why we just lost a trillion dollars. The Wall Street Journal a few years ago won a Pulitzer, for some reason, for doing just that.

What’s Wrong? —- Venal Sins: Why the Bad Guys Of the Boardroom Emerged en Masse —- The Stock Bubble Magnified Shifts in Business Mores While Watchdogs Napped

June, 20, 2002

What’s wrong? Why ask us? This kind of after-the-fact financial reporting I equate with a National Transportation Safety Board investigation—kicking through smoldering wreckage after the plane has already crashed. There’s nothing intrinsically wrong with this kind of reporting. It just feels a little late. Also, I always find it disingenuous to talk about napping watchdogs, as in the headline above, when the Journal and the rest of the business press themselves slept on the job and had to scramble to catch up to the corporate scandals earlier in the decade.

Now, apparently, we again have problems on Wall Street.

Casual business readers, that is, most of us, have been following with some concern the accelerating problems in the financial markets, problems centered, it seems, on mortgages. We have lately learned what the term “subprime” means and now know that banks have been making loans to people who may or may not have had jobs and may or may not have had enough for a down payment and may have even borrowed the down payment under an ingenious arrangement known as a “piggyback” mortgage.

With help from The Wall Street Journal, The Financial Times and The New York Times and others, we know that the banks and investment banks aren’t really lenders anymore, that they put up money initially, but are reimbursed ultimately by the pension funds, mutual funds, hedge funds, and others who buy and hold securities based on the loans, and collect the interest. The banks these days are packagers and brokers and earn fees from each transaction.

We also understand now, I think, that Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings are companies that act as investigative reporters of a sort; they examine the mortgages underlying the securities and grade the bonds according to their risk, AAA being the best grade.

Usually, however, when news readers wake up one day to find they must take a crash course in something as esoteric as the global bond market and the ins and outs of various “loan products” foisted on subprime rubes, whoops, I mean money loaned to qualified borrowers, then something has gone wrong; and chances are, news outlets have some explaining to do. Put it this way, we all know now that the city of Samarra is located in Iraq and that at one time it had a golden dome, that this shrine was deemed holy by Shias, the largest of three minority groups in Iraq, who were oppressed under the previous regime and now are in power, except for the Kurds in the north, etc., etc. We only know all this and more because something has gone wrong, and somebody didn’t tell us all this when it would have mattered.

Okay, back to the bond market. We casual business-press readers now understand that ultimately this deeply complex credit system depends on bond buyers’ ability to rely upon those “AAA” grades, or whatever Moody’s says the bonds deserved.

And I think we readers/vaguely alarmed citizens understand that a lack of confidence in the quality in the loans beneath the bonds causes broader problems in the economy. What if nobody is willing to lend money anymore? People can’t sell their houses, businesses can’t borrow for capital improvements, the stock market falls, perhaps the economy tips into recession.

Those are the basics, and we are all learning them now.

It is not good that we are learning at this late hour, for instance, that credit-rating agencies—Moody’s, etc.—are paid by the very Wall Street houses whose bonds they rate; that the agencies gave the same grade to bonds backed by loans to people who couldn’t afford a down payment as to bonds backed by loans to people who could; and that the shakier the bond issue, the more ratings agencies make, and that without these ratings, there are no bonds.

This has a familiar ring to us casual business-press readers.

It was not so long ago that the business press discovered—too late!—that Arthur Andersen and other accounting giants made more from consulting for Enron and other corporations than from auditing them, and hence were increasingly willing to fudge the books to please the client—and thereby retain the lucrative consulting business.

The business press, also not long ago, was shocked, shocked to learn, from the New York attorney general, of all people, that Wall Street stock research was indirectly funded by the very companies the analysts were analyzing. That research—paid for by Citigroup, Merrill Lynch, CSFB—all the major Wall Street firms—turned out to be fraudulent. Bogus. The business press then learned, also courtesy of Eliot Spitzer (that would be Governor Spitzer to you, WSJ editorial board) that insurance brokers made insurers pay them “contingent commissions,” also known as “kickbacks,” in return for steering them commercial business.

How long had these practices been in place? Decades.

And how long have the ratings-agencies labored under their own conflict? Since the 1970s, according to Jesse Eisinger in Portfolio, when the Securities and Exchange Commission designated them a “public good” and required them to drop their subscription model and charge the subjects of their work.

Point is, the financial system is riddled with conflicts of interest. Some are unavoidable. Many can be managed. But all must be watched. This is why we have a business press, in my view.