In 2002, Georgia passed an anti-predatory lending law that had all the usual provisions—it forbade deceptive practices in the disclosure of basic terms, curbed pre-payment penalties that kept borrowers from refinancing or selling their homes, banned usurious interest, etc.—but it also had a twist: it extended liability for violation of the new law to any player in the lending chain, including Wall Street houses that bundled the loans into securities and pension funds that bought them, and left potential damages open-ended.

One can only wonder what might have happened if those reselling mortgages had known they would be liable for how the mortgages were created.

We’ll never know, of course. The Georgia legislature was treated by the mortgage and securities industries and Bush administration regulators to a political version of shock and awe.

Standard & Poor’s dropped a nuclear bomb on the new law in January 2003, when it announced it would “disallow” loans under the new Georgia law from any S&P-rated structured-finance pools. In other words, the loans couldn’t be resold, so no lender wanted to bother lending in Georgia. The McGraw-Hill unit later pulled back on its language, but it’s not clear whether panicked Georgia public officials picked up on all the nuances. With its lending market freezing up, and the mortgage industry lobbying furiously, the Georgia legislature rescinded various offending provisions.

In interviews with me, S&P strongly objects to any suggestion that it meddled in public policy and says it was only doing its job of protecting bond holders (a lot to unpack there; let’s move on). Spokesman Adam Tempkin says S&P couldn’t rate the bonds because the Georgia law left potential liability uncapped, leaving bond-holders exposed. He also says that the company never comments on public policy, but acts only after the fact in bond-holders’ interests. “What legislatures do is up to them,” he says.

Fine. The point about the Georgia predatory-lending affair: it was a big stink at the time.

The U.S. Comptroller of the Currency at the time, John Hawke, for instance, declared that Georgia’s law would not apply to nationally chartered banks, even for business they did in Georgia, and laid down aggressive new federal rules that would block states from enforcing their anti-predatory lending laws on national banks generally.

State attorneys general, including Iowa’s Tom Miller and North Carolina’s Roy Cooper, objected heatedly, as this recent BusinessWeek story reminds us, and called the OCC’s move an unprecedented intrusion on state authority that would harm their states’ consumers.

Then Eliot Spitzer publicly took on Hawke and brought national attention to the issue of lending-industry abuses, the abuses that led to our current moment global financial peril. This is 2003.

Looking back, it is remarkable to see the degree to which public officials—state bank regulators, attorneys general, legislatures, city councils—raised alarms about deceptive marketing in the mortgage lending industry; Georgia’s anti-predatory lending law came three years after North Carolina passed its own anti-predatory lending law, and a year before New York passed another. In fact, anti-predatory lending laws were quite the rage back then. California (2002), New Jersey (2003), New Mexico (2003), Arkansas (2003), Ohio (2002), Oklahoma (refinancing only, 2004), South Carolina (ditto, 2004) Nevada (2003), Massachusetts (2001), and, of course, Maine (2003), all pass them, according to S&P, which keeps track of these things.

And, Kentucky (2003), Kansas (1999), Florida (2002), Chicago (2000), Detroit (2003), Cleveland Heights (?!, 2003) etc., etc. You get the idea. Everyone was passing them.

In professional journalism circles, this is all known as “a clue.”

After weeks of six-column headlines declaring an emergency caused by an out-of-control financial services industry requiring a rushed $700 billion in U.S. taxpayer commitments still wasn’t enough to stem the panic, casual readers of those headlines have started asking a reasonable question: Why are you telling us this now?

This question—“where was the press?”—is becoming the subject of commentators, interview shows, and news stories. I’m asked about it a lot these days.

Howard Kurtz of The Washington Post tries to answer the question by asking practitioners their opinion. That approach won’t cut it, I’m afraid.

The answers in the Kurtz story and elsewhere range from “we all failed” (CNBC’s Charlie Gasparino) to “we did our jobs but nobody listened” (various) to some combination of the two:

“Did we not accent that enough? Put it above the fold, or on the cover of Fortune, or lead off the television shows?” asks Fortune Managing Editor Andy Serwer. “Yeah, that’s probably true.” At the same time, he says, “if we had written stories in late 2000 saying this whole thing’s going to collapse, people would have said, ‘Ha ha, maybe,’ and gone about their business.”

For business journalists, as well as for their readers and viewers, the question “where was the press?” in the run-up to the greatest financial calamity since the Great Depression strikes me not as one question among many, but central to assessing whether journalism has anything, anything at all, to learn from this historic implosion. If journalists are watchdogs, what does this mean? If journalists are not watchdogs, then what are we?

Unfortunately, answering the question is not going to be so easy as simply rounding up opinions. In reality, no one knows where the press was because no one’s really checked yet. What was written and aired over major financial news outlets in the years leading to the spring of 2007, when the crisis burst fully into public view with the collapse of the Bear Stearns hedge funds, that’s all out there, waiting in electronic data bases for someone with the time, patience, and stomach, to sort through it all.

And, as much as some journalists would like, it won’t be as easy rummaging through the archives to find the good stories—and they are out there—that gave clear and eloquent warnings of certain bad practices in the lending industry and on Wall Street.

Certainly, there will be a list of heroes. Mara der Hovanesian and Peter Coy of BusinessWeek will no doubt find their way onto it, as will Diana B. Henriques, Richard A. Oppel Jr., Patrick McGeehan, Gretchen Morgenson, and probably others at The New York Times, and Scott Reckard of The Los Angeles Times. The Wall Street Journal’s James R. Hagerty and Ruth Simon will be there, I’m sure. Bloomberg’s Jonathan Weil will make it on the first ballot, as will the Journal’s John Hechinger, the author of this, and note the date:

Best Interests: How Big Lenders Sell A Pricier Refinancing To Poor Homeowners —- People Give Up Low Rates To Pay Off Other Debts, Putting Houses at Risk —- `Bill Collector Was on My Back’; 7 December 2001

I’ve already written about reporter Mike Hudson here and here. Cognoscenti, meanwhile, point to Sandra Fleishman’s work in The Washington Post and, especially, to Richard Lord, author of American Nightmare, for his work at Pittsburgh City Paper.

Have your own favorite? Send them to dean@deanstarkman.com.

But assembling a list of good stories strikes me as a little too simple. This isn’t about individuals, after all, but news organizations and the business press as an institution. Any fair measure of press performance will have to take some measure of the record in its entirety. What was the business-press narrative about, generally speaking? What else was written about Wall Street and the financial-services industry? Who was on the covers?

Were the good stories the rule or the exception that proves it?

It will also be important to reconstruct the news cultures created by senior editorial leadership, which, it should not be doubted, sets the tone and sends the unspoken-but-unmistakable message to reporters as to what kind of stories are in favor and which are not. If you don’t think this is important, you haven’t worked at one of these places. We’ll never know what wasn’t done. There will be no list, for instance, of goats, the mid-level types who responded to unspoken signals from above and sat on valuable stories, kicked away ideas, and shied away from confrontation.

And, I’d argue, if you’re really going to do this right, a fair assessment will also have to take into account what was in the available public record and match that—keeping in mind the benefit of hindsight—against the priorities adopted by the leading news outlets.

I think a common misunderstanding of the business press’s role, made by Fortune’s Andy Serwer above and others, is that the standard for business journalists is whether they issued warnings about the future—predicted that “this whole thing’s going to collapse,” as he puts it. That seems to set the bar artificially high, and in doing so lets journalism off the hook. Who can predict the future?

For me, journalism isn’t about reporting what’s going to happen. It’s about reporting what is happening now. We’re not soothsayers. But we’d better be reporters.

And that’s where Spitzer comes in. He and his fellow attorneys general, state banking regulators, even state legislatures were ringing wild alarm bells about mortgage-industry practices well before the fateful years of 2004 and especially 2005-2006, when the financial services industry and Wall Street expanded subprime lending from a fringe market into the mainstream. Never mind the community groups, like the Center for Responsible Lending and others that turned out to be right on target. These were elected officials.

This public record must form the backdrop to any assessment what news outlets were or weren’t writing.

In fact, the early ’00s were busy years in the anti-predatory lending business. The Federal Trade Commission, before it apparently fell down a black hole, settled an anti-predatory lending investigation against Citigroup’s giant subprime factory, CitiFinancial, for $240 million, covering two million customers. A coalition of states reached an even bigger one with Household International for $484 million. This was in 2002.

The BusinessWeek story lays out the record well, and assigns credit, well-deserved, to North Carolina’s Cooper and Iowa’s Miller for confronting Hawke, who is now back at his old job of defending lenders at a white-shoe Washington law firm.

The headline—“They Warned Us About the Mortgage Crisis”—is apt.

But of course, as Tonto said to the Lone Ranger: “What do you mean ‘us,’ white man?”

Indeed, fights between states and the Bush administration over consumer protections against allegedly rampaging lenders broke out around the country. As BusinessWeek mentions, Michigan in 2004 sought the right to examine the books of Wachovia’s mortgage unit and fought the OCC and the banking industry all the way the U.S. Supreme Court, which decided for Wachovia in 2007—about a year before it was sold to Wells Fargo to fend off seizure by the Federal Deposit Insurance Corporation, an arm of the same federal regulatory structure that blocked Michigan’s scrutiny.

Talk about Pyrrhic victories.

At the time it was fighting Michigan, Wachovia was also fighting Connecticut banking regulators on the same issue, prompting no fewer than thirty-five attorneys general and forty-three bank regulators to side with Connecticut—”a number lawyers call unusually high,” according to an August 2003 Reuters story.

Spitzer’s involvement, though, raised the issue to another level of prominence.

This was long before his incredible implosion, of course. Spitzer had already fought his state’s own banking department to wring a big settlement from Delta Funding Corporation, a notorious, now-defunct hard-money lender to low-income people in Brooklyn and Queens. He was among the AGs to look into Household, starting in 2001, and found that the lender, among other things, didn’t include points and taxes in monthly loan amounts presented to borrowers, who found out what their real payments would be only after the closing. Nice industry, subprime. It always was.

This was about the time Spitzer would discover that Wall Street banks were cheating retail customers by recommending stocks they knew were dogs and right before he discovered that the mutual fund industry was cheating its retail customers by allowing favored clients to trade after hours, which came right before he discovered that commercial insurance brokers were cheating their clients by taking kickbacks from insurers instead looking for the best deal, which was right before he discovered that American International Group—does that name ring a bell?—was hiding losses and otherwise deceiving the market.

So his credibility was very high at the time, while the financial-services industry’s was not.

And he kept it up. He held press conferences with congressmen (1). He sued a nationally chartered bank, First Tennessee, that was threatening foreclosure on a New York man who had overpaid his mortgage by $9,000. The OCC intervened. The case was settled. But the fight was only heating up.

This was March 2004.

Spitzer’s fights were well covered, but then this was not an easy story to miss.

Typically, and understandably, the business press responded by framing the fight in one of two ways: as a turf war between ambitious, willful politicians, or, comically, as a good-faith dispute over regulatory “philosophies,” although strangely, in this case, the Bush administration and its amen-corner, The Wall Street Journal editorial page, abandoned their usual commitment to federalist principles and went with the centralized approach, which happened to be the more lax of the two and the one favored by the banking and securities industries.(2), (3), (4).

The stories are fine and give plenty of weight to Spitzer’s side.

The Journal wrote:

The OCC justified its January move by saying only a federal regulator can provide an efficient national banking market by assuring that the playing field is level from state to state for national banks, a category that includes big lenders such as Citigroup Inc. and Bank of America Corp. Failure to provide this level playing field, warns Comptroller John D. Hawke, would mean banks may no longer be able to offer loans to particularly less privileged borrowers.

Besides, Mr. Hawke says, the OCC’s power to pre-empt states in bank regulation are rooted in 140 years of legal precedent granting the OCC pre-emptive authority in national banking issues. “Federal pre-emption is a principle that is almost as old as our nation itself,” Mr. Hawke says.

But outraged state regulators and consumer advocates say the OCC has little experience in protecting consumers, and they accuse the OCC of being soft on banks at the expense of consumers. The OCC’s move, left unchallenged, would mean “the already vulnerable consumer has lost the only protection he had and national banks will now run roughshod over the rights of the individual consumer,” says Donna Heinrichs, Mr. Hall’s attorney.

And there is the usual back and forth:

“We’re prepared to take this to the U.S. Supreme Court,” Mr. Spitzer says.

And:

Mr. Hawke, meanwhile, accuses Mr. Spitzer of “grandstanding.”

And:

“We’re just happy that we were able to work things out with the customer to his satisfaction,” said a spokeswoman for First Tennessee. (5)

The New York Times wrote a good profile of Hawke, pointing out that his agency had allowed Riggs National Corporation to become a money-laundering center for corrupt foreign dictators, a fact embarrassingly uncovered by the Justice Department (6).

As the lenders turned frenzied in 2005 and set up boiler rooms to feed Wall Street’s escalating demand for product to turn into mortgage-backed securities and their lucrative derivatives, Spitzer continued to direct attention to the problem.

In the spring of 2005, he sent letters to nationally chartered banks demanding information about alleged discriminatory lending practices, suspecting what would turn out to be precisely the case—that subprime lenders were steering minority borrowers who qualified for prime loans into subprime products that were more onerous for them and more lucrative for lenders and Wall Street.

Again, the OCC, then led by the justly forgotten Julie Williams, stepped in on the side of big lenders and sued to stop Spitzer. The Wall Street Journal weighed in with a series of now-embarrassing editorials that took the lenders’ side in language approaching hysteria. From June 2005:

New York Attorney General Eliot Spitzer dislikes people who won’t bow to his command, so perhaps Julie Williams should invest in body armor.

That was out of bounds, even for that page. Spitzer kept at it even as he was about to leave office (7) and reminded everyone of the fact in this Washington Post opinion piece in February of this year, probably around the time federal investigators, tipped off by the financial services industry (Hmm. I wonder if…nah), found he was shuffling money around to pay for prostitution.

If you think, by the way, that his prostitution bust means Spitzer was wrong about predatory lending, my advice would be to check your 401(k).

But obviously the point isn’t whether the federal government should regulate nationally chartered banks alone or whether states should, too—I personally don’t care, just as long as somebody does—or whether the preemption doctrine should apply to banking law, or even what percentage of the current crisis is attributable to problems with the national banks (probably about a quarter).

No, the point is that the lending industry’s dangerous practices were openly discussed by public officials, including a nationally prominent one, for many years—way, way before the practices led to the international problem that hangs over us today.

What happened to these mortgages in the aftermarket—Wall Street’s creation of what George Soros calls “the superbubble”—is another matter and should be the subject of a separate inquiry. But without the mortgages, there are no securities, and there is no crisis.

But let’s be clear: reporting on problems in the mortgage industry itself did not require any special forecasting abilities or even particular insight. Any honest discussion of the press’s performance during the run-up to the mortgage crisis must take this into account.


1. “Spitzer attacks plans that may protect banks from state laws.”

12 December 2003

Financial Times

2. “STATES VS. THE FEDS: A FRAGILE TRUCE; In policing money pros, a tug-of-war over who’s in charge.”
BusinessWeek

29 September 2003

3. “A new case tests who regulates America’s banks”

The Economist

24 January 2004

4. “The Enforcer: As His Ambitions Expand, Spitzer Draws More Controversy —- In Latest Move, He Pushes Fund Giant to Cut Fees; New Clash With the SEC —- Eyeing Drugs and Annuities”

The Wall Street Journal

11 December 2003

5.”Bank-Cop Fight: Spitzer Takes On U.S. Regulator,”

The Wall Street Journal

22 March 2004

6.”Tough Washington Insider to Face His Critics on Bank Regulation”

The New York Times
2 June 2004

7. “Countrywide Settles with NY Official”

Origination News
1 January 2007


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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.