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Derivatives Echo Chamber

The business press largely parroted industry on a massive, prescient '94 GAO study
March 9, 2009

The Audit wants to know. What role did the press play in diffusing financial warnings in the years leading up to the current crisis?

We can’t answer that question in its entirety—especially not in one post—but we can offer an example for your consideration: the press’s supremely insufficient response to an important 1994 report by the Government Accountability Office, the investigative arm of Congress, warning about the dangers of derivatives—those largely unregulated financial instruments that have played such a central role in the current collapse.

The two-hundred page report, two years in the making, could have resulted in tough derivatives legislation, which is to say needed regulation. But it didn’t. The reasons why are complicated, and the press is certainly not the only culprit here, but it did play a key role. What happened is this: A triumvirate of the financial industry, misguided regulators and a passive press relegated the report to the dustbin almost as soon as it came out.

(UPDATE: A few months after this piece, The Audit interviewed James L. Bothwell, the author of this critical report. Read it here.)

This despite the fact that the report was remarkably prescient in its strong warning about derivatives—almost a decade before Warren Buffet’s now-famous derivatives-as-WMD comment.

The report does not entirely condemn derivatives, but it is full of flashing danger lights. First it offers some context:

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Derivatives activities are rapidly expanding and increasingly affected by the globalization of commerce and financial markets. Much OTC derivatives activity in the United States is concentrated among 15 major U.S. dealers that are extensively linked to one another, end-users, and the exchange-traded markets.

And then the warning comes:

This combination of global involvement, concentration, and linkages means that the sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to the others, including federally insured banks and the financial system as a whole.

But that’s not all:

Although the federal government would not necessarily intervene just to keep a major OTC derivatives dealer from failing, the federal government would be likely to intervene to keep the financial system functioning in cases of severe financial stress. While federal regulators have often been able to keep financial disruptions from becoming crises, in some cases intervention has and could result in industry loans or a financial bailout paid for by taxpayers.

Bailout. Paid. For. By. Taxpayers. The GAO didn’t have a crystal ball. It just did its job, which was to look at the facts. And after two years analyzing the situation, the GAO had earned the right to offer warnings. But the resulting work was unfairly dismissed—to all of our detriments.

Speaking of dismissal, that phrase “financial bailout paid for by taxpayers” was later derided in the press as a scare tactic. We’ll get to that in a moment, but first let’s finish with the report, which went on to offer some pretty straightforward guidelines:

The immediate need is for Congress to bring currently unregulated OTC derivatives activities of securities firm and insurance company affiliates under the purview of one or more of the existing federal financial regulators and to ensure that derivatives regulation is consistent and comprehensive across regulatory agencies.

And then the ambitious document broadened its scope:

GAO also recommends that Congress systematically address the need to revamp and modernize the entire U.S. financial regulatory system. Gaps and weaknesses in OTC derivatives regulation clearly demonstrate that the existing regulatory structure has not kept pace with the dramatic and rapid changes in the domestic and global financial markets that have occurred over the past several years. Banking, securities, futures, and insurance are no longer separate and distinct industries that can be well regulated by the existing patchwork quilt of federal and state agencies.

We don’t need to tell you that this analysis couldn’t have been more right.

As for methodology, the study included a survey of 14 major U.S. OTC derivatives dealers, chosen because they had “the highest levels of derivatives activity in their respective industries.” (A fifteenth refused to respond.) The list: Bank of America, Bankers Trust Co., Chase Manhattan, Chemical Bank, Citibank, First Chicago, General Re, Goldman Sachs, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Prudential, Salomon Brothers.

This is a pretty comprehensive list of the current crippled or dead.

By way of context, the GAO study came at a time of concern over derivatives and wasn’t the only of its kind. It followed other significant reports, including two in 1993: one by the Group of Thirty and one by the Office of the Comptroller of the Currency along with the Federal Reserve. But the GAO, while nodding to these efforts, essentially called them inadequate.

As we just mentioned, it is hard not to notice that industry executives, regulators and the press often seemed to work in concert. But we want to clarify that point: We aren’t making conspiracy accusations here, we are just saying that regulators and industry executives by and large took the same anti-regulatory line—and then the press chose to pass along these thoughts rather than examine them.

Let’s start by looking at the, rather predictable, industry reaction to the report.

The GAO report so worried industry executives that they took aim and fired before it even came out. A February 17, 1994, Reuters piece, headlined “U.S. study sparks fears in derivatives industry,” told us:

Derivatives players and authorities alike are growing edgy about a planned report by the U.S. General Accounting Office (GAO), bankers and officials said.


Amid increasing publicity of the potential risks from derivatives’ alarming growth, many fear the report will recommend unnecessary or unwieldy regulation.

‘Some are concerned that the GAO report could be used as a predicate for legislation of the market,’ said one market authority attending the conference.

In addition to frontal attack, another industry strategy was to downplay the importance of the study before anyone even knew precisely what was in it. March 18, 1994, Reuters announced “Derivatives focus sparks reform movement,” and informed us:

Explosive growth in over-the-counter derivatives markets has stoked fears about the potential risks they pose to the financial system, fuelling a debate about the need to tighten controls on the largely unregulated instruments.

But policymakers and executives, speaking at an industry conference here, say the heightened focus has already produced initiatives that could preempt the need for comprehensive new laws and changes in the current regulatory structure.

And as for potential new regulation, ideas for which were already floating around, well:

regulators and congressional aides alike say those legislative proposals may serve mainly to sound a note of caution rather than to impose onerous new requirements on the hugely successful markets.

Meanwhile, regulators were sounding uncannily like the industry they were supposed to be regulating, as a March 25, 1994, Dow Jones piece made clear:

Securities and Exchange Commission Commissioner J. Carter Beese urged players in the derivatives market to take meaningful steps toward risk management standards in order to forestall further congressional regulation of their market.

Speaking at an American Stock Exchange options and derivatives conference here, Beese said market factors might ‘force the hand of Congress’ to enact ‘heavy-handed’ legislation that could harm the derivatives market. He said if the industry moved toward widened financial disclosure and other risk management steps, Congress might not feel compelled to burden derivatives players with further
regulation after the General Accounting Office releases a report on the subject later this spring. The GAO report, he said, ‘will be tough, will err on the side of prudence and likely will call for legislation.’

With friends like these… And Beese wasn’t finished:

Beese said attempting a ‘quick-fix’ solution to perceived dangers in the derivatives market could lead to ‘regulatory arbitrage,’ in which market participants move their business to less-regulated locales out of regulators’ reach.

Rep. Jim Leach, R-Iowa, has proposed a bill on derivatives that Beese said takes a ‘modest approach.’ But he warned that fears in Congress of overlooking the next savings and loan crisis could lead to an overzealous response by legislators.

Perceived dangers? Come on, Dow Jones, can’t we drop the qualifier, or at least clearly attribute it to Beese? The GAO clearly had an uphill battle ahead of it, and the report hadn’t even come out yet.

“Fear” was the order of the day, as the May 18 release date approached. May 4, the AP informed us:

A much-awaited study on the controversial derivatives business proposes significantly tighter regulation of the booming market, with an eye to minimizing the potential of a financial catastrophe, sources said Wednesday.

The report by the General Accounting Office, in the works for several months, has been much feared by Wall Street banks and securities firms.

They have privately voiced concerns that the study by the GAO, the investigative arm of Congress, would lead to excessive regulation of derivatives. That would, in turn, drive the lucrative business offshore into the arms of European and other foreign bankers.

May 10, Dow Jones made clear where some ex-regulators stood on the matter:

The battle lines are forming on whether Congress should legislate new rules and safeguards for derivative financial products, and two former regulators came down firmly on the side of those who want Congress to do nothing.

‘The sky is not falling,’ declared ex-Securities and Exchange Commission Chairman Richard Breeden, now chairman of the Financial Services Group of Coopers & Lybrand, at a House subcommittee hearing attended by a batch of lobbyists anxious to ward off derivatives legislation.

Former New York Federal Reserve Bank President E. Gerald Corrigan, now with Goldman, Sachs & Co.—who not long ago warned that derivatives might be introducing new elements of risk into the financial system—joined Breeden in urging Congress to forego trying to enact reforms for derivatives.

And then the May 14 issue of The Economist really went to bat for the anti-regulatory camp, with an almost 3,000-word piece on derivatives. Here is the synopsis:

Regulators worry that huge growth in options, futures, swaps and other derivatives threatens the stability of the whole financial system. To the extent it does, regulation is warranted. But that extent is small, and otherwise the markets will judge the risks better than regulators can.

The Economist took on legislators whose concern over derivatives had led to both the GAO study and a variety of legislative proposals to curb derivatives:

One reason for America’s wariness is that legislators there want to improve on a hitherto poor record of anticipating financial disasters. They failed to foresee either the thrift debacle or the collapse of the junk bond market in the 1980s. Derivatives now offer an attractive target: they are a little-understood market with very big numbers attached. But that does not necessarily make them a threat to the system. On the contrary, used properly, derivatives can spread and even reduce risk in absolute terms rather than increase it.

The piece goes on to knowingly tell us:

In fact, because derivatives contracts are a way of spreading risk, they should improve rather than damage the aggregate position of companies linked by them.

Nice theory. Too bad it turned out to be utterly wrong.

But as much resistance as there was before the report came out, it paled in comparison to the response to its publication. Then the industry, with some help from some influential federal regulators, really tore it up.

Dow Jones, May 18:

Fast on the heels of a General Accounting Office recommendation that Congress enact legislation to lessen perceived financial system risks arising from derivatives, six leading financial trade groups, including the Public Securities Association and Securities Industry Association, stated their opposition to any derivatives legislation.

Other trade groups joining the statement of opposition to legislation on derivatives were the American Bankers Association, Futures Industry Association, the Bankers Roundtable, and the International Swaps & Derivatives Association.

In a separate piece the same day, Dow Jones informed us:

Securities & Exchange Commission Chairman Arthur Levitt said that additional regulation of derivatives is not necessary ‘at this point.’

In response to reporters’ questions on today’s release of the General Accounting Office study of derivatives, Levitt said, ‘I’m not prepared to go out and call for more government regulation today.’ Levitt was speaking at a Investment Company Institute conference here.

And Levitt wasn’t the only government official making the round of industry conferences. Here is Dow Jones the following day:

Treasury Secretary Lloyd Bentsen said the federal government must not be ‘heavy-handed’ in dealing with derivatives.

‘The attention focused on these issues by appropriate committees of Congress and the GAO can also be constructive. However, I believe we need to be careful about interfering in markets in too heavy-handed a way.’

Bentsen’s remarks were contained in text of a speech he is giving before a National Association of Securities Dealers conference here.

Where was the press in all of this? Generally abdicating its imperative to shape the story—to sift through disparate pieces of information and put them in their places—and employing instead a false evenhandedness.

Let us explain.

Some articles merely summarized the report, avoiding the issue of significance entirely. But often reporters brought in opposing voices. That is standard, of course, and not a problem in and of itself. The problem is that reporters seemed at a loss over what weight to give opposition to the report. The result was that they gave it equal time—or more. And so the GAO, which had spent two years making itself an expert on derivatives, became just one voice among many, only to be gradually shouted down by a persistent opposition.

In reality, the GAO was the authority here, and unlike many of its opponents, didn’t have a horse in the race. Some opponents of the bill called the document politically biased in an effort to discredit it. But the problem with that accusation, which seems to have been aimed at Democrats, a few of whose members were at the forefront of the call for legislative action, is that—while solutions may have differed across party lines—concern over derivatives was not entirely limited to one party.

Besides, the GAO has earned considerable credibility over the years. Despite years of excessive government secrecy, they are one of the few government sources we can still count on for real information.

Nonetheless, here is the WSJ May 18, 1994:

The GAO report drops into a seething pool of vested interests, including regulators, legislators and dealers, all of whom have already offered their own, sometimes conflicting answers to three basic questions: What are derivatives? How risky are they? And what, if anything, should be done to regulate them?

There is far too little weighting of the various parties here. It is just plain wrong to equate all these “vested interests.” As if the Congress and private industry are two equivalent, equally self-serving parties. Even equating the industry and regulators is too simple, although the two groups were way too intertwined.

Manifesting that unhealthy connection, the industry and regulators continued to hammer away at the GAO. Here is Dow Jones, May 19:

Yesterday, the GAO released a long-awaited study of derivatives, which drew strong criticism from industry representatives. Market participants and regulators questioned the underlying premise of the report, which assumes that the increasingly close linkage among various financial markets, including derivatives, threatens widespread bank losses in the event of one failure.

Yet the banking system has withstood an assortment of crises in recent years, noted Steven Hellinger, director of research for the New York State Banking Department.

On May 19, the AP presented the problem as one of public perception:

Many fear these hybrid concoctions traded by banks and brokers could trigger a financial crisis, even though most are perfectly safe. But that’s not reassuring to those who remember how the banking industry slogged through the junk bond and commercial loan crisis, risking big sums of other people’s money.

And then:

Bankers complain that recent cases of companies that lost millions of dollars on soured derivatives deals have received widespread coverage, while stories about companies that made money on derivatives seldom get written.

And Reuters, the same day, gave us anonymous criticism:

A major U.S. report warning that trade in financial derivatives poses a dangerous threat to the international financial system is exaggerated, a senior European monetary source said.

The source, close to international banking regulators, told Reuters that the report’s proposals for tougher regulation of trade in derivatives would plug some supervisory loopholes but not all of them were feasible.

The Chicago Sun Times weighed in, again May 19, with the “defenders” of derivatives:

In response to a long-awaited federal government report on derivatives, leaders of Chicago’s futures markets warned against further regulation of the financial instruments.

‘We would rail against any additional regulation,’ said Jack Sandner, chairman of the Chicago Mercantile Exchange. ‘No one has made a case that there’s a catastrophe here.’

Perhaps he didn’t read the GAO report. And yet again, it is beyond misleading to present the opinions of industry executives and the research of the GAO as equally authoritative, as this piece does.

Some more false balance, this time from the WSJ, May 19 again:

A federal study calling for tighter controls on the derivatives market was sharply criticized by the securities and commercial banking industries, which said the proposals would increase costs and reduce the availability of such financial products.

The General Accounting Office, Congress’s investigative arm, formally released its long-awaited study yesterday, calling for formal regulation of securities dealers and insurance companies that deal in derivatives, as well as for improved disclosure and accounting treatment. The report says that gaps in financial regulation could lead to a system-wide problem—and perhaps a federally financed bailout—if a major dealer fails. And it says the Securities and Exchange Commission should demand that public corporations establish requirements for corporate audits.

‘We are convinced that any legislation having these effects will harm the American economy,’ six leading financial trade associations said in a joint statement. ‘Therefore, we strongly oppose such proposals.’

The Globe and Mail May 20 brought up charges of politicizing the issue, in a piece headlined “Derivatives Backlash Overdone” and based on rumor:

A call for broad regulation of the booming financial derivatives market by an arm of the U.S. Congress is a highly political document, not an objective academic study, the president of Swiss Bank Corp. (Canada) said yesterday.

‘We are informed that the original draft, when it was sent to the politicians who commissioned it, was rejected … they just said it’s not negative enough,’ Malcolm Basing said of a report released in Washington on Wednesday by the U.S. General Accounting Office.

‘That gives you a flavour of what is going on,’ Mr. Basing, a past chairman of the International Swap Dealers Association—the key derivatives trade association—told a conference on derivatives.

The Washington Post’s editorial page seems not to have read the actual report, because it is hard to see how a reasonable reader could emerge with the following conclusion:

Derivatives have come to symbolize everything that Washington finds spooky, incomprehensible and menacing about the financial markets. Congress, bruised by the costs of cleaning up the S&L fiasco, wonders uneasily whether the rapid growth of trading in derivatives will produce similar grief. At its request the General Accounting Office has published a report that is, on the whole, reassuring. It suggests some improvements in regulation but rings no alarm bells. As it says, derivatives serve a very useful purpose.

If this were the obvious reading of the report, the derivatives industry would hardly have been so up in arms about it.

The rough climate soon got even rougher for the GAO, thanks in no small part to criticism by Fed Chairman Alan Greenspan and an easily convinced press. By late May, the press was less interested in the report itself than in regulators’ ongoing criticisms of it. Most notable was Greenspan, who continued to promote an anti-regulatory agenda. Here is the AP, May 25:

Derivatives dealings by banks and securities firms are unlikely to lead to losses requiring a taxpayer bailout, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan’s comments, widely disseminated, are important because mere days after the report came out, they played a key role in ushering in its demise. Here is Reuters, also May 25:

Federal Reserve Chairman Alan Greenspan and top regulators Wednesday defended their role in regulating derivatives and downplayed the danger of the $12 trillion market ever triggering a financial disaster.

The regulators told a House panel that new laws are not needed to rein in the market and hastily passed ones could do more harm than good—though the head of the Securities and Exchange Commission left open the door to new legislation.

Just a week ago, a two-year congressional study called for new laws, warning that the complex financial instruments pose a serious threat to the financial system and that a market upheaval could force a taxpayer-funded bailout. Lawmakers have responded with a bevy of proposals.

Greenspan, however, said regulators appear to be ‘ahead of the curve’ in keeping an eye on the market and legislative remedies are ‘neither necessary nor desirable at this time.’ He said the odds for a market meltdown were ‘remote.’

Agence France-Presse the following day gave us a sense of the army arrayed against the GAO:

The GAO report urged legislation to expand supervision and control of the derivatives activities of brokerage firms and insurance companies.

The idea drew opposition from the interested companies, as well as from officials of the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation (FDIC) who testified Wednesday before a House of Representatives subcommittee.

Such corrective legislation ‘is neither necessary nor desirable at this time,’ said Fed Chairman Alan Greenspan. Any new legislation, absent broader reform, ‘could actually increase risks in the US financial system’ and damage the entire system, he said.

Look, we are not saying this is easy. No one was going to serve the derivatives story to the press on a silver platter. The press itself needed to gauge the importance of the GAO report and the importance of industry and regulator criticism. The fact is, the press got that estimation wrong, and the report itself fell by the wayside as criticism mounted.

With the imprimatur of Greenspan, Dow Jones pretty much dismissed the report by June 1, observing:

The punch line of the General Accounting Office’s recent report on derivative financial products was supposed to be that a derivatives-spawned financial debacle could trigger a taxpayer bailout.

Punch line? Turns out the joke’s on us, Dow Jones. The piece continues:

However, now that the GAO report has been issued and hearings have been held, Rep. Edward Markey, D-Mass., a leading proponent of legislation to minimize derivatives risks, is suggesting that legislation might not come until the fall of 1996, if then.

Federal Reserve Chairman Alan Greenspan was asked at a derivatives hearing before Markey’s House Telecommunications and Finance Subcommittee last week to assess the chances that a derivatives-caused mess might lead to a taxpayer bailout.

‘Negligible,’ replied Greenspan, who with that one word squeezed the air out of the GAO’s laboriously constructed bailout scenario. There was no more talk of a taxpayer bailout at the hearing, or elsewhere.

The fact is, everyone, including the press, was cowed by Greenspan’s opposition to the report, and opposition—which had an outsized voice from the beginning—was suddenly the default response. The press, choosing not to shape the story but to be shaped by it, let this happen.

Barron’s was one of the few outlets that really took a look at what was at stake here, and June 20, parsed the interests of the various parties to the debate:

[T]he guiding principle of federal regulation in this area is that if the examiner thinks the bank has good procedures in place, he will permit the bank to create its own valuations and stress tests for derivatives. Which necessarily leaves the danger that someone who talks a good game may get carte blanche, and the banks can pay talkers more than 10 times what the government can play listeners.

Moreover—let’s face it—on the political-appointee level, bank regulators tend to be people who believe that bankers know what they’re doing. Alan Greenspan himself, while in private practice, once certified that Charlie Keating and his crew were ‘seasoned and expert,’ and that under their leadership Lincoln Savings & Loan had become ‘vibrant and healthy … a financially strong institution that presents no foreseeable risk to the Federal Savings & Loan Insurance Corp.’

The piece concluded:

Until the regulators or the accountants get their act together, readers of financial statements from big bank holding companies would be wise to equip themselves with a magnifying glass to read the fine print, and a salt-shaker to sprinkle on both the balance sheet and the income statement.

This analysis makes complete sense. So why was Barron’s one of the few voices in the wilderness?

That such insight was rare meant that the GAO was reduced to repeating itself over and over, like a drunk on the street corner. Here is the GAO, as described by Dow Jones June 23, more than a month after the report came out:

A General Accounting Office official said Congress should require federal oversight of all major over-the-counter derivatives dealers to ensure the system’s safety and soundness.

In testimony before the House Banking Committee, Charles A. Bowsher, Comptroller General, said there is an ‘immediate need’ for Congress to bring currently unregulated derivatives activities of securities and insurance companies under the eye of federal regulators.

‘Given the gaps and weakness that impede regulatory preparedness for dealing with a financial crisis associated with derivatives, we recommend that Congress require federal regulation of the safety and soundness of all major U.S. OTC derivatives dealers,’ Bowsher said in his prepared remarks.

Echoing the concerns cited in a report his agency released last month, Bowsher said that the sudden failure or abrupt withdrawal from trading of any of the large derivatives dealers could cause liquidity problems in the markets and pose risks to federally insured banks and the financial system as a whole.

Woe to the prophet in his own land. And this despite the fact that derivatives estimates, according to the WSJ on August 25, 1994, were already ballooning:

By Wall Street Journal estimates, the world’s derivatives markets are far larger than most people realize and far exceed the latest assessment published by the General Accounting Office.

Total derivatives outstanding currently top $35 trillion, roughly twice the congressional agency’s estimate for year-end 1992. The numbers are based on the value of the stocks, bonds, currencies and money-market instruments that underlie these arrangements and determine their worth—measures known as open interest or ‘notional’ value. Unlike the situation in securities transactions, little or no money changes hands when most derivatives trades are initiated.

Nonetheless, coverage of the GAO report continued its anti-regulatory skew, until it tapered off to a tiny trickle—and most of that in economics journals or industry trade publications.

The issue of derivatives would come up again and again—the GAO itself put out a follow-up report in 1996, and derivatives got broader attention in 1998 when Long-Term Capital Management failed and in 2001 with the collapse of Enron—but as response to this GAO report makes clear, merely raising the issue is not necessarily much better than ignoring it.

That we are not asking the impossible is clear from two excellent derivatives stories that swim against the tide of coverage. One was a Fortune story that came out before the GAO report, and the other was a Washington Monthly piece that came out in the report’s wake.

The stories are the products of hard work and curious minds: in Fortune Carol Loomis and in Washington Monthly Byron L. Dorgan (the Democratic Senator from North Dakota who also, as the NYT’s David Leonhardt noted last year, was one of the few voices raised against the repeal of Glass-Steagall). But the writers also had the privilege of cover stories with a lot of space, so the publications themselves deserve considerable credit as well.

The two stories are quite different but equally useful, especially read in concert. Fortune takes a more technical view of the situation, explaining in detail how derivatives work. Washington Monthly gives more of a layman’s account and focuses on the big picture. Neither story minces words.

Fortune’s Loomis offers warnings like:

Most chillingly, derivatives hold the possibility of systemic risk—the danger that these contracts might directly or indirectly cause some localized or particularized trouble in the financial markets to spread uncontrollably. An imaginable scenario is some deep crisis at a major dealer that would cause it to default on its contracts and be the instigator of a chain reaction bringing down other institutions and sending paroxysms of fear through a financial market that lives on the expectation of prompt payments. Inevitably, that would put deposit-insurance funds, and the taxpayers behind them, at risk.

And the magazine itself gives this prescient comment in an editorial:

The vast swelling of the so-called financial derivatives market to trillions of dollars has given investor after investor, not to mention lawmakers and corporate executives, a touch of that shiver. Some fear that this may be more than just a benign shifting of tectonic plates, but perhaps a precursor of the financial equivalent of the Big One.

Washington Monthly hits the right note immediately by mentioning the Fortune story up top—after all, big issues like derivatives can only be sufficiently covered by multiple stories, one building on the other—and then hits its stride a few paragraphs in:

Yet, this ‘false alarm’ could turn out to be a harbinger of a real financial conflagration—one that would make us nostalgic for the days of the $500 billion savings-and-loan collapse.

And about the chances of broader economic collapse, Washington Monthly makes a point so simple it seems almost self-evident, and yet virtually no one else in the press made it:

If this seems a remote possibility, don’t forget that financial implosions nearly always seem that way—before they happen.

That’s right. And all it takes is that one simple insight to undercut voice after voice saying how unlikely collapse was.

We add a related point: One of the reasons we don’t see economic collapse coming is that we would prefer to see ourselves as on track, rather than spinning wildly out into the ether. To that end we, perhaps understandably, sometimes fit the facts to our sensibility, rather than the other way around. But one job of the press is to be better seers than everyone else, less willing to be lulled into false contentment.

The Washington Monthly piece is so painfully on target, we can’t help but offer a few more choice quotes. First:

All that stands between the public and a financial disaster of this sort is the guardians of the banking system in Washington. Regrettably, they are outgunned by the derivatives dealers in several ways.

And then some thoughts on the press that echo our own:

[A]lthough some members of Congress are awake to the derivatives problem, it takes more than that to reach a critical mass.

That’s where the press comes in—or should. But except for a few pieces, the national press has been cowed by the complexity of the subject. Instead of inquisitive reporting, we get reports of assurances from Greenspan and others.

Yes! That is exactly right.

And why any fair analysis of how we got here must involve some serious soul searching on the part of the press.

Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.