the audit

In the Crisis, the Journal Falls Short

The newspaper is missing the moment
December 24, 2008

“…The last great newsman. He may be the greatest newspaper man of all time”—Michael Wolff, author of The Man Who Owns the News: Inside the Secret World of Rupert Murdoch, on Murdoch, in an interview with Marketwatch, December 1, 2008.

The Wall Street Journal, once the dominant force in financial news, is failing, and failing badly, in key aspects of its coverage of the credit crisis and the financial bailout.

This isn’t all Rupert Murdoch’s fault, just partly. But for all our sakes, the paper needs to find its way, and soon.

Senior Journal leadership may dismiss this idea, but at least a few among the rank-and-file have expressed to me a gnawing sense that paper has buried itself in the weeds of this unprecedented financial story and lost sight of the big picture. That’s certainly my view: its coverage is too incremental, overly geared toward those already in the know, and too willing to trade arms-length scrutiny for access. At this point, for instance, the paper isn’t so much as covering the Treasury Department as channeling it.

The problems are two-fold, as I see them. The paper’s leadership has not shown the vision needed to stop, take a deep breath, and take control of the narrative. Absent has been an effort to explain in a coherent way what just happened—how a few publicly traded companies managed to siphon a trillion dollars from the U.S. Treasury and tip the world into recession—and who is to blame.

Let’s put this part on Murdoch and his top editor, Robert Thomson. Sending the staff to chase news like so many hamsters on a wheel is not the same as editing a great newspaper. Neither is festooning page one with the news everyone else already has. The net result is that much great work is lost in the news gusher.

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But this is not all about Murdoch, not by a long shot. Old Journal formulas—inside-the-boardroom narratives—seem anachronistic now. Old rules—not revisiting a topic once it has been “done” in a single story—should be irrelevant. I wonder, too, if the Journal’s general we-don’t-rake-muck attitude quite fits the moment.

As it is, the paper offers flashes of brilliance, of which its Lehman and Bear Stearns coverage are prime examples. But these are pockets of resistance. What is needed is a general mobilization.

This is not, strictly speaking, a matter of opinion. The record speaks for itself, and we’ll get to it. But for the shorthand version of this argument, readers might want to examine the different approaches represented by the forthright, relentless, and relevant New York Times series, “The Reckoning,” which has hammered at regulators, rating agencies, Goldman Sachs, Citigroup, American International Group, yes, even President Bush, the person actually in charge, and The Journal‘s listless recent series, “The Fallen,” which chronicles the lost fortunes of the rich (!?).

The Journal series, which has zero relevance for public policy purposes, fails to deliver even compelling narratives—supposedly the paper’s strong point. The best inside information we learn about John Bucksbaum, the mediocre mall heir who blew up mall giant General Growth Properties, is that he is an avid bicyclist. A Mexican cement mogul comes across in a Journal profile with all the grit and pluck of an economic indicator.

He has long come across as a hands-on corporate boss. A decade ago, displaying a battery of computers to a visitor, he demonstrated how he monitored the heating temperatures of industrial kilns an ocean away in Spain.

This is your capstone series in this of all years? I hope not.

Last month, the Times exposed Robert Rubin’s involvement in increasing Citigroup’s risk, just as Rubin and his disciples are set to steer economic policy in the incoming administration. The Journal follows with an interview with Rubin a week later. That’s the difference. One is a public service; the other is just a very good newspaper story. One sets the agenda; the other follows it. One doesn’t need Rubin’s cooperation; the other does.

Louise Story’s recent piece in the Times on Wall Street bonuses was like somebody finally threw on a light switch, so deftly did it tie compensation to the crisis’s creation.

Yes, the Journal did its compensation story first (1), but it was hardly the last word and so much has been learned since then.

Also showing surprising grit has been Bloomberg News. Unheralded, gloves-off, the wire service has remorselessly hammered at the financial crisis’s heart—right on Wall Street. A Bloomberg expose documented Goldman Sachs’s toxic securities operation under Hank Paulson’s tenure. The Journal described how Goldman “won big’ on the mortgage meltdown.(2)

On holding the government accountable for the bailout, this historic raid on the U.S. Treasury, Bloomberg, a former business-news backwater, has been unparalleled. The Journal wins scoops from the government; Bloomberg has sued it. It’s just a different approach.

It is not too much to say that Bloomberg’s work, had it run in the Journal, would have changed the public’s understanding of the bailout and the course of the current debate. (Several links are below.) Paulson’s credibility would have been considerably lower; skepticism of his moves much higher. The debate about the relative contributions to the crisis of Wall Street and, say, the Community Reinvestment Act of 1977, would be over.

This is a failure not of industry but of imagination. The Journal, as an institution, has shown that it clearly understands it is reporting the greatest financial story of our lives. Bloomberg and the Times understand, however, that they are also reporting the greatest-ever financial scandal.

This is about institutional leadership—setting priorities and allocating resources. It’s about recognizing the need for responsibility, accountability, empathy, moral imagination. It’s about knowing when you’ve been had—had your lunch eaten—by the people and institutions you’ve been covering all these years, and being mad about it. It’s about professional pride. Or is that just for the rank-and-file?

Great newspaperman? See, let The Audit explain something: You don’t get to be that by owning a lot of newspapers. If that were true, whoever owned the Thomson chain would be great, and whoever heard of them? Owning several dozen Fond du Lac Reporters and Guelph Monitors just doesn’t get it done. Neither will owning a hundred New York Posts and Sunday Tasmanians.

No, great newspaper men and women got that way because they sensed a broader purpose to the enterprise and built a culture based on those beliefs, one mundane decision at a time. And when the key historical moment arrived—New York Times v. Sullivan, Watergate, the Pentagon Papers, right now—they rose to the occasion. Those owners had a sense of mission, and they were willing to bet the company on it. That’s the difference between Katharine Graham and Rupert Murdoch. She doesn’t need a biographer to tell everyone she was great.

But let’s be clear: News Corp. took over the paper at a low ebb. Mediocre journalism—passionless, unimaginative, overly stylized, formulaic, timid, dull, rote—all too routinely occupied the Journal’s famous page one long before Murdoch and Thomson ever arrived. Indeed, the journalistic torpor cleared the way for News Corp. When Murdoch and Thomson arrived, they openly questioned, even mocked, what Thomson has called the staff’s “fetishization” of the Journal’s page one and long-form journalism. But how would they know what they were missing?

And in fairness to editorial management, the crisis could not have come at a worse time. Murdoch made his unsolicited bid for the Journal’s late, not-great parent, Dow Jones & Co., in the spring of 2007, catching its controlling shareholders, the feckless and unworthy Bancroft family, with their jodhpurs down, just as the crisis was unfurling. It was a full year before Murdoch had won the paper, jettisoned its not-quite-flexible-enough top editor in clear breach of signed agreements, and installed Thomson, a former Financial Times editor, to run the show.

New management came in intent on shaking up the culture, and a period of experimentation was inevitable and even desirable. It’s too bad it had to come during this past year.

Alas, News Corp.’s innovations have gone in precisely the wrong direction. Attempting to become a new New York Times has left the Journal neither fish nor fowl. And was this really the year to shift emphasis away from business news? Misguided attempts to make the Journal “newsier” has just served to elevate commodity-type business stories to multi-column headlines on page one, effectively burying the occasional gems that are being done and adding to the impression of aimlessness. Dismantling the paper’s page-one operation has cost the paper its elegance and writing advantage.

And the Journal’s white-hot pursuit of scoops is also a turn toward insiderism. Scoops are valuable—if you’re a trader. For the rest of us, not so much. But this debate was always a false choice. The Journal has always won scoops. Pushing too hard just leads to scoops that turn out to be wrong, as when the Journal revealed that Citigroup was considering firing its chairman and later splitting up the company. Both those stories were a month ago.

When it comes to Citigroup, we don’t need scoops. We need somebody to probe how it led us all here. Did you know that in 2000, nearly three of four Citi mortgages were made by a subprime unit? I didn’t think so.

Many have remarked, and I predicted, that the Journal was being made to resemble the FT. The FT is a fine little paper, just like Britain and Australia are fine little countries. But the FT’s newsgathering operation in this crisis has been irrelevant. It effectively has no investigative capability. Why, if you are The Wall Street Journal, would you want to imitate it?

Let’s take a look at the record. And yes, this will be highly selective, but I’m going to try to fairly reflect the ocean of material these outlets produce.

On September 27, the Times’s Gretchen Morgenson published a story that hit at the heart of the AIG bailout by exploring who benefited. Answer: Goldman Sachs, among others, which would gain if AIG could meet its obligations and lose if it couldn’t. Morgenson also pried loose the fact that Goldman chief executive Lloyd Blankfein, successor to the current treasury secretary, met with Fed officials on September 15, the day of the Lehman bankruptcy and a day before AIG was bailed out.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

This story prompted strenuous denials from Goldman that it had any material interest in AIG’s fate, disputes that reached even The Audit. The Times was forced to correct an error that put Blankfein and Treasury’s Hank Paulson in the same September 15 meeting at which AIG’s fate was decided. Goldman, however, was forced to acknowledge that current and former Goldman CEOs did attend other meetings at the Fed that weekend, and that Blankfein was the only Wall Street CEO at the AIG meeting.

Point being, the Times story set the agenda for all subsequent coverage of AIG. That’s precisely the kind of journalistic courage that readers all too often take for granted.

As remarkable as that story was, two days later, Bloomberg, led by rising investigative star Mark Pittman, one-upped it with a blockbuster that flatly contradicted any inference that Goldman did not benefit from the bailout (my emphasis).

Sept. 29 (Bloomberg)—As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.

Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt.

On November 3, the Journal advanced the ball with a fine story on a consultant/Yale professor whose risk models failed to protect AIG from a colossal system failure. But a look at the key paragraph—known as the nutgraph—reveals that the story asks questions that are already answered. The emphasis is mine:

A close look at AIG’s risk-management operations, and the rapid-fire chain of events that crippled the firm, raises questions about the run-up to the financial crisis: Did firms like AIG plunge into lucrative but perilous new markets without thoroughly understanding the pitfalls? Had the sheer complexity of the financial products made it all but impossible to fully calculate the risk? And did firms put too much faith in computer models to assess dangers?

The answers are obvious—aren’t they?—just as they were the moment they were written.

I don’t mean to belittle this excellent story, but I believe comparisons with the earlier entrants are instructive. It is good to probe the rubble of an already failed financial experiment. It is better to reveal—expose, bring to light—the indirect transfer of public funds—money needed for food stamps, unemployment benefits, Medicaid—to Wall Street investment banks engineered by current and former executives of one of the beneficiaries, all in the face of fierce opposition from the most powerful firm on Wall Street. (And to think that readers get it for free on the Internet, without so much as a thank you.)

A five-part series by Bloomberg at the end of last year, while uneven, and, it must be said, not beautifully written, exemplified the wire service’s sense of urgency and mission.

One story found the thirty-something bankers and lawyers who met after hours at Deutche Bank to create the standardized contract that allowed for subprime securitization:

Those meetings of the “group of five,’” as the traders called themselves, became a turning point in the history of Wall Street and the global economy.

Another explored the corruption of mortgage-industry culture with a profile of a mortgage boiler-room operator who with the profits underwrote an action movie starring his fiancee in which a $1.2 million Ferrari Enzo is crashed into a concrete barrier. The story says Wall Street funded it all, including this detail:

Sadek [the boiler room operator] says that with the support of Citigroup, which funded the loans, he pioneered lending to homebuyers with credit scores of less than 450.
Citigroup spokesman Stephen Cohen said the bank doesn’t comment on its relationships with clients.

Another revisited ratings-firm collusion:

Rating Subprime Investment Grade Made `Joke’ of Credit Experts

The series, which won a Loeb Award, ended with long, jumbled account that tries to tie it all together—from the boiler rooms to the I-banks, to the raters, to a broke Icelandic city that invested in junk CDOs to, yes, a six-year-old girl who lost her bike during a foreclosure in Dorchester, Massachusetts.

Savannah got her first bicycle for her birthday in August, pink with streamers dangling from the handlebars. She decorated the present from her grandmother with stickers of Dora the Explorer, her favorite animated character.
When sheriff’s deputies emptied the house and changed the locks, they left Savannah’s bike behind.

Schmaltzy? Sure. Does the story work? Not entirely. But does it have heart? Yes, it does.
Another story, more than a year old, asked a central question: How much of the defective securities did Goldman sell on global markets while the future Treasury secretary was running it?

Notice the language in the headline (my emphasis):
Paulson’s Focus on `Excesses’ Shows Goldman Gorged

Treasury Secretary Henry Paulson says the U.S. is examining the subprime mortgage crisis to ensure that “yesterday’s excesses” aren’t repeated. He could be talking about himself and his former firm, Goldman Sachs Group Inc.

Paulson, 61, doesn’t mention that Goldman still has on the market some $13 billion of almost $37 billion in bonds backed by subprime loans or second mortgages that it created while he was chief executive officer. Those bonds have an average delinquency rate of almost 22 percent, higher than the average of other subprime bonds from the period, according to data compiled by Bloomberg.

The story, among other things, notes that Paulson opposed a bill that would make Wall Street firms responsible for what they sold:

One provision would make firms that package and sell subprime mortgages liable for damages if loans violate certain minimum standards, including ensuring a borrower’s reasonable ability to repay. Paulson criticized the liability idea in an Oct. 16 speech at Georgetown University in Washington.

“We need to ensure yesterday’s excesses are not repeated tomorrow,” Paulson said. Penalizing Wall Street for packaging mortgage loans “is not the answer to the problem,” he said.

This is accountability reporting, pure and simple, although Pittman’s calculation of Goldman’s toxic CDO share took an unusual degree of sophistication.

Given that Bloomberg has more than 2,000 journalists on staff (compared to 110 business journalists at the Times and 750 at the Journal as of last summer), it could do a lot more. But still, someone over there understands the business-journalism game has changed.

And note this headline:

Evil Wall Street Exports Boomed With ‘Fools’ Born to Buy Debt

—October 27, 2008.

No, this is not Mother Jones. It’s Bloomberg.

Yes, the Journal has done fine work that offers glimpses of what is possible. The irreplaceable Ellen E. Schultz discovered that as much as $40 billion in bailout money could go to pay for executives’ specially crafted pensions and deferred compensation (my emphasis).

The government is seeking to rein in executive pay at banks getting federal money, and a leading congressman and a state official have demanded that some of them make clear how much they intend to pay in bonuses this year.

But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces. (3)

The paper nailed the story of the strange bird who ran the Reserve Primary Fund, the supposedly ultra-conservative money market fund that managed to lose money, or “break the buck” and sent financial markets into deep freeze.

After a slow start on AIG, the Journal has bested its rivals in following it. In a November 12 story Serena Ng and Liam Pleven found that a reworked AIG rescue plan would benefit mostly AIG’s irresponsible Wall Street trading partners, who get to keep $35 billion in collateral they pried from AIG earlier and yet still get made whole by selling their junk securities to a new government-backed entity. And here’s my favorite quote (my emphasis):

A person familiar with the government’s rescue plan says it wasn’t specifically designed to benefit individual banks at the expense of U.S. taxpayers and AIG, which will end up bearing the risk of the CDOs. However, officials wanted to give banks sufficient incentives to sell the securities so that AIG could cancel the swaps. (4)

As long as that wasn’t specifically the point, just generally.

The Journal widened its new lead with a story by Ng, Carrick Mollenkamp, and Michael Siconolfi on how AIG has lost another $10 billion not previously known on other bad bets with Wall Street banks.(5)

Too bad the paper couldn’t find room for either of them on page one, but this to me is part of the broader problem. It is the same problem that would lead the paper to make this sweeping claim:

With retirement accounts tumbling and millions of homeowners struggling to pay their mortgages, a realization is dawning on many Americans: The banks, brokerage firms, insurance companies and other players in the financial-services industry have failed them…

and put it on page B1. And get this headline:

Some Consumers Say Wall Street Failed Them

“Some consumers”? This is a joke, right?

To me, that story is your year-end series. Instead, it’s a 1,200 word afterthought. You may not like this vision, but at least I have one.

But this is supposed to be the part about the Journal’s good stuff. Kara Scannell and Susanne Craig wrote the defining story on Securities and Exchange Commission chairman Christopher Cox. We knew he was passive. This story shows him to be certifiably Hooverian. On missing a key call on the Bear Stearns bailout:

In an interview, Mr. Cox said the time of the call changed overnight and no one told him.

On missing another key meeting, at which officials discussed, among other things, a Fed plan to lend funds to investment banks, “a radical shift that took the central bank into the SEC’s turf,” the story says:

Mr. Cox says his participation wasn’t required. “Because [the Bear Stearns loan] was the Fed’s money, they were chiefly responsible for the terms,” said Mr. Cox.

The SEC, which typically has five commissioners in all, had two vacant seats. Paul Atkins, one of Mr. Cox’s two remaining fellow commissioners, was traveling overseas and wasn’t informed about developments. He was furious, a person familiar with the matter says.

Mr. Cox says commission approval wasn’t warranted. He instead worked with his staff on “very intense and rapid” decisions.

The weekend after the Bear Stearns bailout, Mr. Cox headed to the Caribbean for a scheduled family vacation. He worked throughout, he said, staying in touch with SEC staff when needed.

The next week, as Mr. Cox returned from his trip, the Treasury Department unveiled a proposal to overhaul financial-services regulation. It called for dissolving the SEC and handing its Wall Street brief to another federal body. (6)

And a word about the Journal’s Wall Street coverage: No one has been better at getting inside the boardrooms of the fallen firms—Bear Stearns and Lehman Brothers particularly. I recognize the industry involved in, and the value of, the three-day Bear Stearns series that ran in May, even if it’s not my cup of tea. The level of detail found in the Morgan Stanley (7) and Lehman (8) coverage is remarkable.

Kate Kelly’s page one tour de force of November 1, 2007, which chronicles
how Bear’s then chief played bridge and smoked pot while two subprime hedge funds collapsed, is a journalistic achievement of the highest order.

This, after she and her colleagues beat the world in explaining the significance of the funds’ collapse in real time. (9)

This year, the Journal’s coverage of Lehman was unmatched. It signaled the bank’s balance-sheet problems in the spring and after its fall dug deep into what its management knew and when it knew it.

A story on October 8, “The Two Faces of Lehman’s Fall,” (10) established facts of unquestioned value.

The ailing securities firm quietly tapped the European Central Bank and the Federal Reserve as financial lifelines. On Sept. 10, one day after Lehman executives calculated the firm needed at least $3 billion in fresh capital, the firm assured investors on a conference call it needed no new capital at all. Lehman said its massive real-estate portfolio was valued properly, but Wall Street executives who have seen it say it was overvalued by more than $10 billion. As hedge-fund clients began yanking their money from Lehman, the firm assured them it was on solid financial footing.

None of those sentences was easy to pry loose. Each represents a scoop in itself, and all carried a degree of risk for the paper.

The Journal broke the news that Lehman executives were under federal investigation for possibly misleading investors about its financial condition (see footnote 10), just as it reported the feds were probing AIG executives for the same reason. (11)

Ah, well. It’s not easy being the global financial news leader in a time of global financial crisis.

And I’m not even going to mention the not-getting-it pieces, like the not one but two stories this year on “shopaholism” (12, 13) that recycle hackneyed myths about middle-class debt woes.

If you’re keeping score—and I’m afraid that’s what this is about for some—the Journal has been beaten on Citi, Goldman, Paulson, the Federal Reserve bailout, and AIG; it has won on the SEC, Lehman and Bear Stearns, and held its own on Fannie, Freddie, regulators and Greenspan.

But even if I’m wrong about a story here or there, no news organization in the world has reach, resources, and prestige to match up to this crisis, this particular moment in history. If Murdoch wants to be a great newsman, it is getting late.

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.