Many predatory lenders have gone through a similar cycle: sudden growth, fueled by the predatory loans themselves and stoked by the quick influx of cash provided by the securitization process, followed in a few years by growing allegations of improprieties, allegations which the lenders furiously deny. These allegations are followed, but often slowly, by investigations conducted by regulatory agencies. Only after several profitable years of predatory lending does the entire structure come crashing down. The crash typically happens when publicity regarding the lender’s methods so frightens the lender’s financial backers and loan purchasers that the lender suddenly finds itself without the ability to fund or sell its loans. At that point, the predatory lender goes out of business, perhaps after declaring bankruptcy, leaving its borrowers to contend with the purchasers of their loans over the validity of those loans.
—KURT EGGERT, “Held Up in Due Course” (2002; emphasis added)
Demonstrators chanting slogans and carrying signs gathered near the canyons of Wall Street to protest a financial system they believed had run off the rails. They accused it of raking in profits at the expense of less sophisticated home borrowers and of aggravating wealth disparities between rich and poor. Speakers included bereft former homeowners who told tales of deception, hucksterism, bait-and-switch tactics, and defective financial instruments that had left them destitute. After some initial hesitation, politicians also got involved. Andrew Cuomo, a prominent New York Democrat, struck a populist tone. “Someone is financing these companies to begin with; someone is buying these mortgages, and it is Wall Street.” Senator Charles Schumer of New York, normally one of Wall Street’s closest allies in Congress, was even more explicit: “The bottom feeders of society, these predatory lenders, reach up to the highest economic titans in society, and the two work together, and we have to break that link.”
The site of the protest was not Zuccotti Park but the World Financial Center, a few blocks from the headquarters of Merrill Lynch, Lehman Brothers, and Citigroup’s Salomon Smith Barney unit (and, for that matter, the Wall Street Journal, which didn’t cover the protest). The protesters were not Occupy Wall Street, still a decade in the future, but borrowers and activists complaining of fraudulent lending practices in the subprime mortgage industry. It was the spring of 2000.
Among the notable aspects of this demonstration—apart from its target—was what had triggered it. According to a lengthy analysis in Investment Dealers Digest, a public hearing had been organized by federal officials in May to examine a “predatory lending scandal” that had “erupted” two months earlier. The trade periodical worried that the “scandal” had caused liquidity problems in the market for subprime mortgage-backed securities—fewer buyers of MBS and falling prices—and noted that subprime MBS issuance in response had dropped to $60 billion in the previous twelve months, a third of the volume of the previous year and the lowest level in a decade, when the subprime securitization market was just getting started. While it wasn’t clear how much the falloff had to do with the “scandal” and subsequent protests, Wall Street bankers were nonetheless walking on eggshells. “Obviously [predatory lending] is a high-focus item,” the periodical quoted a Merrill Lynch managing director, Rob Little. “People are very cognizant of it, and they’re very cautious in terms of how they address it.” In other words, with the help of public pressure, subprime lending—the sector that would be at the epicenter of the mortgage crisis—was being contained. As the headline put it: “The Predatory Lending Fracas: Wall Street Comes Under Scrutiny in the Subprime Market as Liquidity Suffers and Regulation Looms.”1
As it turns out the “scandal” that had “erupted” a couple of months earlier was not a regulatory crackdown or bankruptcy. It was a newspaper story, an exposé about scandalous practices and the collusion of a large and notoriously lawless lender and one of Wall Street’s brand names, Lehman Brothers. “Mortgaged Lives: Profiting from Fine Print with Wall Street’s Help” was published March 15, 2000, in the New York Times, with a companion piece airing around the same time on ABC’s 20/20 news magazine. It explored the intimate relationship of First Alliance Mortgage Company, which had a long and pockmarked history with state regulators, and Lehman, then the fourth-largest U.S. investment bank. The piece was a tour de force of reporting and writing that, to devastating effect, described how the businessman Brian Chisick and his wife, Sarah, had left a trail of defrauded borrowers, lawsuits, and regulatory actions in the two decades it had taken them to build the Irvine, Calif., company into a subprime powerhouse.
Drawing on court records and interviews with former employees, New York Times reporter Diana B. Henriques and journalist Lowell Bergman documented how FAMCO had been carefully constructed as a deception machine. The piece reported that the Chisicks had populated its ranks not with bankers but with salesmen from area car dealers. The company implemented a corporate training program, known as “The Track,” designed to deflect borrower’s concerns about rates and fees and obscure the true cost of a loan until long after the closing. (Among the scripted lines: “May I ignore your concern about the rate and costs if I can show you that these are minor issues in a loan?”) And when The Track didn’t work, the lenders agents flatly lied, which the Times was able to demonstrate by quoting from a recording made by a cautious borrower—a paralegal from St. Paul—of a conversation with a FAMCO loan officer:
Mrs. Gunderson was still wary enough to double-check her loan with First Alliance, and to tape the call on her telephone answering machine.
Worried about the $13,000 in fees, she sought confirmation that her loan was for about $47,000.
“Right, your amount financed is $46,172,” the loan officer, Brian Caffrey, assured her. “That doesn’t change.”
“Right, right,” she continued. “And then the $13,000 goes on top of that? And then interest is charged?”
“No, no, no,” he responded.
As the Times story said, the true answer was, “Yes, yes, yes.”
Through the sheer weight of the reporting—testimony of former employees, regulators from several states, activists, lawyers, the company’s own documents—the Times demonstrated that a major national player in the still-seamy subprime business placed deception at the center of its business model. But it did more: in the classic mode of investigative work, it followed the money to its source—Wall Street. The story recounts how FAMCO had been brought public in 1996 by a bottom-tier investment bank, Friedman Billings & Ramsey, but moved up in class two years later when Lehman became its main funding source. The story quotes a Lehman spokesman saying that the company was aware of FAMCO’s lengthy regulatory record when it began underwriting the firm but felt it could manage the relationship. The Times story drew on an important lawsuit mentioned in the story—a class action spearheaded by a San Jose lawyer, Sheila Canavan, that would yield rich discovery materials from Lehman.
Today, the Wall Street–subprime connection is a given. Then, its implications were only beginning to be understood. Indeed, Lehman’s relationship with FAMCO was only a few years old. Henriques and Bergman, like Tarbell and her journalistic heirs, were working in real time, with imperfect information, on a story about active, hostile, and powerful institutions. The information was timely, still actionable by regulators, and, more important, still relevant for the literate citizen to grasp important shifts then occurring in the financial sector. Public opinion had a fighting chance to have an impact on the debate. The length, depth, and prominent display in the nation’s most important paper helped to shift its terms.
In the wake of the story, political figures and other officials issued statements and made speeches denouncing predatory lending. Among them was Alan Greenspan, chairman of the Federal Reserve, who, about a week after the Times story, denounced predatory lending in a speech to a group of housing activists. “Discrimination is against the interests of business—yet business people too often practice it,” Greenspan said. He announced an interagency task force, including the Department of Housing and Urban Development and the Treasury Department, to create a joint policy statement defining specific illegal practices. It was the first time the Fed chairman had spoken on the subject.2
Within weeks, the Clinton administration’s Office of Thrift Supervision had moved to close a loophole under a 1982 law that allowed mortgage lenders to opt out of tighter state laws in favor of OTS regulations.3 The same month, four bills were offered in Congress, including the LaFalce-Sarbanes Predatory Lending Consumer Protection Act of 2000, by John J. LaFalce of New York and Paul Sarbanes of Maryland, which would strictly limit points, fees, balloon payments, and credit insurance and require additional disclosure and counseling, and would force lenders to determine whether the borrower had the ability to pay. Soon, more bills would be introduced, or, as a banking trade publication put it: “More Jump on the Predatory Bandwagon.”4 The Treasury Department and HUD organized public hearings on predatory lending around the country, including in New York, the site of the protests and political denunciations by Cuomo, Schumer, and others.
FAMCO and the Chisicks would eventually agree to pay $60 million to settle deceptive-lending allegations brought by private litigants, state regulators, and the Federal Trade Commission. The settlement covered 18,000 borrowers. But by then, FAMCO was long finished; First Alliance filed for Chapter 11 bankruptcy protection and announced it would stop making new loans. The filing came on March 23, eight days after the Times-20/20 story.
Did a single news story do all that? Certainly not—and that’s the point. The NYT/ABC News story on FAMCO and Lehman was part of a wider network of consumer activism and legislative and regulatory action focused on the nexus of subprime and its funding sources on Wall Street. It’s not my purpose here to measure the effect of journalism in containing the brewing financial crisis, only to suggest that journalism, when performed right, has one.
When the Columbia Journalism Review began to review pre-crisis business reporting on Wall Street and mortgage lenders, we had a hunch that something had gone wrong. This conviction stemmed from our belief in journalism. As journalists, we have to believe that what we do is not entirely ineffectual and that it has some effect on the outcome of events. Otherwise, why bother? Given that the system failure here was absolute, whatever journalism did, as a matter of logic, was insufficient. But a second idea was that what passed for the “debate” about business-press performance was not really a matter of opinion at all. Either the work was there, or it wasn’t. Facts have a way of obliterating assumptions. Our approach was fairly straightforward.5 But in the end, we were simply looking for the best investigative work on the big financial institutions that brought down the system. We tried to be as scientific as possible, but the issue isn’t complicated. It’s about the stories. After all, what else does journalism do? The fact that all but one of the business publications in the survey volunteered their best work is to their credit and gave us confidence that we had a fair picture of what was and wasn’t done in mainstream business news during the years 2000–2007.
More on the survey in chapter 9, but I’m going to provide a capsule summary of our findings, which, given the title of this book, should not be surprising: the mainstream business press failed to meet even minimum standards of investigative reporting on financial institutions during the bubble period, let alone its own highest standards from the not-too-distant past. This disappearance of investigative reporting had three causes: the rise of CNBCization and dominance of access reporting (explored in chapter 5), deregulation, and financial distress among media outlets (discussed in this chapter). The data that CJR collected provide a paradox that begs for an explanation: it was during the years 2000–2003—the period before the true madness that engulfed the lending industry—that the best business investigations were done, as exemplified by the Times exposé of Lehman and its deep relationship with predatory lending. Bizarrely, it was during 2004–2006—the period of the worst excesses, what I call the “Locust Years,” when subprime lending totaled $1.7 trillion6—that we find mainstream accountability reporting virtually dormant. The watchdog, powerful as it was, didn’t bark when it was most needed.
The accountability paradox resolves when we see that the great journalism from the early range of dates we examined coincided with what would be the final gasp of robust lender regulation at the federal level. As regulation left the field, journalism did, too. The relationship between uncompromised regulation and accountability reporting is symbiotic; one lives off the product of the other. Regulation provides raw material for stories—indictments, settlements, white papers, and testimony. Journalism investigations provide the basis for a substantial number of law enforcement and regulatory investigations. A 2006 study of 263 cases of accounting fraud brought by the Securities and Exchange Commission found that a third were first reported by news organizations.7 Investigative reporting also amplifies the effect of regulatory action. The cost of what’s known as “headline risk” is usually far greater than any fine. A “perp walk”—the shame of publicly exposed criminal prosecution—is a significant part of the risk for white-collar offenders. In some cases, the process is dynamic: a regulatory action leads to a headline, which leads to a tip, which leads to a new headline, which leads to another action, and so on. Most important, the combination of the two presents the public with representations that are different from the airbrushed reality presented by corporate public relations and, to some extent, access reporting. In the early stages of the mortgage era, journalism and regulation combined to police an industry that was starting to career out of control.
The period from the late 1990s to 2003 was one of extraordinary regulatory activism centered on what was correctly perceived to be a growing problem: predatory lending, principally in urban areas. This activism was concentrated at the state and local levels but included the Federal Trade Commission, which brought important fraud cases against Citigroup and other brand-name lenders. The journalism of the period reflected and was part of this emergent reform dynamic.
Of course, the activism—journalistic and otherwise—came in response to real-world problems. Inner-city neighborhoods experienced spikes in foreclosure rates, many related to lending by old-line subprimers: Associates First Capital, First Alliance, Conseco Finance, Household Finance, Delta Funding, and the like. From the mid-1990s to the early 2000s, foreclosures began to jump in urban areas around the country, rising by half again in Chicago’s Cook County; doubling in Detroit’s Wayne County, Newark’s Essex County, and Pittsburgh’s Allegheny County; and tripling in Cleveland’s Cuyahoga County. In 2002, the American Mortgage Association reported that 1.5 percent of all mortgages were in foreclosure, a low number today but an alarmingly high rate then. A staggering 7.2 percent of all subprime loans were in foreclosure that year.8 The word “staggering” may seem strong, but for people who cover real estate, it fits. For years, residential mortgages had been so solid that problems were measured not in foreclosures but in delinquencies (late payments) or at worst defaults (missed payments triggering a declaration by the lender) because foreclosure rates had been so low, invariably a fraction of a percent.
Looking back, it is remarkable to recall the vigor with which politicians, regulators, and—as we’ll see—journalists responded to what was considered to be essentially a social crisis, not yet a financial one. An array of studies sought to solve the same problem that journalists like Michael W. Hudson faced: how to move beyond anecdotal horror stories to demonstrate that lawless lending was not just the work of a few bad apples, as the industry maintained, but was, in the words of a 2002 law review article, a “pattern and practice” of lenders industrywide and a product of corporate policy.9 The problem was proving the very existence of predatory lending, which, without further explanation, can seem almost a contradiction in terms, matching the benign act of “lending” with a malign descriptor, “predatory.” How can the act of lending money be shown to be aggressive? And how to get around the not-insignificant fact that each loan was signed by a borrower acknowledging both understanding and agreement?
Community groups, activists, and public-interest lawyers used various methods to chip away at the problem of proof. A 1996 Freddie Mac study of 15,000 consumer credit histories reportedly found that only 10 to 50 percent of subprime borrowers actually qualified for prime loans, an obvious telltale since no one would knowingly choose a more expensive loan.10 A 1999 Chicago study found that subprime loans led to disproportionate numbers of foreclosures relative to other loans, which hinted that the products were doing more harm than regular loans. A 2001 study of Dayton in Montgomery County, Ohio, interviewed 231 borrowers to conclude that the increased foreclosures there were caused by “predatory practices.” A 2002 Urban League study in Louisville, Kentucky, studied court records and found that a third of inner-city foreclosures involved loans with “predatory features.” A 2003 study of Monroe County, Pennsylvania, found that foreclosures often involved inflated appraisals, indicating collusion between lender and appraiser (borrowers have nothing to do with appraisals).11
Predatory lending was a particular concern of state and local governments, then coping with spiking foreclosure rates and complaints from constituents about fraudulent sales tactics by subprime lenders. In 1999, North Carolina became the first state to pass what its sponsors called an “anti-predatory-lending” law, a so-called mini-HOEPA meant to fill in gaps left by the federal law. North Carolina’s law lowered interest-rate thresholds requiring disclosure and banned more bad practices, including “loan flipping,” repeated refinancing without benefit to homeowners, and lending based on the value of the house, without regard to whether the loan could be repaid. Between 1999 and 2004, more than twenty states, both red (Georgia, 2002; South Carolina, 2004) and blue (California, 2001; New York, 2003), followed suit with some form of anti-predatory-lending law. “Spring Fever for Predatory Lending Bills,” read a headline in Real Estate Finance, a trade publication, on April 23, 2001.
The state of Georgia’s battle with the combined forces of Wall Street and the Bush Treasury Department perhaps best shows how heated the battle over predatory lending became. Led by Roy Barnes, the former Atlanta trial lawyer who had fought Fleet a decade earlier and went on to win Georgia’s gubernatorial election in 1998, the state touched off a ferocious finance industry response in 2002 when it sought to hold Wall Street bundlers and holders of mortgage-backed securities responsible for mortgages that were fraudulently conceived. It passed a landmark anti-predatory-lending law that extended liability for violations to any player in the lending chain, including the Wall Street houses that packaged the loans into securities and pension funds that bought them, and it left potential damages open-ended.
Mortgage and securities industries and Bush administration regulators demanded repeal, and the Office of the Comptroller of the Currency, led by the staunchly pro-bank John Hawke, also weighed in against Georgia’s new law, declaring that it would not apply to nationally chartered banks, even for business they did in Georgia. The OCC 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, calling the OCC’s move an unprecedented intrusion on state authority that would harm their states’ consumers.12 Standard & Poor’s dealt a decisive blow when it announced that it would “disallow” loans made under Georgia’s new law in securities it rated, making securitization all but impossible. Georgia’s lending market began to freeze up. Governor Barnes was defeated in the 2002 elections, swept out by Republican gains and his own controversial fight to minimize the Confederate battle flag on Georgia’s state flag. With the financial-services industry lobbying furiously, the Georgia legislature rescinded various provisions the following year.
Even as anti-predatory-lending enforcement shrank at the federal level, legal and policy activism if anything increased during this period at the state level. Eliot Spitzer, New York’s attorney general from 1999 to 2006, made lender fraud a major priority of his tenure before becoming involved in higher-profile investigations of Wall Street stock-analyst research and accounting fraud at American International Group. Spitzer conducted a well-publicized probe of notorious inner-city lender Delta Financial Corporation. Spitzer emerged as a major opponent of the Bush-era OCC. Indeed, the OCC, siding with a banking group that includes J.P. Morgan Chase and other big banks, famously went to court to block an attempt by Spitzer to enforce New York anti-predatory-lending laws on nationally chartered banks. The OCC argued that national banks should be exempt from state lending laws. The fight against “preemption,” federal regulators’ assertion that they may override state predatory-lending laws, spread throughout the country. Eventually, forty-nine states, led by Michigan, sued for the right to examine the books of Wachovia’s mortgage unit and fought the OCC and the banking industry all the way to the U.S. Supreme Court. (The administration’s legal argument was upheld in the fall of 2007 by liberal justices, led by Ruth Bader Ginsburg, months before Wachovia itself cratered.) The fight was the subject of a 2005 series of editorials in the Wall Street Journal, which, abandoning its long-standing deference to state authority, sided with the OCC and the banks.13
Finally, it’s worth noting that even into the first years of the Bush administration, the Federal Trade Commission kept up a credible show of vigilance over growing problems in mortgage lending. FTC cases against the subprime industry in the early 2000s includes some of the industries most notorious names: Chase Financial Funding (now part of J.P. Morgan Chase), Delta Funding, Fairbanks Capital, First Alliance, Nationwide Mortgage, and many others. The most important FTC case of the period was against Citigroup and its CitiFinancial unit, partly the result of its acquisition of Associates First Capital and the negative journalism coverage that accompanied it. In 2002, Sandy Weill’s firm was forced to sign a settlement that included $240 million in fines. The FTC’s sweeping case had alleged that Citigroup, a market leader and a household name, had “engaged in systematic and widespread deceptive and abusive lending practices” in its subprime lending operations. The FTC’s suit, initially filed against Associates and continued against Citigroup and its CitiFinancial unit, alleged that the bank used “deceptive marketing” to “induce consumers to refinance existing debts into home loans with high interest rates and fees,” and to “unknowingly” buy “high-cost credit insurance,” a product worthless for most customers. When customers noticed the extra fees for credit insurance, bank employees “used various tactics to discourage them from removing the insurance,” the complaint alleged.14 Notably, the settlement covered not a few customers but two million borrowers, emphasizing the fact that the abuses were corporation-wide and systematic, indeed, a function of Citi corporate policy. What is notable about this period of vigilance—both journalistic and otherwise—is that it had no trouble drawing a direct line between the rising tide of shady operators making mortgage loans and their funding source: Wall Street.
During the period from 2000 through 2003—which might be called the “pre-mortgage era”—journalism turned in stories that kept bank abuses of subprime borrowers very much in the public eye. The ominous shift in the lending business was, despite considerable resistance from the financial community, thrust into public view. Indeed, the FTC-Citi case came about only after hard-hitting reporting regarding Associates and its practices shortly after Citigroup’s 2000 acquisition of the firm. Soon after the deal’s announcement, the New York Times, again, published “Along with a Lender, Is Citigroup Buying Trouble?” (October 23, 2000), a 3,258-word story that went to impressive lengths to explain the risks to Citi from its association with the notorious Associates and, importantly, to document the firm’s execrable practices.
The story, by Richard A. Oppel Jr. and Patrick McGeehan, quoted damning internal Associates memos, including one entitled “The Roadmap to Continued Record Profits in 1995,” which emphasized the importance of selling credit insurance (“insist that the insurance offer is written on every application, NO EXCEPTIONS”) and pushed sales staff to refinance “aging” loans, no matter the consequences for the borrower. Also notable is the degree to which the story put Citi on the spot. Significantly, bank officials offered no defense of their new acquisition, arguing only that they would reform it. And Charles O. Prince, then Citi’s chief administrative officer, later its CEO and chairman, was brought forward to offer assurances. He vowed he would not allow Associates to drag down Citi’s reputation.
More examples of hard-hitting investigative journalism on abuses in the subprime mortgage market can be found across mainstream business journalism. John Hechinger of the Wall Street Journal wrote exemplary stories on subprime problems, including one about how brand-name lenders were convincing the poor to refinance zero-percent loans from the government and nonprofit groups with rates that reset to the midteens and higher. The lists of lenders named as taking part in the practice amounts to a roll of dishonor: “Some of the nation’s biggest subprime lenders have refinanced zero-interest and low-interest loans from Habitat, including Countrywide, units of Citigroup Inc., Household International Inc., Ameriquest Mortgage Co. and a unit of tax giant H&R Block Inc.”15
Businessweek published “Predatory Lending: Easy Money” (April 23, 2000). It led with, “Subprime lenders make a killing catering to poorer Americans. Now Wall Street is getting in on the act.” The piece is mostly anecdotal (a fifty-one-year-old truck driver is double-talked out of a cheap Veteran’s Administration loan and into a ruinous one, courtesy of a Bank of America unit) but does note Wall Street’s entrance into subprime securitization.
Forbes unleashed “Home Wrecker,” a scathing report on Household International, the old-line consumer-finance concern. The story drips with contempt for the company’s lawless practices and, for added “oomph,” includes the name of its CEO in the lead line: “William Aldinger says his Household International succeeds at lending to bad credit risks by managing smarter. People suckered into his mortgages cite other reasons: lies and deceit” (September 2, 2002). Forbes’s reporter, Bernard Condon, turned to former employees to find a lending environment little different from what Mike Hudson had found. “Household pressed its agents relentlessly for growth, raising targets several times in three years. ‘It was a pressure cooker,’ says Seth Callen, a former branch manager in Colorado. At times this led to deceptive tactics, former loan agents say.”
The common thread of these stories is that they put a spotlight on individual institutions for core business practices that are shown to be creeping toward lawlessness. Names are named. Importantly, the stories explain the creeping shift in the industry from an underwriting culture to a sales culture and the importance of compensation incentives in encouraging the highest volume of sales under the most onerous terms. Finally, the smartest stories among them follow the money to its source—Wall Street. Here is real information presented in a way any layman can understand. Something big is happening in the mortgage business.
The national business media’s aliveness to the issue mirrored even stronger work by local and regional papers. The New York Daily News, for instance, led a true crusade against Delta Funding Corp., the Long Island–based consumer-finance company that preyed almost exclusively on equity-rich, minority-dominated neighborhoods in Brooklyn and Queens. The paper ran a dozen stories in 1999 and 2000, documenting how Delta’s salesmen, like Fleet’s proxies a decade earlier, had knocked on doors around the neighborhoods to sell loans with high fees and hidden rates. One story, by Heidi Evans, described how a Delta “loan officer,” accompanied by a lawyer and (oddly) his girlfriend, approached a woman recovering from emergency stomach surgery in her hospital bed. “‘You don’t need to read all the documents, just sign each one at the bottom,’” the man told her, according to her account in the Daily News.16
This good journalism was accompanied by, and may have contributed to, regulatory crackdowns on a lending system that was increasingly tipping out of control. In 2000, Delta Funding was hit by lawsuits from the FTC, the Department of Justice, and HUD for a laundry list of “abusive lending practices,” including “paying kickbacks and unearned fees to brokers to induce them to refer loan applicants to Delta,” funding loans for “African American females with higher mortgage broker fees than similarly situated white males,” among many other abuses.17 The federal cases accompanied actions brought by New York’s Spitzer.
The largest settlement of the period, announced in December 2002, involved Household International in a suit brought by the attorneys general of all fifty states and led by Iowa’s Tom Miller and Washington State’s Christine Gregoire, who alleged that the parent of Household Finance had also systematically misrepresented basic loan terms—the true interest rates, for instance—and failed to disclose material information. The settlement totaled $484 million. “We are extremely hopeful that this settlement will signal a new day for protecting low- and moderate-income borrowers and every consumer involved in the All-American dream of home-ownership,” Miller said in a statement.
Did the journalism spur the crackdown? Did the crackdown create the journalism? In a sense, it doesn’t matter. The relationship between forthright journalism and uncompromised regulation is dynamic and symbiotic and, ultimately, salutary, the stuff of democracy. Each uses the other to do its work and is far weaker in the other’s absence. Regulators use investigative stories to identify targets and as information sources. Reporters similarly use regulators as sources, to provide documents that come with legal protections and to push investigations forward with their subpoena power. As we’ve seen, Tarbell relied to an enormous degree on official documentation, particularly from probes by Congress and the legislatures of Ohio, Pennsylvania, and New York, to support her Standard Oil probe. Likewise, the sensation her work created laid the groundwork for the 1906 lawsuit by Theodore Roosevelt’s attorney general, Charles J. Bonaparte, which wound up breaking up the company.
There are other similarities between investigative reporters of the early twenty-first century and their forebears a century earlier. What industrial concentration was to the muckrakers’ era, financialization is to ours. Both phenomena were equally baffling to the literate citizen. Both demanded an explanation. Both had been brewing for decades. Both were marked by institutionalized lawlessness perpetrated by increasingly brazen brand-name firms. Both were widely known among legislators, lawyers, clerks, cops, bartenders, and prostitutes—just not the public.
There were differences, of course. In some ways, the mortgage story was more difficult to report and analyze for a broader readership. As we’ll see, the aftermarket, where the lawless mortgages were bundled into mortgage-backed securities and collateralized debt obligations and where credit-default swaps were taken out on them, was opaque, difficult to understand, and, crucially, not the subject of as much regulatory activity as Standard Oil’s monopolization of the oil business or, for that matter, lawless lending among financial giants. Tarbell had the critical advantage of having Teddy Roosevelt in the White House; our generation had George W. Bush. But then, Tarbell was working virtually alone, with only John Siddall in Cleveland for help, for a small, entrepreneurial publication, virtually inventing a journalism form as she went along. She didn’t have it easy, either.
In the late 1990s and early 2000s, the press could be seen at least to present a challenge to the growing radicalization of the financial sector. True, given the frantic activity of state legislatures, city councils, state officials, and the FTC, the predatory-lending story was hard to miss. But through work in the Wall Street Journal, Businessweek, Forbes, and especially the New York Times, nonspecialists had at least a fighting chance to understand how the financial world was shifting under their feet. The journalism wasn’t perfect, but it was working.
It is true that stories revealing Wall Street’s role as the primary engine of mortgage-industry lawlessness were still few and far between in the early 2000s. It is also true that the regulatory crackdown that accompanied the journalism was grossly inadequate to the looming task. Household’s record-setting settlement with state attorneys general, for instance, amounted to only a fraction of the losses, estimated to be in the billions, suffered by hundreds of thousands of customers. It was greeted with derision by borrowers and acknowledged as a compromise by state officials.18 Indeed, it turns out the company’s settlement cleared the way for a sale. The next year, its regulatory problems behind it, Household sold itself, and its giant portfolio of subprime loans, to the British financial conglomerate HSBC Group for a stunning $15.5 billion, netting its CEO, Bill Aldinger, a payout of $100 million.
For Steve Eisman, the short-selling hedge fund manager who plays a major role in Michael Lewis’s The Big Short, the Household settlement and sale were a turning point and hardened his view of the subprime industry and the wider financial system supporting it as fundamentally corrupt. “It never entered my mind that this could possibly happen,” he said. “This wasn’t just another company—this was the biggest company by far making subprime loans. And it was engaged in just blatant fraud. They should have taken the CEO and hung him up by his fucking testicles. Instead, they sold the company and the CEO made a hundred million dollars. And I thought, Whoa! That one didn’t end the way it should have.” “That’s when I started to see the social implications,” he said. “If you are going to start a regulatory regime from scratch, you’d design it to protect middle- and lower-middle-income people, because the opportunities for them to get ripped off was so high. Instead, what we had was a regime where those were the people who were protected the least.”19
The FTC-Citigroup settlement was also woefully inadequate both as a deterrent and as compensation for borrowers even as it was hailed by its signatories—and the general business press—as a historic crackdown. While its $240 million penalty seemed high, this covered more than two million customers, working out to a mere $120 each. The figure was dwarfed by Citi’s net income, which that year, 2002, would hit more than $15 billion and go up from there. The internal reforms it imposed on Citi proved to be easy enough to evade.
But if, as Herbert J. Gans suggests, the actors in the mortgage drama—banks, regulators, activists—were all engaged in a battle to determine what news entered the symbolic arena, the press’s role was critical. The question was whether the public would have a chance to learn, as activists, state regulators, and industry whistle-blowers were arguing, that the financial sector was becoming radicalized, its mores were shifting, and a subprime ethic was seeping into mainstream lending.
As we’ll see, regulation at the federal level collapsed at the worst possible moment—just as the news media’s own business models began to crater as well. The period could be said to be a perfect storm for watchdog journalism. Regulatory failure and financial problems are, however, offered only as explanation, not an excuse. The retreat into access reporting is journalism’s problem, journalism’s choice. While investigative reporting disappeared at the national level, it continued doggedly on the local level, at modest publications with small budgets, and at regional papers that had no need for access to Wall Street firms or big banks. Somehow, they managed. What’s more, the collapse of regulation was true only at the federal level. Accountability reporting saw the failure of federal bank regulation not as a reason to ignore predatory lending but as one more reason to expose it.