The government, the financial industry and the American consumer—if they had only paid attention—would have gotten ample warning about this crisis from us, years in advance, when there was still time to evacuate and seek shelter from this storm.
—DIANA HENRIQUES, New York Times business reporter, 2008
But anybody who’s been paying attention has seen business journalists waving the red flag for several years.
—CHRIS ROUSH, American Journalism Review, 2009
The notion that the business press wasn’t paying attention is wrong, and the assertion that we were asleep at the switch is wrong. We were attentive. We were aggressive. We were aware. We wrote abundantly. But it is very hard to get the public’s attention for stories warning of complex financial risks in the middle of a roaring, populist bull market.
—MARCUS BRAUCHLI, Wall Street Journal national editor and managing editor
The story of the 2008 financial crisis is not only a story of hubris, greed, and regulatory failure, but one of these deeply troubling problems of social silence and technical silos.
—GILLIAN TETT, Fools Gold
The demise of the mainstream media, especially newspapers, has been forecast for decades, but the years following the “Tech Wreck” of 2000—the period of the housing bubble—opened a new, defining chapter. The crash of the technology bubble set off a severe ad recession, particularly at Dow Jones, which had made what the business press would call “missteps” that left it more vulnerable than most publishers. Starting in 2000 and running through the entirety of the mortgage bubble and subsequent financial crisis, the media industry began a revolution from which it has not yet emerged but whose first phase included the disintegration of the financial underpinnings of the news business. Driving the revolution was the migration of advertising dollars to new Internet companies—Google, eBay, Craigslist, and, later, Facebook—that relied on models that had nothing to do with covering the news. Newspaper advertising revenues, which had reached a peak of more than $60 billion at the beginning of the period, were cut in half by the end of 2008 and, by 2009, had returned, in real terms, to levels not seen since 1965. Once-great newsrooms were cut down beyond recognition.1
The total number of newsroom professionals (journalists) dropped 25 percent between 2000 and 2009, from about 56,000 to 41,000, a conservative count that understates the impact on great metropolitan dailies, particularly the Washington Post and the Los Angeles Times, both of which saw their staffs of professional journalists cut in half, from 1,200 to 650 at the LA Times. The steepest decline in value came around mid-2007, just about the time the credit crisis burst into full view. For instance, the market capitalization of the Journal Register Company, publisher of the New Haven Register and hundreds of smaller papers, fell more than 99 percent beginning in 2007—long before, it’s worth remembering, the credit crisis made business flameouts commonplace. In newspapering, it was the business model itself that fell apart.2
Around the same time, the drip of newsroom cuts became a deluge—in all, newspapers lost 13,000 jobs in 2007—and business news wasn’t spared. Chris Roush, director of the Carolina Business News Initiative at the University of North Carolina–Chapel Hill, estimates that the number of print business reporters around the country fell from 12,000 to 9,000 between 2000 and 2009. Business pages of major regional papers were hit especially hard: between 2004 and 2009, the Washington Post business staff lost thirty of its top reporters. The Los Angeles Times lost at least fifteen in the same period, leaving it with a total of around fifty.3
The debilitating effects on the news of such financial losses can be seen in the case of Dow Jones, the once-undisputed global leader in financial news and the parent company of the Wall Street Journal. Dow Jones’s particular problems can be traced to poor strategic decisions, including the failed 1991 bid for CNBC, which became such a cash-generator that it could have saved the company. Other opportunities came and went. The biggest blow, though, was a $900 million writedown of a Bloomberg-like financial-data unit in the fourth quarter of 1997. In an April 16, 2007, story, “Bloomberg’s Money Machine,” Fortune’s Carol J. Loomis wrote: “In the annals of business, the fall of Dow Jones from its financial-information throne and the rise of Bloomberg must be counted one of the great competitive turnabouts in history.” In the “annals of business,” one of the “great competitive turnabouts” is not something you want to be on the wrong side of. By the turn of the twenty-first century, the financial-news industry’s flagship was reliant almost solely on a single asset, a newspaper, and was vulnerable to any shock. These would come in bunches.
The first was self-inflicted. In the spring of 2000, the Journal’s managing editor, Paul Steiger, announced a bureaucratic shuffle that replaced the Page One editor, the great if imperious John Brecher, and moved the position itself under the general news hierarchy. The move effectively ended Page One’s autonomy within the hierarchy and made it less able to withstand the pressure to elevate routine daily business news at the expense of more in-depth reporting and careful writing. More and more, instead of taking the long view, Page One stories ignored Kilgore’s admonition and began to recount what happened “yesterday.”
The early 2000s ad recession lowered revenues across the media industry and, with them, Dow Jones’s stock price. The Journal had struggled to diversify its advertising base and so was hit especially hard by the loss of technology and financial-services ads that had filled the paper in the preceding years. The attacks of September 11, 2001, drove the staff from its newsroom across from the destroyed World Trade Center but created an esprit that helped win a Pulitzer Prize and reenergized the paper in the days and weeks that followed. The adrenaline rush, however, ended with the kidnapping and murder of Daniel Pearl in January 2002, which cast a pall over the Journal, an inchoate atmosphere of depression and bad feeling that no amount of memorializing and tribute could remedy.
The company was increasingly hampered by its ownership structure. Over the years, the Bancroft heirs had multiplied, and by the mid-1990s they numbered more than thirty, working in a variety of occupations (airline pilot, horse breeder) and scattered about the globe, some with a tenuous emotional connection to the paper and, for that matter, one another. Fatefully for the paper, many family members relied on the company’s quarterly dividend for income. A dividend is capital returned to shareholders because the business has no better use for it. Everyone knew that Dow Jones needed to grow to remain independent. And everyone understood, certainly by the mid-1990s, that the newspaper business was in transition and that lots of capital was needed to help with the shift. This became especially true after the big writedown of the data unit. But the company’s board kept the dividend at $1 per share, or $83 million a year—money badly needed for improving the news organization. The Bancroft family controlled about 20 million shares and so split about $20 million a year.
In 2002, Dow Jones stunned shareholders by posting a $8 million loss, threatening its credit rating, imperiling dividend payments to the controlling Bancroft family, and putting the independence of the company in doubt. The company responded by laying off more than 1,700 employees, including four rounds of layoffs in the newsroom, and slashing expenses by $179 million.4 It scrapped its generous pension plan in favor of a standard 401(k) and made cuts so deep in its health insurance plans that war correspondents were reduced to writing open letters to company directors, appealing to their conscience. Contract negotiations with the reporters’ union, once pro forma affairs, turned into bitterly contested struggles. Newsroom employees held byline strikes, boycotted the office, and picketed the company’s Lower Manhattan headquarters, chanting slogans and marching around a giant inflatable rat. The Journal’s sense of élan was fraying.5
While Dow Jones distributed its working capital in the form of dividends, more adroit—if less enlightened—media competitors were making savvy acquisitions and investments. Rupert Murdoch’s News Corporation bought a string of independent television stations to create the Fox Network in the 1980s, established Fox News on cable in 1996, and later gained dominant positions in satellite TV in the United Kingdom, United States, and other key markets. In 2010, its cable news division produced operating profits of $2.2 billion, twenty times that of all of Dow Jones, indeed twice as much as Dow Jones posted in revenue.6 This is simply to say: when it comes to journalism, ownership matters.
Balkanization at the Journal worsened, the atmosphere at the office darkened, and the gap between managers on the ninth floor and reporters on the tenth became a yawning chasm. The culture shifted from one of confidence, swagger, muckraking, and storytelling to keeping one’s head down and career survival. In some indefinable way, the power of reporters—not unlike that of rank-and-file employees in other industries—diminished, while that of managers increased. Dissent from reporters all but disappeared. Office politics became byzantine, and productivity demands on the newsroom grew ever more pronounced. Time-consuming investigations were undertaken at the reporter’s own risk: If a lead didn’t pan out—no matter the reason—your productivity numbers took a hit, putting your career in peril. This wasn’t subtle. Management grew more remote. In contrast to Kilgore, who walked the floors every day, an appearance by Steiger on the ninth floor was a rarity; one by CEO Peter Kann, rarer still. The Journal’s weakened condition, financially and, in my view, journalistically, cleared the way for Murdoch’s News Corporation to buy it with an unsolicited offer in mid-2007, just as subprime credit markets were starting to crack.
But problems at Dow Jones were worse than those in the rest of the business media only by a matter of degree. Shares of Fortune’s parent, Time-Warner, plummeted more than 80 percent after the disastrous 2000 merger with AOL, to less than fifty dollars two years later, where they have more or less remained. Shares of the New York Times’s parent fell nearly 90 percent, to about six dollars, where they remained. Forbes’s privately held parent floundered financially in the 2000s, to the point that the family sold a piece to a private equity firm in 2006. Businessweek’s parent, McGraw-Hill, prospered, ironically enough, because of its Standard & Poor unit, paid under a conflicted business model by Wall Street banks to provide AAA ratings to defective securities; the magazine itself floundered, particularly after 2006, and was sold to Bloomberg for a small sum in 2009.7
The disintegration of the business media’s financial underpinnings could not have come at a worse time. Low morale, lost expertise, and constant cutbacks, especially in investigative reporting—these are not conditions that produce an appetite for confrontation and muckraking, for vision and ambition. Instead, newsrooms retreated into CNBCization: tethered to the news cycle, competing ever more frantically for increasingly smaller scraps of news, cranking up the output requirements of reporters, and further marginalizing muckraking and investigations. The intra-newsroom tug of war between depth and speed tilted toward the latter and would eventually become a rout. Much has been made of the increasingly frenetic pace of news and newsgathering today, a phenomenon I refer to as the “Hamster Wheel.”8
As it happens, increased productivity requirements for reporters can be traced to the late 1990s, when news organizations responded to the rise of the Internet by producing more at a quicker pace and with the same or decreasing staffs. In the late 1990s, for instance, the Journal’s newsroom produced stories at a rate of about 22,000 a year while still doing epic, enlightening work that created value for the shareholders. By 2010, that number had nearly doubled to 41,000. The creep began in 2000 with a spike to 26,000, and story counts rose more or less steadily afterward. This count does not include Web-only material, so the figures are conservative. Meanwhile, the number of journalists producing those stories has shrunk. The International Association of Publishers’ Employees Local 1096, which represents a substantial number of newsroom workers, says the number of its covered employees dropped 13 percent, from 323 in 2000 to 281 in 2008.
The debilitating effects of this kind of productivity increase can’t be definitively measured—measuring quality is always tricky—but nonetheless can’t be overstated. Suffice it to say that it can shrink the horizons of a news organization and the reporters that work within it. The hamster wheel goes hand-in-hand with CNBCization, producing the need for a hurried gathering of incremental scoops. The hamster wheel makes impossible the kind of source cultivation, document studying, stair climbing, and door knocking that created masterpieces like Susan Faludi’s “The Reckoning.” The wheel is a boon for news managers and bureaucrats because story quantity is easy measured while quality is not. Short, incremental news items rarely entail the kinds of risks and stresses that typically define a news investigation. The hamster wheel is a bane to reporters, who find themselves tethered to their desks, dependent on official sources for stories, and deprived of the time to step back, dig deep, or merely think. Ultimately, this process is also a problem for readers, who are left to sort through a deluge of information, much of it generated from corporate sources, without the benefit of depth or analysis. And of course readers will never know what stories were left by the wayside, which voice wasn’t heard, which public service not performed.
Figure 9.1 Hamster Derby: Number of stories published in the Wall Street Journal
Source: Author research, Factiva.
Figure 9.2 Rising newsroom workload
Source: Author research, Factiva.
In a landmark report on news media trends, the Federal Communications Commission confirmed the trend and slightly bureaucratized the name, calling it “hamsterization”:
The broader trend is undeniable: there are fewer full-time newspaper reporters today, and those who remain have less time to conduct interviews and in-depth investigations. In some ways, news production today is more high tech—there is nary a reporter in America who does not know how to tweet, blog, and use a flip video camera—but in other ways it has regressed, with more and more journalists operating like 1930s wire service reporters—or scurrying on what the Columbia Journalism Review calls “the hamster wheel” to produce each day’s quota of increasingly superficial stories. They can describe the landscape, but they have less time to turn over rocks. They can convey what they see before their eyes—often better and faster than ever—but they have less time to discover the stories lurking in the shadows or to unearth the information that powerful institutions want to conceal.9
Figure 9.3 Stories of more than 2,000 words
Source: Author research, Factiva.
Across the news business, the number of long-form stories also dramatically declined, coinciding with—if not caused by—a period of media disruption and journalistic retreat (see figure 9.3).
This period of disruption and disempowerment in the media business occurred at roughly the same time as the super-empowerment of the financial sector. In 1996, for example, Morgan Stanley was, as it is today, an elite Wall Street firm, and Dow Jones was an elite publishing company. Each had a market capitalization (the market’s perceived value of a firm, share price times the number of shares outstanding) of roughly $5 billion. Morgan was slightly larger, but its resources were not virtually unlimited, as they would become, and the enormous cultural prestige of the publisher—a legacy of its journalism—was matched by its balance sheet. Dow Jones had clout.
A decade later, in 2006, Morgan Stanley’s market capitalization had ballooned more than tenfold, peaking at nearly $70 billion dollars. Its revenues had increased to $76 billion, riding, like all of Wall Street, the inflation of the housing bubble and the residential mortgage-backed securities and collateralized debt obligation factories they had created. Dow Jones, meanwhile, posted revenues of $1.7 billion that year, its shares dead in the water and its market capitalization at a mere $3 billion. Its net income was $387 million, a fraction of Morgan Stanley’s, but even that low figure was inflated by the sale of cash-producing local newspaper assets. Its income from continuing operations was half that. And its actual cash flow from continuing operations was $35 million. To put that in perspective, Morgan Stanley’s CEO, John Mack, commanded a pay package that year of $41 million. Mack’s personal earnings rivaled or exceeded, depending on the metric, what of all of Dow Jones was taking in.10
As Wall Street rode financialization to a position of unprecedented power, countervailing forces weakened. Most consequentially, the Bush presidency ushered in a deregulatory regime that that not only failed to adequately regulate the mortgage market but actively fought attempts by others to do so, principally state banking commissioners and state attorneys general. Regulation was compromised especially at the Office of the Comptroller of the Currency, which oversees nationally chartered banks such as Citigroup; the Office of Thrift Supervision, which regulated savings-and-loans such as Washington Mutual; the Federal Reserve, which had broad powers over the financial system and specific responsibility for nonbank subprime lenders; the Federal Trade Commission, with jurisdiction over consumer fraud; and the Securities and Exchange Commission, the once-proud watchdog of Wall Street. The Financial Crisis Inquiry Commission report put it simply: “The sentries were not at their posts.” What’s more, “the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products” through more than $3.7 billion in federal lobbying expenses and campaign contributions between 1998 and 2008.11
As we’ve seen from Ida Tarbell’s work onward, effective journalism and uncompromised regulation operate independently but together create a dynamic that generates information, public awareness, and, ultimately, reform. Without effective regulation, journalism can have all the resonance of one hand clapping. With the rollback in regulation and the dramatic growth of financial institutions, the financial system changed not just in degree but in kind. Financial news, however, did not. The mortgage era provides a study in the limitations of a narrow, investor-oriented focus that, broadly speaking, privileges access journalism. As crisis loomed, there was no Tarbell, not even a Faludi.
The defensiveness of business-news professionals, as evidenced in this chapter’s epigraphs, is understandable. As we’ll see, the business press wrote a lot of stories, and a portion of them can be seen as warnings of one sort or another. On the other hand, many of them were the exact opposite of warnings. In any case, it’s certainly a mistake—always—to blame readers for inattentiveness. Almost by definition, when the public is caught this off-guard about something this big, journalism needs to wonder if there was something, somewhere that it did wrong, something it didn’t do. In this case, what wasn’t done was accountability reporting. What journalism had done for more than a century, it could not muster when it was needed most. It may indeed be true that “it is very hard to get the public’s attention for stories warning of complex financial risks,” as Marcus Brauchli, the former Wall Street Journal editor, says. But it is less hard, I would suggest, to get the public’s attention about stories of institutional or systemic corruption. Those tend to be popular.
Mainstream business coverage of major financial institutions from 2004 through 2006 was trapped in old narratives, trapped in New York, trapped in the Wall Street paradigm, trapped on a spinning hamster wheel of increased productivity requirements, trapped in its comfort zone of risk, strategy, and interfirm competition. It became less mindful of broader societal concerns and ignored sources outside the bubble of investors, analysts, and executives. Jesse Eisinger, a former financial columnist for the Wall Street Journal and now a Pulitzer Prize–winning writer for the nonprofit investigative news organization ProPublica, says his old paper, like business journalism generally, clung to outdated formulas. Wall Street coverage tilted toward personality-driven stories, not deconstructing balance sheets or figuring out risks. Stocks were the focus, when the problems were brewing in derivatives. “We were following the old model,” he says.12
For muckrakers such as Hudson and Lord and short-sellers such as Eisman—attuned to the possibility of systemic corruption—deals such as Citigroup’s purchase of Associates and HSBC’s of Household Finance were clear landmarks, fraught with meaning and portent. For business news, these were another set of “risks” among many others. The conceptual difference is important; indeed, it is everything. As Lord described in American Nightmare and Eisman demonstrated around the same time with his CDS purchases, it was but a small step on the financial conveyor belt between mass fraud in low-income lending in the mortgage market and the global explosion in securitization of the same debt in the aftermarket. The connection was intimate and, as Lord demonstrated, not especially difficult to understand. And remember: the findings of mass fraud in the early 2000s were not mere allegations but settled cases brought by government authorities. The players involved in the mass frauds were not marginal operators but market leaders. And behind them, Wall Street firms—the world’s largest and most prestigious financial institutions—stood as the main market for their defective products, which they repackaged and sold many times over on the aftermarket. In 2004, 2005, and especially 2006, billions then trillions of dollars in debt securities and insurance would be based on these very loans.
If, as a journalist, one believed these loans represented reasonable risks undertaken by two more or less equally sophisticated parties based on reasonably symmetrical information, then one would not necessarily view the debt securities then created with alarm. One might believe it possible, even reasonable, to view subprime mortgage debt as similar in kind to prime mortgage debt, just riskier, but with risks that could be compensated for with extra interest, prepayment clauses, credit enhancements, and other safety measures. Indeed, such a view might not be too different from Wall Street’s. The fact that U.S. housing prices had “never” fallen on a nationwide basis (never, that is, since the Great Depression, when they had fallen 30 percent) would even lend plausibility to the idea behind collateralized debt obligations. But if one believed the original mortgages were, in fact, defective products, based—to some substantial degree—on fraud and misrepresentation, on hard-sell tactics and street-corner ethics—that is, if one believed that the sub-prime industry was as it always had been and will always be—then one’s view of the “risks” to the entire global financial system begins to change. A system with fraud at its foundation will, in all likelihood, ultimately fail, and the larger the system, the bigger the failure.
In launching the Columbia Journalism Review’s 2009 survey of business news, which I spearheaded, we had a hunch that the professionals were wrong in their assertion they had provided the public with adequate warnings about the transformation of the lending system and its Wall Street roots, and they were. Business news, as our survey demonstrated, failed to hold major lenders and their Wall Street backers to account. As I argued in 2009, it did everything but take on the institutions that brought down the financial system.13
But these professionals weren’t wrong that business news produced useful stories, and that’s perhaps the source of the disconnect with members of the public—Jon Stewart’s audience—who believe, like me, that whatever was done was inadequate. The trouble is, however, that even the best work produced during the years when the subprime sales culture had overrun the financial system was hampered by business news’s own narrowing definition of its mission. The run-of-the-mill, conventional business coverage of Wall Street was, because of its investor-centric view, not only myopic but also a contributor to the coming crisis.
The goal of the CJR report was to find stories that met past journalism standards for accountability reporting: head-on investigations of powerful institutions that, to use the Schudson and Downie definition, held “business and professional leaders accountable to society’s expectations of integrity and fairness.”14 So our survey was a search for the best in business reporting during the period and was designed to capture all significant warning stories, not just some of them. The survey (for methodology, see note 5 in chapter 7) took three months and involved sorting through many thousands of stories to find those that were relevant and could reasonably be seen as accountability reporting focused on major lenders and their Wall Street backers. Along the way, as noted, we found stories that didn’t qualify as accountability reporting but were valuable in other ways. That eight of the nine publications we examined participated by submitting what they believed was their best work bolstered our confidence that we had captured the significant precrisis work.
In the end, what emerges is a fundamental disconnect between the world that Hudson, Lord, and others had been reporting on for more than a decade and the one represented in the mainstream business press. Business news, as sophisticated as it might have been in some ways, revealed itself as surprisingly innocent, even naïve, about the subprime mortgage industry. Major business and financial coverage of subprime lending stayed within established frames, viewing it as an extension of the prime market, only “riskier.” Indeed, “risk” is the frame through which business news viewed the mortgage market. But the problem wasn’t systemic risk. The problem, as later official investigations amply demonstrated, was systemic corruption.
Some of the best work from 2004 through 2006 is what I call “investor” and “consumer pieces”: warning about unsustainably high housing prices and against patently defective new mortgage products then flooding the market. Business-news outlets deserve high marks for early and loud warnings about the housing bubble.15 Bubble talk appears, surprisingly, as early as the fall of 2001. Fortune might well win the prize, if there were one, for bubble-bursting, with “Is the Housing Boom Over?”—4,539 words by Shawn Tully, on September 20, 2004; on October 31, 2005, Tully answered himself with another five-thousand-plus words in “‘I’m Tom Barrack and I’m Getting Out,’” about the “world’s best” real-estate investor.
Meanwhile, the press was also warning consumers not to agree to a mortgage product containing terms that no well-regulated system would allow (and that have since been banned).16 Indeed, the Wall Street Journal kept after the issue and essentially called these mortgages bad on their face in several articles: “For These Mortgages, Downside Comes Later” (October 5, 2004); “The Prepayment Trap: Lenders Put Penalties on Popular Mortgages” (March 10, 2005); and “Mortgage Lenders Loosen Standards” (July 26, 2005). It should be said these usually ran on page D1, not A1, and so gave the impression of low-priority messages. Even so, there they were, and the defenders of business news have a fair point.
Regulators and lawmakers did have information they could have used had they wanted to. Businessweek ran a 4,000-word cover story on September 10, 2006, under the headline: “Nightmare Mortgages” with the subhead: “They promise the American Dream: A home of your own—with ultra-low rates and payments anyone can afford. Now, the trap has sprung.” The story relates the dangers of option adjustable-rate mortgages—loans with low teaser rates—and includes several anecdotes about homeowners who had taken them and found themselves in trouble. The story explains accounting rules that allow lenders to book sales on contract signing rather than when the cash comes in, encouraging high loan volume to generate short-term profits, and notes that banks had insulated themselves from risks by selling the lousy loans to Wall Street, which repacked them and sold them to someone else. It mentions that sales brokers are incentivized to “care more about commissions rather than customers” and use “hard-sell” tactics.
But even this laudable story—one of the better mainstream business stories of the period—illustrates the limits of the investor/consumer perspective. The story mentions some prominent lenders in passing as taking part in the practice—Golden West, Washington Mutual—but focuses on none in particular. Instead, the focus is on the dangers of the mortgage itself, not the massive institutions selling them. What the reporting failed to see was that the real danger was not in shoddy consumer products per se but in institutionalized, systemic corruption based on misaligned incentives to put as many of the most vulnerable borrowers into loans under the most onerous terms.
The story recounts four anecdotes of customers who not only bought a bad product but also, in three of the cases, assert that they did not understand the terms of the loan. In other words, the article argues that either the lender misrepresented the terms or, at a minimum, the disclosure was inadequate:
“They know they’re selling crap, and they’re doing it in a way that’s very deceiving,” [Gordon Burger, Sacremento police officer] says. …
“We didn’t totally understand what was taking place,” says Carolyn [Shaw, wife of a retired mechanic with diabetes]. “You have to pay attention. We didn’t, and we’re really stuck here.” …
“What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we’re getting now?” says Eric [Hinz], 36, who works in commercial construction. Refinancing is out because they can’t afford the $15,000 or so in [prepayment] fees.
The story calls to account a financial institution for each anecdote. Each of these declares the problem an anomaly, a consumer-product problem, not an institutional one. The reporting never rises to make the distinction that Richard Hofstadter lauded the muckrakers for: identifying not only malpractices but also malpractitioners.
Stories about deficient products are not enough to get the public involved, which requires stories of institutionalized corruption. There’s no way around that particular hard journalistic task. Perhaps the most impressive work during the period were stories that explored the consequences of the rapidly growing pool of savings accumulating in global debt markets, which made its way into debt instruments of all sorts, driving down yields and increasing leverage in the global financial system. In late 2005, for instance, the Wall Street Journal published “Awash in Cash,” a five-part series highlighting the dangers of some of these issues.17 The series explored how the cash glut led to a rise in asset prices, stocks, commodities, and real estate. It reported that lower borrowing costs had spurred corporate mergers globally and fueled corporate stock buybacks and dividend payments (as corporate profits increased). However, it doesn’t mention mortgages in a meaningful way, and when it discusses collateralized debt obligations, it’s in the context of those made from corporate debt.
But the very nature of such “system” stories, as I call them—those that frame issues in terms of “risk” to a particular facet of the financial system—renders them of limited use because they fail to take into account the extent to which fraud played a role in undermining financial models. The view is top-down when the reporting needed to be from the bottom up. Without knowing that important foundations of the financial system—mortgages—were to a large extent fraudulently conceived, the authors must search among all the various risks in the financial universe—commodities, corporate loans used for private equity buyouts, sovereign debt, other asset classes—to try to find, using numbers alone, which risk is the riskiest. Second, even if the “riskiest risk” was correctly identified, there’s not much for the public to do about it since no individual institution is responsible.
Still, it’s not hard to find interesting and useful stories about rising risks in the debt and derivatives markets. Warren Buffett, in Berkshire Hathaway’s 2002 annual letter to shareholders, famously proclaimed derivatives to be “financial weapons of mass destruction” after the company had experienced losses in a reinsurance unit. And a reading of business news in the early 2000s shows that the nearly catastrophic losses at Long-Term Capital Management, in 1998, weren’t far from business reporters’ minds.
The Enron debacle of 2001—which even the Wall Street Journal called part of an “upswing” in “corporate corruption” of the era—prompted news organizations to revisit the matter of derivatives and explore the role played by financial deregulation. A Wall Street Journal story, for instance, included early accounts of how in the late 1990s Brooksley Born, then chair of the Commodity Futures Trading Commission, had fought Alan Greenspan, Robert Rubin, and other powerful figures over her agency’s ability to regulate derivatives—and lost.18
In 2005, big hedge fund losses in the derivatives markets related to General Motors debt touched off worries among policy makers and explorations by business journalists into instability in the system. In April, the International Monetary Fund warned in its annual report of a possible meltdown in credit derivatives if investors all tried to “run for the exit at the same time,” and even Alan Greenspan, an apostle of derivatives, warned of “unanticipated losses” because “the rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress.” Businessweek responded by asking, “Will derivatives cause a major blowup in the world’s credit markets?”19 But the limits of this 1,300-word piece are evident. It focuses, understandably, on corporate debt but doesn’t mention mortgage debt. And why should it? No one had alleged that corporate debt, in general, or GM’s, in particular, was somehow fraudulently conceived. Indeed, fraud would have been far from the minds of reporters engaged with corporate debt, which differs from consumer debt, let alone subprime, in that both parties—issuer and buyer—are professionals and, at least nominally, sophisticated. The balance of information, power, and means between the two parties is much more symmetrical. There may be expensive lending in the corporate market, but, by definition, there can be no such thing as predatory corporate lending. That’s why even the best “system” stories were hamstrung; they viewed subprime mortgage lending as just another form of risk—like GM’s corporate bonds—and failed to take into account the possibility of widespread fraud in the system.
The business press began to zero in on the market for mortgage derivatives in the mid-2000s as the market began to balloon. Indeed, even as Steve Eisman and Michael Burry and other characters in The Big Short, as well as John Paulson and other hedge-fund managers, were beginning to assemble their positions to short the housing market, business-news organizations were reporting on it. In December 2005, the Wall Street Journal ran a 1,000-word story on C-1 discussing hedge funds that were betting against “lower-grade” mortgage-backed securities using something called a “credit-default swap”:
The new market came to life in June, when dealers agreed on a standard contract applying credit-default swaps, already widely used in the corporate-bond market, to the pools of home, auto or credit-card loans known as asset-backed securities. So far, trading has focused mainly on the riskiest part of the market for home-equity securities, which are backed by adjustable-rate loans to folks with shakier credit—a category that has grown in recent years as mortgage lenders have plied high-risk borrowers with easy financing.20
One of the most penetrating stories exploring systemic risk came ten months later, on October 30, 2006, when, in a Page One story, the Wall Street Journal impressively explained the ties between sub-prime mortgages and not only mortgage-backed securities but also the market for collateralized debt obligations (CDOs) and credit-default swaps, considered then to be some of the most sophisticated and complex products on the market. The 2,500-word piece by Mark Whitehouse, “As Homeowners Face Strains, Market Bets on Loan Defaults,” explicitly linked the fates of a Los Angeles–based hedge-fund buyer of a synthetic CDO tranche to a subprime borrower living in New York City: “Bryan Whalen and Ike Spirou have never met. But through the world of modern mortgage finance, their fates are inextricably linked.”
As the story recounts, Spirou had bought a $300,000 house in Queens, using a $266,000 mortgage from Option One, an H&R Block unit, then refinanced with a $360,000 loan from Long Beach Mortgage, a Washington Mutual unit. Whalen, the hedge-fund manager, had bought credit-default swaps—an insurance contract—against a bond containing Spirou’s mortgage: Long Beach Mortgage Loan Trust 2004-2. The party selling the insurance on the bond was Citigroup (in retrospect, unsurprising). Whalen paid only $20,300 a year for a contract that would pay up to $1 million if at least 3.35% of the loans in the bond went bad. The story discusses the potential benefits of spreading risks through credit-default swaps but is clearly a warning that the market’s risks were unknown:
Whatever happens with Mr. Whalen’s wager, there’s a lot more at stake than his fund’s performance or the roof over Mr. Spirou’s head. Subprime lending has put as many as two million families into homes over the past decade, helping push the U.S. homeownership rate up to 69% from 65%—a major shift toward an “ownership society” that politicians of all stripes have touted as one of the nation’s economic successes. As the bets play out, they will show how much of that success is permanent, and how much a temporary phenomenon fueled by overly aggressive lending.
Sure enough, we learn Spirou can’t keep up with the payments and is now in arrears. He admits to living beyond his means and says he only has himself to blame:
At the time, Mr. Spirou could easily afford the loan. He had seen his monthly income jump to more than $10,000 in the midst of the housing boom. Still, he says, he lived beyond his means, taking friends out to dinner at Ruth’s Chris Steak House and buying new clothes for the brokers who worked under him. He also took on loans to buy two new cars—a Pontiac Grand Prix for himself and a Pontiac Grand Am for his mother.
“I was young, naive,” he says. “I had to look like a big shot.”
The story ends with Spirou vowing to keep his house and adds, with a touch of irony, that he is “looking into ways to get another loan.”
As remarkable as the story is, it also shows the limits of even the best top-down business reporting. Spirou, a mortgage broker earning $10,000 a month at age twenty-three, was unrepresentative of the typical subprime borrower (only one of ten of subprime loans went to first-time home buyers) and was in fact part of the problem then overrunning the mortgage system. Using Spirou as the emblematic borrower illustrates how divorced business news had became from the realities of the mortgage system. Put another way, concerned citizens seeking to understand risks in the derivatives market in 2005 and 2006 had no reason to think that predatory lending or fraud might underlie the financial instruments being discussed because the business press did not tell them.
But it was worse than that. While business-news leaders point back to stories that they believe played a watchdog function, it’s also necessary to look at other prominent stories, particularly the standard profiles of Wall Street firms and big banks that purported to examine the institutions in depth. These, as we’ll see, sent messages that were far from warnings.
A reading of Wall Street profile stories shows them to be so deeply embedded in Wall Street values and expectations that they actually contributed to the atmosphere stoking predatory lending. Coverage of Citigroup and Lehman is perhaps the most notable—and galling—given all that was already known about the two firms when the stories were written. In January 2004, Businessweek ran a story on the rising fortunes of Lehman Brothers because, as the story said, it was diversifying away from its roots as a bond-trading house and into investment banking and other services. The lead proclaimed, “Under CEO Fuld, the bond house has become a dealmaking power.” The story starts with an anecdote designed to show Fuld’s relentless personality:
It was late December, but the holidays were not on the mind of Lehman Brothers Inc. (LEH) Chairman and Chief Executive Richard S. Fuld Jr. In 2003, Lehman had catapulted ahead of a slew of Wall Street rivals to become a serious investment-banking power, and Fuld was not letting up. On his desk, next to a tall Starbucks Mocha Frapuccino, was a list of hundreds of banking clients. He was determined to reach every person by New Year’s Day. “When something is on my list,” he says, “it will get done.”21
In hindsight, one can question the relevance of the Lehman-friendly premise. M&A aside, Lehman’s profits were and would continue to be concentrated in fixed income; it would relentlessly churn out subprime products—including its own subprime originations through retail subsidiaries BNC Mortgage and Aurora Loan Services—after others had backed off and would veer disastrously into commercial real estate and other illiquid bets.22 But the larger and more common problem is that it addresses Lehman strictly from an investor’s perspective and, as a result, betrays a myopic unawareness of the realities of its business. Absent is any awareness of reporting already done by the New York Times, and even Businessweek itself, on the bank’s deep connections to predatory practices at its client FAMCO and predatory lending generally. It was disconnected to the subject Hudson had been writing about for more than a decade, the funding and purchase of subprime loans, and the one Tett was beginning to explore in the aftermarket, the repacking of those loans into opaque derivatives. The word “mortgage” does not appear.
Fair enough. No story can cover everything. But, the CJR report shows, the Businessweek story was far from an outlier. It is representative of a business-press staple that examines investment banks in terms of their competition with other banks, often via a carefully negotiated profile of the CEO as means of humanizing an otherwise dry topic. In October 2004, the Wall Street Journal published a 2,400-word story on Lehman based on a similar premise under the headline “Trading Up: To Crack Wall Street’s Top Tier, Lehman Gambles on Going Solo.” The leader enlarges on this: “Firm Built on Bonds Expands Without Seeking a Merger; Investment Banking Is Key; No New Gorilla for Mr. Fuld.”23 The lead paragraphs also illustrate Fuld’s drive and ambition, this time in winning an investment-banking deal:
Last year, data-storage firm EMC Corp. decided to give a big investment-banking assignment to Goldman Sachs Group Inc., bypassing rival Lehman Brothers Holdings Inc. Richard Fuld, Lehman’s chief executive, was determined that wouldn’t happen again. A few months later, when EMC was looking for bankers on another deal, Mr. Fuld flew to Boston in one of Lehman’s private jets to make the pitch in person.
“It was very influential,” says EMC Chief Executive Joseph Tucci. That level of attention, unusual for what was a relatively small deal, helped win Lehman the business.
This story, too, is only concerned with Lehman’s investment prospects. It doesn’t mention the firm’s past legal scrapes with predatory lending and, indeed, mentions mortgage-backed securities only in the context of its desire to expand from them into other businesses:
Lehman’s bid to challenge Wall Street’s largest firms will soon be tested. Despite its advances, two-thirds of Lehman’s 2003 revenue came from bond-related businesses such as trading in mortgage-backed securities and selling corporate debt. That market, which boomed as stocks swooned after the Internet bubble, is now a dicier proposition. Many on Wall Street think a bond-market retreat is likely, although such predictions have yet to materialize. Lehman has continued to make money in the bond market even as rivals stumble.
The issue is not that these stories were wrong about the prospects of the bond market (it may have been “dicier” then, as the story said, but it would boom for the next two years) or even that they focus on less relevant aspects of the firm’s business. But the stories were written about corporate-suite executives for Lehman investors and do not address broader public concerns. In retrospect, we know Lehman investors, too, would have been better served by an examination of broader public concerns. But the narrow, investor-centric lens through which Wall Street firms were examined prevailed and rarely varied, no matter the publication or the firm under review.
In April 2006, Fortune ran yet another story lauding Fuld and Lehman: “The Improbable Power Broker: How Dick Fuld Transformed Lehman from Wall Street Also-Ran to Super-Hot Machine”:24
Consider this: When Lehman went public in 1994, it had only $75 million in earnings, with a paltry return on equity of 2.2%. Fast-forward to 2005, and the turnaround is breathtaking: Lehman booked $32 billion in revenues, $3.2 billion in profits, and hit 19.4% in return on equity. Over the past decade Lehman’s stock is up 29% per annum on average, highest of any major securities firm and 16th best among the FORTUNE 500.
The story aptly notes Lehman’s enormous reliance on bonds, which then accounted for nearly half the firm’s revenue:
Fuld’s magic has in part been to ignore doomsday predictions that Lehman was too focused on bonds. Instead he chose to exploit that area of strength, building the firm into a fixed-income juggernaut and benefiting mightily from the seismic decline in interest rates over the past decade. Today Lehman derives 48% of its revenue from fixed income.
But that’s as far as an investor perspective will take you. The word “mortgage” does not appear.
The business-press view of Wall Street—focused on executive suite personalities and, more importantly, on a firm’s recent and relative financial performance and stock price—dominated coverage by leading business and financial media outlets. It was universal and unshakable. No amount of alarm bells from housing activists, reporting from the alternative press, lawsuits from borrowers and whistleblowers, or regulatory activities by state attorneys general could budge the frames of Wall Street reporting from its investor orientation. The narrowness of the frame is striking. Business-news profiles of Wall Street firms are almost admirable in their resolute unwillingness to look beyond the usual sources and topics.
This is true even for Citigroup, arguably the worst actor during the crisis. This is not to say there wasn’t fine conventional business reporting on Citigroup or that the subprime story was the only Citi story worth pursuing. Roger Lowenstein wrote a wonderfully intimate 8,000-word profile for the New York Times Magazine in 2000 chronicling Sandy Weill’s rise from modest Brooklyn roots, his painful exit from American Express, a stormy relationship with protégé-turned-rival Jamie Dimon, and his unlikely triumph in taking over and vastly expanding Citi, making it for a while the world’s most profitable company. Fortune’s Loomis and the Journal’s Monica Langley did good work on Weill’s driven personality and why he is not the world’s nicest boss. Much was written, albeit after the fact, about Weill’s central role in creating and taking advantage of conflicts of interest that led to a fraudulent stock-research scandal, his relationship to fallen star analyst Jack Grubman, and Citigroup’s pivotal role in the crashes of Enron and other scandals.25
The Wall Street Journal also did interesting work framing the Weill-Dimon rivalry as a battle over the consumer, as opposed to the commercial, market.26 But the story merely waves at a serious accusation of predatory practices: “The trend has big risks for banks and their customers. The banking behemoths have gained a reputation for ingenuity at generating growth by tinkering with consumer interest rates and tacking on myriad fees.” That “tinkering” with rates and “tacking on myriad fees” packs a lot of bad behavior into a very small space, when, in fact, that was the story. That’s not good enough. In that sense, it was typical of reporting on Citigroup as a whole.
In October 2006, Businessweek ran a story on the megabank that criticized it for its stock-price performance in recent years, noting Citigroup “lags behind” banking rivals Bank of America and JPMorgan Chase and investment banks such as Morgan Stanley or Goldman Sachs in various profit metrics. More acquisitions are urged. The following paragraph illustrates how far the business press discourse had strayed into financial-services industry logic:
By all accounts, Citigroup is still a profit powerhouse. Earnings surged to $24.6 billion last year, a 37.7% jump since December, 2003. … But almost half of the company’s businesses are under pressure to find new sources of growth, and recent investments have yet to pay off. Moreover, despite $16.8 billion in stock buybacks and $14 billion in dividend payouts in the last 18 months, the stock has hovered at around $50 a share. Since Prince’s appointment in October, 2003, shares are up just 8.6%, vs. 35% for the S&P 500 Financials Index. Bank of America Corp., with $248 billion in total market value, is quickly closing in on No. 1 Citi, whose stock is worth $252 billion.27
The story is unassailable from a business-journalism perspective, and perhaps that’s the problem. From a moral perspective—in hindsight, at least—it’s a disaster. The earnings the story describes—put in perspective—were some of the highest ever posted by a publicly traded U.S. company. On top of that, add $16.8 billion and $14 billion in stock buybacks and dividend payments, for total surplus values of more than $55 billion—over and above compensation accrued to Citigroup executives and employees. The Businessweek story—it should go without saying—fails to convey the predatory lending machine that Hudson had described three years earlier in Southern Exposure. But only in Wall Street’s reality-distortion field could $24 billion in profits—by a bank, of all things—be tossed off with such nonchalance.
Likewise, a Fortune profile of Citigroup’s Charles Prince was published in February 2006, two and a half years into Prince’s tenure and three years after Hudson’s Citi exposé, near the end of the era of mortgage lawlessness with Citigroup very much in the middle of it. The 4,300-word piece contrasts the low-key, awkward personal style of Prince with that of his hard-charging, charismatic predecessor, Sandy Weill, and describes the challenges Prince faces in controlling the sprawling empire Weill created. It shouldn’t be mistaken for a puff piece. It is “tough” but operates only on the ground where Wall Street is comfortable: Citigroup’s relative stock performance, which had lagged. As the story puts it:
The pressure to perform—and soon—is almost palpable. During his tenure, Prince has overseen a 40% hike in the dividend and in 2005 alone plowed almost $13 billion into share buy-backs. Yet Citi’s stock has languished, returning just 10.8%, including dividends, since Prince took the helm, vs. 34% for the S&P 500 and 33% for the S&P 500 financials. When Citi announced its fourth-quarter earnings on Jan. 20, Wall Street was disappointed—for the third consecutive quarter—and the stock dropped almost 5%. Shareholders aren’t calling for Prince’s head. He is, after all, dealing with less than hospitable economic conditions, including a flattening yield curve and a shriveling mortgage market. Says Citi’s biggest investor, Prince Alwaleed bin Talal bin Abdul Aziz al Saud, who owns close to $11 billion of stock: “It’s all wonderful and lovely that Chuck Prince has cleaned up Citigroup. But we now need him to execute growth and boost the stock price.”28
As a matter of perspective, Citi’s net income for the previous year, 2005—including the three previous quarters that “disappointed” Wall Street—was, as noted, $24 billion, one of the most profitable years in the history of U.S. public companies. As a comparison, Bank of America earned $16 billion that year, Goldman Sachs earned $5.6 billion, Merrill Lynch, $5 billion, Lehman Brothers, $3.2 billion, Countrywide, $2.5 billion, and Bear Stearns, $1.5 billion, and so on. It is true that these are different businesses of different sizes in different product areas. But this blindness to the magnitude and implications of such profits shows the limits of investor-oriented, CNBCized business reporting.
Finally, a look at Washington Mutual coverage is useful since the savings and loan later underwent one of the most thorough and public forensic examinations after its spectacular 2008 failure. In March 2003, Fortune ran a piece examining Washington Mutual’s approach to consumer banking and how it was “using a creative retail approach to turn the banking world upside down”:
On a blustery afternoon in late February, a thirtysomething woman rushes through the door of a Washington Mutual branch in the heart of midtown Manhattan, stops, and stares. Tucking her hair behind her ears, she surveys the bustling scene. There are no bulletproof-glass partitions visible, no roped-off lines. But what is there is curious enough: In one window display are mannequins, clad in polo shirts, that look as if they belong in a Gap store, and children are playing quietly in a corner. When a smiling “concierge” approaches to greet her, a perplexed look crosses the woman’s face. “Um, is this the bank?” she asks.
You can’t blame her for being confused. Washington Mutual specializes in turning the accepted banking model upside down. Led by ambitious CEO Kerry Killinger, this Seattle thrift bank has grown from a relative unknown into a $268 billion banking powerhouse in just under a decade.29
That November, a Wall Street Journal Page One story covered essentially the same ground, also mentioning the “concierge” in the lobby.30
When a business-news organization didn’t have anything nice to say about a specific bank, it said very little indeed. Examinations of major lenders, like these during the earlier period, were largely either flattering or were not done at all. And when mainstream accounts do fault WaMu, it’s for the poor performance of its stock. “What Went Wrong at WaMu,” for instance, castigates the bank for failing to hedge the risk of rising interest rates, diversify out of mortgages, and fully integrate acquisitions, but the criticism goes no further. “Take a closer look at the mortgage business, and it’s easy to see how profits have evaporated,” the story says. “Start with the computer systems.”31 And even this negative story came after CEO Killinger had already publicly apologized to investors for poor financial results released earlier in the year. A story in the Wall Street Journal made similar points the next summer and worried about turnover in the executive ranks.32
And, as we’ve seen, those journalistic frames are arbitrary, and they shift over time. However, in the 2000s they fatefully narrowed. Business news had plenty of journalistic capacity to take on the sub-prime lenders and their Wall Street backers—it had done so just a few years before. Its abandonment of muckraking and public-interest reporting about major banks and Wall Street left it dangerously detached from the realities of the subprime industry and the sweeping changes overtaking the financial system. Indeed, because of its choice of an investor-oriented, access-driven approach, the business press was often a spur to the mortgage frenzy, publishing stories that mocked banks for poor financial performance and goading them forward with unflattering comparisons.
In February 2007, the Money and Investing staff of the Wall Street Journal gathered for an unusual newsroom meeting on the ninth floor of the World Financial Center in Lower Manhattan. A crisis was evidently unraveling in the mortgage markets and had been doing so for the past several weeks. “M&I,” or the “third front” as it is known internally (it’s the third or “C” section of the paper), covers the paper’s core financial beats: Wall Street banks, big commercial banks, the New York Stock Exchange and other exchanges, insurers, mutual funds, stocks and bonds as individual beats, and so on. M&I is not for every journalist—some find the pace too demanding or the material too dry—but it is the spiritual heart of the paper. Among the reporters was Mike Hudson, who had been a staffer for about a year.
Housing prices had begun to fall. The previous September, Nouriel Roubini had warned a gathering of the International Monetary Fund that the United States faced a once-in-a-lifetime housing bust, with catastrophic consequences for global credit markets. A wave of subprime lenders, including New Century, were reporting financial problems.33 The M&I section was about to get hit with what, by all appearances would be a financial storm unlike anything the journalists in the room had seen in their lifetimes. Various reporters were asked to speak. They reeled off potential problem areas and story ideas. Hudson offered a couple of thoughts on abusive lending in the subprime market and how they might affect the MBS markets, but no one paid much attention.34
Things didn’t go terribly well for Hudson at the Wall Street Journal. His career there could fairly be described as unproductive, frantic, and short. During his time at the Wall Street Journal, from May 2006 to November 2007, Hudson had story ideas, including a big one linking Lehman Brothers and other Wall Street banks to the subprime industry. But in early 2006, lacking an understanding of the true nature of subprime and of the systemic corruption in U.S. mortgage lending, business-news culture had no frame of reference for understanding Lehman’s place in such a system. Hudson, like most new reporters at the paper, was discouraged from something so ambitious so early in his career. Required, not unreasonably, to prove himself, he pitched a number of feature stories, most of which had an investigative cast: predatory lending in student and auto loans and how those might affect securitization pools; how anti-predatory-lending community groups, including ACORN, had been co-opted by the very lenders they were supposed to be monitoring, and so on.
But Hudson’s beat wasn’t mortgages or fraud but the global debt markets—a vast and complex subject that was essentially new to him. He did his best. He put in long hours boning up on the subject and reporting stories no better or worse than others’.35 Hudson’s job was to become an expert in the bond markets as quickly as possible, to turn out medium-length stories of 1,000 to 1,200 words that would appear on C1 and provide information for investors in credit markets, and to put longer, in-depth pieces on Page One.
Hudson also suffered from what might be called a social-capital deficit. He was unfamiliar with the intricate world of internal alliances and networks, of mannerisms, references, and stylistic cues that can make life in a big national organization as complex and as exquisitely nuanced as an Edith Wharton novel. While the Journal newsroom was not exactly a fashion runway, Hudson could look rumpled even in his best suit. Finally, and critically, Hudson did not project the kind of poker-faced cool that prevails at the Journal and other big newsrooms. It was fine to care about stories—just not too much. Hudson wore his earnestness on his sleeve. He cared about the stories in and of themselves. He presented evidence with rapid, unblinking force. Some found that jarring.
As it happens, less than a year after his arrival, the beat for which he was responsible and about which he had little knowledge was starting to crack at the seams.36 Try as Hudson might, his editors sensed he wasn’t taking command of the beat and, generally speaking, was not getting it. He didn’t get what the paper needed, didn’t understand the global debt markets. They began to sense he might not be up for the demanding job. And while it might be reasonably asked why he wasn’t switched to another beat—mortgages, for instance, or investigations—the Journal had a long-standing, if unspoken, rule against transfers for reporters deemed to be struggling. The paper considered a transfer between bureaus to be a reward and felt that failure should not be rewarded. Reporters, especially new reporters, must make it work on whatever beat they happened to cover with whichever bureau chief they were assigned to.
The policy made the system efficient but also rather airless or, as some would say, suffocating. There was little give, no mediation for rejected stories, no reconsideration for mangled copy, and no appeal for any wrongheaded, reckless, or malignant decision that might have cost a reporter weeks or even months of precious time. For new reporters, without allies, there was no steam valve to release tension that might build up between two journalists who disagreed on stories. Reporters complaining about their bosses were in effect questioning the system, a career-threatening gambit. A senior editor made that point explicitly to Hudson (and to me, for that matter): don’t question the system. Whatever the logic, the policy was fairly ironclad. Hudson would rise or fall as a bond reporter.
But if Hudson did not understand the bond beat, the paper didn’t get Hudson, either, and it certainly didn’t get subprime. His supervisors were not investigators; they were business reporters. Hudson’s immediate supervisor, Jon Hilsenrath, now the paper’s chief economics correspondent, was an accomplished business reporter. Hilsenrath’s supervisor, Nik Deogun, was a mergers-and-acquisitions reporter and an accomplished reporter and editor on other business beats. Hudson, by contrast, was an accomplished muckraker, an investigative specialist. All parties were highly skilled, motivated, professional, and well intentioned. They just didn’t connect. One side didn’t get the other.
But beyond credentials, it’s clear from what it published that the paper as a whole didn’t “get” the subprime business; had no grasp of boiler rooms, “Miss Cash,” and nut-squeezing; and didn’t understand what the mortgage industry had become. That Wall Street was funding systemwide lending abuses—as Hudson knew—was remote from the Journal’s understanding. Conventional business reporting did not grasp financial lawlessness on this scale. Hudson didn’t get a lot of things. But he got that.
Hilsenrath, the byline on many important pieces on the Federal Reserve for the paper, says he’s proud of the work the Journal did before and during the crisis, including Hudson’s. In an interview, he says Hudson’s hiring was part of an expansion of the credit-markets beat precisely because the Journal was trying to understand the looming problems there. He says the paper performed exceptionally in staying ahead of the crush of news as the crisis began. “In the early stages of the crisis, we were fully engaged and ahead of the curve on a lot of important stories, especially in 2007,” he says. “In 2005 and 2006, we were engaged in trying to figure it out. … People were doing very good work and were very, very focused on these issues,” he says. “I’m not going to put my head in the sand and pretend we had figured the whole thing out. … [But] we were trying very hard to do that stuff, and successful in some cases.”37
Hudson, for his part, says he felt a like a basketball player playing out of position: a power forward trying to play point guard. Hudson’s career at the Journal was a study in people talking past one another. He spent many wasted weeks—conducting dozens of interviews—on a feature story that was assigned to him, that would have missed the point of the brewing crisis, and that, in any event, fell through. The Lehman/subprime story, meanwhile, languished.
In early 2007, though, housing prices were already on the decline, subprime operators were already reporting losses or shutting down altogether, and debt markets began to shudder—and the case for Hudson’s Wall Street (later Lehman Brothers) subprime story became more apparent and compelling. Getting it into the paper would take months. Sometimes news took precedence. The story was delayed when an editor was forced to take an extended leave. It shifted to another editor, and then it shifted back when the editor returned. Hudson believed some editors understood the story, others just didn’t. The editors and Hudson had good-faith disagreements about the writing. Hudson, for instance, wanted to lead with recent allegations of forgery at BNC Mortgage, one of Lehman’s wholly owned subprime retail arms. One editor wanted to dispense with anecdotes and write a hard-edged lead with declarative sentences. Another wanted an older anecdote showing that Lehman knew of wrongdoing at its subprime partners as far back as the 1990s (a view that ultimately prevailed). The editors struggled to keep it under 3,000 words, a standard leder length. Hudson wished it was longer.
A big source of delays was, naturally enough, Lehman itself. Its PR people and executives objected vociferously to the premise of the story: that it was directly linked to subprime lending abuses and that the securities it sold on global debt markets were fueling the abuses. Lehman officials even tried to reargue the 2003 federal jury verdict (later upheld on appeal) that found Lehman partly responsible for predatory lending at FAMCO, the case behind Henriques and Bergman’s exposé in the New York Times seven years earlier.38 Hudson, though, had an ace in the hole: twenty-five former employees at Lehman’s BNC subsidiary who had recently confirmed they had either witnessed or participated in defrauding borrowers.
Under intense pressure, the paper stood firm. Hudson received strong backing from both colleagues and senior editors. The company demanded another meeting, this one on a conference call attended by a half dozen or more PR people and executives who argued that the story was misguided, wrong in its premise, and unfair to the company. The Journal’s side included Hudson; Hilsenrath; Michael Siconolfi, the investigations editor; Susanne Craig, who had covered Lehman and helped on the story; and Deogun, who led the meeting and, Hudson says, coolly and effectively resisted pressure to drastically revise the story or kill it altogether.
Finally, on June 27, 2007, it ran: “Debt Bomb—Lending a Hand: How Wall Street Stoked the Mortgage Meltdown.” Even at 2,600 words, it was classic Hudson:
Lehman’s deep involvement in the business has also made the firm a target of criticism. In more than 15 lawsuits and in interviews, borrowers and former employees have claimed that the investment bank’s in-house lending outlets used improper tactics during the recent mortgage boom to put borrowers into loans they couldn’t afford. Twenty-five former employees said in interviews that front-line workers and managers exaggerated borrowers’ creditworthiness by falsifying tax forms, pay stubs and other information, or by ignoring inaccurate data submitted by independent mortgage brokers. In some instances, several ex-employees said, brokers or in-house employees altered documents with the help of scissors, tape and Wite-Out.
But one story doesn’t make a career. Debt markets were cracking open, and Hudson struggled to get his arms around the beat. Not helping matters was the fact that Rupert Murdoch’s News Corp. had announced an unsolicited bid for Dow Jones. The company’s century of independence was coming to a close amid a messy, fractious takeover. After a while, all sides decided it was better to part ways. Hudson wanted to write a book and took a job with a borrower-advocacy group, Center for Responsible Lending. After resigning, Hudson stopped by to say goodbye to Deogun, who thanked him for his efforts, wished him luck, and complimented him again on the Lehman “Debt Bomb” story. It was, Deogun remarked, one of the better stories in the paper that year.
By mid-2007, of course, the seeds of the crisis had already been sown—the predatory loans made, the CDOs packaged and sold, the CDS trades done. No story or series of stories could make a difference then. Housing prices were falling; subprime lenders had declared bankruptcy; and debt markets were breaking. Even as the public was blissfully unaware of any serious problems in the financial system—the stock market tanked in the spring but would rebound through October 2007—business publications were summoning all hands on deck to deal with what many sensed would be the story of their lives.
As Hilsenrath points out, the Wall Street Journal deserves credit for being early, if not first, to signal that the gigantic global debt markets were on the verge of something resembling a nervous breakdown. Indeed, the unofficial start of the financial crisis could be dated to scoops in June 2007 by Kate Kelly that exposed problems in Bear Stearns–controlled hedge funds that would soon collapse and require rescue by the investment bank itself.39 The financially savvy understood that while the hedge funds were relatively small, the securities they held—subprime-backed CDOs—were not particularly different from those held at their full face value on the balance sheets of every bank on Wall Street, not to mention pension funds and financial institutions around the world. If lenders didn’t trust Bear’s securities, why would they trust any of them? Confidence among financial players worldwide began to waver. The system began to resemble Wile E. Coyote at the point of realizing he has just run off a cliff.
From mid-2007 forward, it should be said, mainstream business news played an indispensable role in explaining the depth and implications of the credit crisis and performing the first of the forensic examinations of how it had all happened. The Journal’s Serena Ng and Carrick Mollenkamp identified the leading role a Merrill Lynch executive played in creating toxic securities and provided an early exposé of Wall Street banks helping to create CDOs designed to fail in order for hedge-fund clients to bet against them40
Bloomberg News, the wire service run by a data provider that was previously considered a journalistic backwater, rose to the forefront of crisis examination, led by the extraordinary Mark Pittman. Big and buff—about six feet four and weighing in the mid-200-pound range—a hard drinker and heavy smoker, this profane and funny reporter had immersed himself in the arcana of the debt market and its “structured products” to the point that he could lecture traders and executives on their ins and outs. A former police reporter and ranch hand, Pittman brought a rare moral empathy to financial reporting and a pure accountability mindset. “I’m going to retire on this story,” he once said of the crisis with a weird mix of grim determination and giddy exhilaration. In June 2007, shortly after the Bear revelations, Pittman wrote a story that demonstrated that rating agencies had violated their standards by failing to downgrade clearly devalued mortgage securities, “masking”—that is to say, covering up—the coming crisis. Another exposé documented the role played by Treasury Secretary Henry Paulson in creating toxic securities while he had been head of Goldman Sachs.41 With Bob Ivry and others, Pittman headed a multipart series at the end of 2007 that was one of the earliest efforts to unravel the crisis. But Pittman may be remembered most as a named plaintiff in Bloomberg’s groundbreaking and ultimately successful lawsuit against the Federal Reserve to pry loose information about the Fed’s multi-trillion-dollar emergency lending programs to prop up major banks. Tragically, Pittman died of heart-related illnesses in late 2009, leaving a wife and two daughters and a void in the public’s knowledge of the financial crisis.
The New York Times also distinguished itself with important investigative work once the crisis had hit, notably a story by Gretchen Morgenson less than two weeks after the Lehman bankruptcy of September 15, 2008, that revealed for the first time the true beneficiaries of the American International Group bailout, namely, Goldman Sachs and other Wall Street banks.42 The story was part of a laudable series, “The Reckoning,” a sweeping and hard-hitting examination of the main actors behind the crisis, including Goldman Sachs, Citigroup, Washington Mutual, regulators, housing agencies, and President Bush. But there was much, much more to learn.
The two major government investigations after the crisis—from the Financial Crisis Inquiry Commission and the Levin-Coburn committee—returned findings that essentially confirmed that systemic corruption had taken root across the financial sector. The Levin-Coburn committee (formally, the U.S. Senate’s Permanent Subcommittee on Investigations), for instance, included a detailed examination of Washington Mutual that found the bank had engaged, as corporate policy, in “steering” borrowers from conventional mortgages to “higher-risk” (more expensive) loans; used “teaser” rates that led to “payment shock”; ignored its own lending standards; exercised weak oversight over third-party brokers, who supplied at least half of its loans; and, fatally, designed compensation incentives that rewarded loan personnel based on the highest volume of the worst loans. The report noted that subprime loans fetched five times the margin of prime loans in the secondary market, pushing the bank to “sell” as many as possible. As a result, Washington Mutual’s lending practices would later be described by its own president, Steve Rotella, as “terrible” and a “mess,” with default rates that were “ugly,” while internal investigations by the bank’s own fraud investigators as early as 2004 would turn up, “extensive fraud” by employees who “willfully” circumvented bank policies. An internal review found fraud of one sort or another on 71 percent of loans sampled and “discrepancies or other issues” in appraisals (which could have nothing do with borrowers’ mistakes or fraud) on nearly a third. A second internal sampling turned up “excessive levels of fraud” in 42 percent of the files. Other reviews found evidence of fraud in 58, 62, and 83 percent of loans issued by various offices, the Levin report said.43
The report said James Vanasek, WaMu’s chief risk officer from 1999 to 2005, made a direct appeal to Kerry Killinger, the chairman and CEO, in 2004, urging him to scale back the high-risk lending practices that were beginning to dominate not only WaMu “but the U.S. mortgage market as a whole.” The report quotes Vanasek’s testimony: “I went to the Chairman and CEO with a proposal and a very strong personal appeal to publish a full-page ad in the Wall Street Journal disavowing many of the then-current industry underwriting practices.”44 Vanasek was, of course, ignored. He left the company the next year.
The report attributed the rampant fraud to “compensation incentives” that “rewarded loan personnel and mortgage brokers according to the volume of loans they processed rather than the quality of the loans they produced.” Policing fraud was difficult, the report said, because loan originators “constantly threatened to quit and to go to Countrywide or elsewhere if the loan applications were not approved.”45
The Levin autopsy of WaMu, which, it should be remembered, was one of the largest loan originators in the United States, contains telling internal e-mails that echoed what Hudson had learned over the years about subprime sales culture. As part of its “High Risk Lending Strategy,” a deliberate and formal program initiated in 2004, the company commissioned focus groups of borrowers and sales personnel seeking to increase sales of a new product, the Option ARM, which Businessweek later described as “the riskiest and most complicated home loan product ever created.”46 According to the report, WaMu’s own focus groups found that few customers, most of whom sought thirty-year-fixed loans, would ever know to ask for such a product. They had to “sell” it, a process that could take as long as “an hour,” greatly inconveniencing already reluctant members of the sales staff, who often “simply felt these loans were ‘bad’ for customers.” Training—and additional compensation—was needed to overcome this feeling, the report said. Later reports would describe a 2004 retreat “at which thousands of WaMu managers chanted the company’s tag line, ‘The Power of Yes.’”47 The Levin report and other investigations validated the reporting of muckrakers—Lord, Hudson, Reckard—both in their particulars and in the broader implications about the mortgage-lending market as a whole.
But WaMu was only the lender that happened to be most closely examined. The same incentives applied across the industry, and evidence spilled into view that the subprime ethics had taken hold across a multi-trillion-dollar industry at the heart of the economy and the global financial system. Put simply, as Hudson and Reckard had revealed in the Ameriquest series, the practices once confined to Associates, FAMCO, and their ilk had spread across the U.S. lending market—as no less an authority as Angelo Mozilo himself had feared. Wells Fargo was sued by the Federal Reserve for instituting a compensation system that encouraged its sales force to take advantage of customers. Citigroup’s chief underwriter, Richard Bowen, who supervised 200 underwriters and oversaw $90 billion in loans, testified to the FCC that the flaws in mortgage documents, the bank’s “defect rate,” reached 60 percent. He, too, tried to alert managers but was brushed off. “There was a considerable push to build volumes [sic], to increase market share,” he said. “So we joined the other lemmings headed for the cliff.”48
In 2008, Businessweek reported that Wall Street’s demand for mortgages became so frenzied that “dozens” of brokers and wholesale buyers confirmed that female wholesale buyers were “expected” to trade sex for them with male retail brokers. GE-owned WMC was later discovered to have hired former strippers and a former porn actress to help entice brokers into selling mortgages “The whole point was to have someone attractive to talk to the brokers,” a former WMC executive would confirm. “One of the salespeople did porn before she worked there. When someone told me that, I couldn’t believe it. Then I saw the video and I realized it was true.”49
Bribery between wholesale buyers and retail brokers became common throughout the industry. At BNC, a subprime lender owned by Lehman Brothers, bribes were known as “spiffs.” Businessweek quotes a former wholesale buyer who said underwriters demanded spiffs of $1,000 for the first ten loans and $2,500 for the next twenty. Failure to pay meant the loan supply chain slowed, drying up commissions. At Washington Mutual’s Long Beach unit, a senior lending officer would be convicted on federal charges of receiving cash bribes from brokers of $100,000 to approve fraudulent loans.50
But as the Levin-Coburn report makes clear, it was the legal incentive to put borrowers in the most-onerous-possible loans—“destructive compensation practices”—that drove the frenzy all along the lending supply chain, from strip mall brokers to lending chiefs like WaMu’s Kerry Killinger (“questionable compensation practices did not stop in the loan offices, but went all the way to the top of the company”) and onto Wall Street’s trading desks. The FCIC makes the same point: “Compensation structures were skewed all along the mortgage securitization chain, from people who originated mortgages to people on Wall Street who packaged them into securities.” In 2007, total compensation for the major U.S. banks and securities firms was estimated at $137 billion, according to the FCIC. That led to the headline-making pay packages for CEOs ($34 million for Lehman’s Fuld that year, $91 million for Merrill’s O’Neal the year before), but also for inflated pay for millions of financial professionals. Bankruptcy documents would reveal, for instance, that no fewer than forty-two Lehman executives were paid at least $10 million in 2007, and, as Ben Walsh, a Reuters finance blogger, would write, “of course, there’s nothing special about Lehman, in terms of pay.” Down the mortgage chain, twenty-something salespeople with little education or mortgage experience pulled in $250,000 to $350,000 a year while sales managers made $1 million or $2 million, thanks to generous production bonuses and the network of independent mortgage brokers that fed the lender business.51
In 2008, an award-winning public-radio documentary, “The Giant Pool of Money,” quoted Glen Pizzolorusso, a young sales manager at another lender, WMC Mortgage, who reported earning between $75,000 to $100,000 a month and described the boiler-room ethic similar to the one Hudson and Reckard had described at Ameriquest:
PIZZOLORUSSO: What is that movie? Boiler Room? That’s what it’s like. I mean, it’s the [coolest] thing ever. Cubicle, cubicle, cubicle for 150,000 square feet. The ceilings were probably 25 or 30 feet high. The elevator had a big graffiti painting. Big open space. And it was awesome. We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about. … We looked at loans. These people didn’t have a pot to piss in. They can barely make car payments and we’re giving them a 300, 400 thousand dollar house.
ANNOUNCER: Glen had five cars, a $1.5 million vacation house in Connecticut, and a penthouse that he rented in Manhattan. And he made all this money making very large loans to very poor people with bad credit.
The former broker’s description of life as a high-flying mortgage salesmen also had a familiar ring to students of boiler rooms:
We would roll up to Marquee [a Manhattan nightclub] at midnight, with a line 500 people deep out front. Walk right up to the door. Give me my table. We’re sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing a—whatever, I’m Christina Aguilera. I’m going to get up and sing. So Christina Aguilera and all her people are there.
Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kid’s name? Fabian? We ordered, probably, three or four bottles of Cristal at $1,000 a bottle. They bring it out. They are walking through the crowd. They hold the bottles over their head. There is fire crackers and sparklers. The little cocktail waitresses, so you order four bottles of those, they’re walking through the crowd of people. Everybody is like, whoa, who’s the cool guys? Well, we were the cool guys. You know what I mean? They gave me a black card. This little card with my name on it. There’s probably like 10 of them in existence. And that meant that I just spent way too much money there.52
WMC was a unit of General Electric Co.
And that was just the mortgage market. Big as it was, it was dwarfed by the aftermarket, where defective loans were packaged into mortgage-backed securities, repackaged into collateralized debt obligations, and bet on or against in the form of credit-default swaps. Governmental and journalistic investigations have shown rampant wrongdoing in which the less-canny Wall Street banks—Merrill Lynch, Bear Stearns, Lehman Brothers—merely sold defective securities either knowingly or without regard to their quality to pension funds around the world, keeping what they wouldn’t move on their own books or on off-balance-sheet vehicles. Meanwhile, the savvier firms—Goldman, Deutsche Bank, Morgan Stanley (a special case that did not work out well) did the same but also took short positions against the same securities they had sold. Worse, Goldman and Deutsche and others worked with hedge funds to create new CDOs that were doomed to fail, working through malleable CDO managers to hand-pick the worst securities, a maneuver that reaped huge fees for the banks, astronomical profits for the hedge funds, and, unconscionably, created artificial demand for more sub-prime mortgages, stoking boiler rooms in Ameriquest, CitiFinancial, New Century, Countrywide, and among mortgage brokers in strip-mall America.
In April 2010, ProPublica, in partnership with NPR and This American Life, published an investigation that showed how a single giant hedge fund, Magnetar LLC, based in suburban Chicago, beginning in 2005 had driven the creation of at least twenty-eight subprime CDOs made up of mortgage-backed securities valued at more than $30 billion, all while taking out large positions in credit-default swaps against those very derivatives.53 For a period in late 2006, Magnetar-sponsored CDOs made up more than half the market in that type of particularly risky CDO. Magnetar put up only a small amount to buy the “riskiest” part of the CDO, which made the rest of the deal possible, but the obscure hedge fund stood to gain multiples of its investment when the CDO failed. The word “riskiest” deserves to be placed in quotes because, as ProPublica showed, the deals were designed to fail. Magnetar helped pick the securities that would make up the CDO, overriding supposedly independent CDO “managers” who had a duty to pick securities in good faith that they would perform as advertised. The managers were beholden to Magnetar for business and were often marginal operators. One of the managers, for instance, was a Long Island brokerage firm that specialized in penny stocks. (Among its other ventures was funding a documentary called American Cannibal, profiling the aborted launch of a reality TV show in which contestants were stranded on an island and goaded into cannibalism.) Virtually all of Wall Street—Citigroup, Merrill Lynch, JP Morgan Chase—helped Magnetar put these deals together and peddled them to pension funds and other unsuspecting investors. Each new CDO created demand for more mortgage-backed securities, which created more demand for mortgages, which spurred on the boiler rooms that Hudson was exploring for the LA Times and elsewhere.
When overall demand for CDOs began to flag in 2006, a parade of investment banks, including Merrill, Citi, Goldman, and others, created new CDOs to buy unsold portions of other CDOs. As Pro-Publica/NPR put it, “They created fake demand.” By 2007, fully 67 percent of the risky portion of the CDOs were bought by other CDOs, which replaced pension funds and others who had begun to balk at the housing market. Indeed, ProPublica found eighty-five instances during 2006 and 2007 in which two CDOs bought pieces of each other. These trades, which involved $107 billion in value, underscore the extent to which the market lacked real buyers, ProPublica said. Often the CDOs that swapped purchases closed within days of each other, making it all the more likely they had been created to provide bogus “markets” for each other. And when creating fake demand proved unwieldy, Wall Street found other sordid means to move soon-to-be-toxic CDOs. At Merrill Lynch, for instance, one unit sold CDOs to another Merrill unit, paying back part of their fees to employees at the buying unit. The payments, known internally as “the subsidy,” amounted to nothing more than kickbacks to buyers of securities that would soon be worthless.
It’s worth remembering that each CDO deal could net the bank that created it between $5 million and $10 million—about half of which usually ended up as employee bonuses. All incentives, it’s worth stressing, pushed for the creation of more deals. To investment bankers, there was no “risk” in turning out CDOs, as business journalists insist on repeating, only fees. The risk was borne by the firm—and only to the extent that it might not unload the defective securities in time. The bankers themselves were compensated in sums that would—and did—set them up for life. It’s worth recalling that these perverse incentives—to do deals, no matter the quality or outcome—extended down the entire mortgage chain, from bond traders who bought mortgages in bulk from Ameriquest, Countrywide, Citigroup, and Wells Fargo to their executives, who reaped huge annual bonuses based on the number of mortgages sold, to branch managers paid based on the number of mortgages made, to the brokers themselves, paid a yield-spread premium amounting to thousands of dollars per loan to place borrowers in subprime mortgages. Is it any wonder that by 2006 more than 60 percent of sub-prime borrowers actually had prime credit?
Looking at the rampant corruption in the derivatives markets represented by the Magnetar trades, one begins to understand why, even as the housing market slowed in 2005 and began to sag in 2006, and as interest rates rose, subprime lending ramped up to $625 billion in 2005 and remained at $600 billion in 2006, up from (an already staggering) $310 billion in 2003. The demand for CDOs, “fake” as much of it was, generated spectacular paydays on Wall Street, particularly among hedge-fund managers. (In 2007 alone, Magnetar’s Alec Litowitz pulled down $280 million).
This summary of the record just scratches the surface. With federal regulators defanged, Congress compliant, the White House complicit, and a financial sector running amok, who was fighting for the public? The observation Samuel McClure made in 1903 applied a century later: “Miss Tarbell has our capitalists conspiring among themselves, deliberately, shrewdly, upon legal advice, to break the law so far as it restrained them, and to misuse it to restrain others who were in their way; Who is left to uphold it? … There is no one; none but all of us.”
Why the business press failed to hold financial institutions to account when it mattered most—whether it was because of cultural problems, financial problems, or some other problem—is a valid question. That it failed, especially during 2004 through 2006—is why the public had no meaningful role to play in the workings of a financial system that was doomed to fail. The access view could not see the problems because it was forever looking in the wrong direction—up. The accountability view could see because it looked around. Accountability reporting got the story in 1903. It got the story in 2003. If there’s a single journalism lesson from the financial crisis, that’s it.
