By Howard Kurtz
Washington Post Staff Writer
Monday, October 6, 2008
Charlie Gasparino was so anxious to get on the air that he phoned in to CNBC, rather than walking to the studio, to report that nervous federal authorities were considering a bailout of the insurance giant AIG.
"I was sweating through my underwear. That was scary," the correspondent says of his mid-September story, which wasn't confirmed until that night. When his colleagues said on the air that their own sources were expecting AIG to go bankrupt instead, "that freaked me out."
The stakes are enormous in a fast-moving crisis where the traditional concern about journalists causing a run on the bank is hardly a theoretical danger. But as news organizations chase exclusives about the Wall Street meltdown, they also are grappling with a troubling question: Why didn't they see this coming?
"We all failed," says Gasparino, a former Wall Street Journal and Newsweek reporter. "What we didn't understand was that this was building up. We all bear responsibility to a certain extent."
The shaky house of financial cards that has come tumbling down was erected largely in public view: overextended investment banks, risky practices by Fannie Mae and Freddie Mac, exotic mortgage instruments that became part of a shadow banking system. But while these were conveyed in incremental stories -- and a few whistle-blowing columns -- the business press never conveyed a real sense of alarm until institutions began to collapse.
"Did we not accent that enough? Put it above the fold, or on the cover of Fortune, or lead off the television shows?" asks Fortune Managing Editor Andy Serwer. "Yeah, that's probably true." At the same time, he says, "if we had written stories in late 2000 saying this whole thing's going to collapse, people would have said, 'Ha ha, maybe,' and gone about their business."
After being burned by years of cheerleading before the dot-com collapse, the media warned repeatedly that the surge in housing prices might turn out to be a bubble. But the emphasis was generally on the potential toll on homeowners, not the banks that would be left holding bagfuls of bad loans. As in the savings-and-loan scandal of the late 1980s, the press was a day late and several dollars short.
Marcus Brauchli, The Washington Post's new executive editor, who was the Journal's top editor until this past spring, says no policymaker who followed those papers, the New York Times, the Financial Times and CNBC could have been unaware of the explosive growth of derivatives that embedded debt across the financial system.
Still, he says, "I regret that when I was at the Journal, we didn't keep the focus on some of these questions, including the possible moral hazard posed by the structure of Fannie Mae and Freddie Mac. These are really difficult issues to convey to a popular audience. . . . You do have an obligation as a journalist to push important issues into the public consciousness. We also have to remember you're pushing against a powerful force, which is greed."
It is not easy for journalists to take on the masters of the financial universe, especially when the market is going up and everyone is happy. Franklin Raines, then chief executive of Fannie Mae -- which was seized by the government last month -- complained to Brauchli about critical Journal stories in 2001. Gasparino, who also broke the news about the Treasury bailout plan, says debt-rating agencies cried foul with his Journal bosses when he challenged their approach (some of today's now-toxic loans, he notes, were rated AAA).
PBS's David Brancaccio says that "we journalists have had a long history with accepting what the smart people hand down to us, especially on complicated stuff. . . . When I would cover these very issues about problems with regulation, problems with 'is this a disaster waiting to happen?' people would say: 'Well, young man, you don't have an MBA like I do. Trust us. We went to business school.' "
Post business columnist Steven Pearlstein, who won a Pulitzer Prize for columns last year warning about the magnitude of the coming crisis, says he was often dismissed as a pro-regulation zealot or gadfly critic of Alan Greenspan. "The business press tends to get in with the people that they cover," he told me in a CNN interview. "They get in the bubble that is Wall Street, just like political reporters get in the bubble that is the White House and the traveling press of the campaign . . . and they don't see the obvious things."
Beyond Wall Street, what about Washington? Most news organizations fell short in reporting on the lax federal regulation that everyone -- even the Bush administration -- now admits was at the root of the problem.
Christopher Cox, chairman of the Securities and Exchange Commission, told the New York Times last month that he belatedly shut down a "fundamentally flawed" program that relied on investment banks to police themselves, because "voluntary regulation does not work." Yet major newspapers did not report on the voluntary program's adoption in 2004, which the Times now trumpets as a turning point. (The Journal ran an eight-paragraph piece on Page C4.)
The media also have a tendency to lionize CEOs and turn them into celebrities. A 2006 Fortune piece by Serwer was headlined "The Improbable Power Broker: How Dick Fuld transformed Lehman from Wall Street also-ran to super-hot machine." Fuld led Lehman Bros. into bankruptcy last month.
There were a few other prescient voices. In February, Times columnist Gretchen Morgenson wrote that the market for "unregulated" credit swaps had ballooned from $900 billion to $45 trillion-- twice the size of the U.S. stock market -- and a market hiccup "could set off a chain reaction of losses at financial institutions" that would make it even harder for borrowers to get loans.
Even in the 401(k) age, hard-core business coverage tends to be ghettoized. Subjects that directly affect a broad audience, such as housing prices, are covered obsessively. But the arcana of credit default swaps and collateralized debt obligations -- limited to financial pages and financial TV shows -- is what caused the system to buckle.
"It wasn't for lack of courage that the media didn't pursue this stuff," Brauchli says. "Ultimately, it's not we who are charged with taking away the punch bowl."
But journalists are reluctant to target those who are guzzling the punch: the overstretched folks who bought houses they couldn't afford and second homes they wanted to flip, all based on the presumption of endlessly rising prices. " 'Blame the people' is a harder story to write," Serwer says. "There's plenty of greed to go around. Everyone's complicit."
Financial journalists face a difficult balancing act. Penetrating the finances of corrupt companies, such as Enron, and crooked accountants, such as Arthur Andersen, is daunting enough. If these journalists shout too loudly, they can be accused of scaremongering and blamed for torpedoing the stock of outwardly healthy companies.
But does the problem run deeper than that? Gasparino recalls interviewing for a financial magazine job and having the editor warn him that he couldn't sell magazines "with a bucket of crap on the cover."
"People like when the stock market goes up," Gasparino says. "There is a mind-set at newspapers and magazines that shies away from negative coverage."Taking a Stand
Many editors these days gamely insist that they can put out high-quality newspapers with decimated staffs.
But when Stephen Smith announced last week that the Spokesman-Review in Spokane, Wash., was cutting one-quarter of its editorial staff, he took a different route: He quit.
"The journalism that's important to me is no longer possible. . . . It's time to stop standing behind our salaries, our bonuses and our pensions and stand up and say what needs to be said," he told the Knight Digital Media Center.