The Failure of the Business Press

February 11, 2009 1:25 PM

How Could 9,000 Business Reporters Blow It?A former Wall Street Journal writer dissects why business reporters bought the bull—and missed the biggest story on their beat.

from the linked Mother Jones article:

FOR CASUAL readers of business coverage—that is, most of us—the past 18 months have been a crash course in things we never knew existed but that, we are told, have already done us all irreparable harm. Not only are the problems catastrophic, goes the somewhat frustrating message, but it is already too late to do anything about them—other, that is, than pay for them.[...]business journalists as a rule are as smart, sophisticated, and plugged-in as they seem. And yet that army of professional business reporters—an estimated 9,000 or so nationwide in print alone—for all practical purposes missed the biggest story on the beat. Why?

**

In addition to examining the question of why the mainstream business press mostly failed to recognize, predict, or properly understand the current financial crisis, the author of the article, Dean Starkman--who worked as a Wall Street Journal staff writer for eight years ending in December 2004 and now critique[s] the business media full time at the Columbia Journalism Review--also addresses the dismal failure of the financial regulators:

IT WASN'T JUST the media abdicating their watchdog role: Just as financial news outlets were weakening, regulators were also abandoning the field, leaving business reporters starved of the investigative leads they rely on.[...]
In 2002, the [FTC] announced a then-record $240 million predatory lending settlement involving Citigroup's giant subprime units, and covering no fewer than 2 million customers. Since then the FTC has brought no major consumer lending cases. Zero. The last such case brought by the Office of the Comptroller of the Currency, against Providian National Bank, came in 2000.[...]
It is worth remembering that prior to the Enron, WorldCom, Adelphia, and Tyco scandals earlier this decade, the SEC had already opened formal investigations into each doomed company—forcing disclosures that tipped off investors, yes, but also providing road maps and official cover to the financial press. (The problems at Enron, a special case, were first uncovered by a short seller, who tipped off reporters.)
Contrast that with the most recent disasters: Bear Stearns, Lehman Brothers, AIG, Fannie Mae, and Freddie Mac had all collapsed before the SEC had even launched an investigation....

posted by ornate insect (47 comments total)

So it's basically the fault to the regulators at the FTC and SEC?
posted by benk at 1:28 PM on February 11

I have a pet theory that goes as follows:

Everybody knew the system had to collapse, so they kept shorting the market thinking "it was about to happen".

This represented an influx of capital -- enough capital, in fact, to keep the system from collapsing.

In other words, so many people bet the system had to fail, that the bets were keeping the system going. All the business reporters in the world could see that the bears kept losing (and losing huge, insane short bets) while the bulls kept winning.

That the bull market pulls in more capital to keep the music running, this is obvious. That the false bull market *also* pulls in these enormous short bets, precisely because it's a false bull market, and that the scale of these bets can ALSO keep the music running -- this I don't know if we've seen proof of. Yet.
posted by effugas at 1:32 PM on February 11

This represented an influx of capital -- enough capital, in fact, to keep the system from collapsing.

That is the dumbest thing ever. When you sell short, you remove capital and inject phantom stocks!
posted by delmoi at 1:35 PM on February 11

But the good, hard-hitting, arm's-length stories will have to be compared to what else was gushing out of the 30-inch business-news drainpipe—those Citigroup earnings stories, those edgy-yet-flattering profiles of Merrill Lynch's Stan O'Neal, Lehman Brothers' Dick Fuld, et al., the pieces noting how Countrywide Financial's Angelo Mozilo liked to dress well, etc., not to mention the Home Depot marketing stories, the personal finance columns, and all the cheerleading and Flip That House fluff that diverted resources from the real task at hand.

I stopped when I asphyxiated trying to read this godawful "sentence."
posted by jckll at 1:37 PM on February 11 [3 favorites has favorites]

on a somewhat related note, see Why Wall Street could go to jail:

Corporate officers were making reassuring statements about financial prospects just days before Armageddon hit their companies -- and investors' portfolios. Here's some prominent cases. (FORTUNE magazine)
posted by ornate insect at 1:40 PM on February 11 [2 favorites has favorites]

Er wait, IIRC when you do a "naked" short, that's when you "create" phantom shares, basically an agreement to pay the dividends of the underlying stock. And you have 3 days or something to do the actual purchase or borrow the shares you sold short.

On the other hand, a "normal" short sale involves borrowing shares from your broker, then selling them. Later on you have to re-buy the shares at whatever price they are at.

My understanding is that when you sell short, you actually borrow shares held in people's margin accounts.

There's also the possibility of selling naked put options, meaning someone pays you for the right to sell you X number of Y shares at Z price. And you'd better have Z ready.

I'm not a financier, so all this could be wrong. But when you sell short, you remove money from the market, just as if you sold shares you owned. That's my understanding anyway.
posted by delmoi at 1:41 PM on February 11

Damn, I guess the journalists will actually have to do some journalism now.
posted by crapmatic at 1:42 PM on February 11

Great link, ornate insect.

It reminds me a little of a UChicago GSB (now Booth)/HBS study I found a few years ago about why journalists didn't catch on to Enron-type debacles earlier. I can't link to the original pdf (they changed their links over when they switched to being Booth instead of GSB in November or whenever), but here's an html link to it.
posted by anniecat at 1:57 PM on February 11

This is simple; the last investigations (which ended in 2002) started under teh Clinton Administration; once Bush got in, the regulators' teeth were pulled in the name of "market capitalism" (along with the all other regulators except the FCC lookin into "wardrobe malfunctions").

Republicans told you they were "pro-business" and anti-regulations, and they weren't lying. And this is the result.
posted by orthogonality at 1:58 PM on February 11 [5 favorites has favorites]

Well the WSJ reporting is probably going to get worse since it got announced today that the WSJ library is closing next month.
posted by cashman at 1:58 PM on February 11 [1 favorite has favorites]

Selling short is a bet that a stock price will go down. If it does not go down -- if it goes up -- there are guaranteed buyers at whatever that higher price happens to be.

Think about that. That means there's some portion of the market with an inelastic demand for a good. I'm no master of the universe, but when I see inelastic demand, I see prices *rise*, not fall.

We saw a little of this, I think, with the short squeeze that happened around Porsche and VW. My suspicion -- not even a theory, really -- is that any any point, there was some "big bet" shorting the market from someone, raising the value of a stock if only for a few more days.

In other words, I'm wondering if all the bets that the market was about to collapse, didn't actually keep the market going.
posted by effugas at 2:02 PM on February 11

Sorry. That link I posted before won't work.

This works for me but not when I'm clicking through after posting it.

It's called The Bubble and the Media (2002) and it's by Luigi Zingales (Chicago Booth) and Alexander Dyck (Harvard Business School).
posted by anniecat at 2:03 PM on February 11

Oh, easy, reporting & regulating are jobs normally taken by those unable to either produce new ideas (academics, scientists, inventors, authors, philosophers, etc.) or execute other's new ideas (engineers, traders, business people, etc.). You know, plenty of people on Wall St. were "shorting houses" by buying CDSs, etc. So all the information was available, but the reporters & regulators were just not smart enough.
posted by jeffburdges at 2:03 PM on February 11

Another victory for reflexive deregulation!
posted by Mister_A at 2:10 PM on February 11

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. [Emphasis mine]

And they *still* don't know what they're talking about.
posted by bonecrusher at 2:16 PM on February 11 [2 favorites has favorites]

business journalists as a rule are as smart, sophisticated, and plugged-in as they seem

And that's where I stop reading. Following the Enron debacle it should be obvious to even the most casual observer that business reporters are gullible dupes without the brains of mayonnaise. Business reporters have yet to meet a failing or corrupt business that they won't report is the best thing since sliced bread.
posted by sotonohito at 2:18 PM on February 11 [7 favorites has favorites]

Since when is the press supposed to predict the future anyway? They reported on things like Casey Serin's ability to buy two million dollars worth of houses using liar loans. The possible effect that those kinds of lending practices might have on the economy could be left up to the reader to contemplate.

If the actual experts in the field weren't predicting the kind of economic meltdown that we were heading for, it doesn't seem reasonable to expect reporters to do it for them.
posted by burnmp3s at 2:18 PM on February 11 [1 favorite has favorites]

Selling short is a bet that a stock price will go down. If it does not go down -- if it goes up -- there are guaranteed buyers at whatever that higher price happens to be.

Think about that. That means there's some portion of the market with an inelastic demand for a good. I'm no master of the universe, but when I see inelastic demand, I see prices *rise*, not fall.

We saw a little of this, I think, with the short squeeze that happened around Porsche and VW. My suspicion -- not even a theory, really -- is that any any point, there was some "big bet" shorting the market from someone, raising the value of a stock if only for a few more days.

In other words, I'm wondering if all the bets that the market was about to collapse, didn't actually keep the market going.

You know that thing, that people do, where the run their index finger up and down over their lips, making a noise not unlike a motorboat? Blubba-blubba-blubba? Then they open their eyes wide, and look at you, and say "awhaaaat?" Yeah. That.
posted by jckll at 2:18 PM on February 11 [1 favorite has favorites]

"where they run..."
posted by jckll at 2:19 PM on February 11

How Could 9,000 Business Reporters Blow It?

Why are there so many soft-ball questions lobbed at White House press conferences?

Why are so many stories about celebrities shallow puff-pieces orchestrated by that celebrity's publicist?
posted by jason's_planet at 2:25 PM on February 11

Why is there hair?
posted by Kirth Gerson at 2:38 PM on February 11 [1 favorite has favorites]

How Could 9,000 Business Reporters Blow It?

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" -- Upton Sinclair

The eventual exposure of Casey Serin in late 2006 removed the scales from eyes WRT real estate bubble valuations. Before then I was sorta on the fence, negatively biased but not expecting humongous Japan-style price collapses, but after that I was pretty sure that a whole lot of really bad lending had gone on and we were in for one heckuva ride.

I was surprised by the 2003-2006 recovery, but largely thanks to the info-dumps via the Calculated Risk blog I was able to piece together the macro picture of the out-of-control nation funding economic growth via debt issues.
posted by troy at 2:40 PM on February 11 [4 favorites has favorites]

Its the same reasin all crashes and booms happen...everyone wants to believe and gets sucked in by group think. The winners will always be the people who disregard sentiment and group think and rely on a rigorous analysis of past data and cycles...history tends to repeat itself.
posted by ghost32 at 2:44 PM on February 11

michael moore wants to talk with them
http://www.michaelmoore.com/words/message/index.php?id=245
posted by robbyrobs at 2:56 PM on February 11

Paid propagandists do what they're told. Now that they're faced with their actions...hmmm. Nothing.
posted by Chuffy at 3:01 PM on February 11 [2 favorites has favorites]

Not all of them missed the story.

The Economist in June 2005 (now pay walled) ran a story on what they viewed as a housing bubble.

It was even posted to MeFi.
posted by sien at 3:07 PM on February 11 [3 favorites has favorites]

This video linked the other day here kindof worked as a microcosm of the problem here. We've developed a form of "journalism" in this country that's by and large tangential to understanding of the issues it discusses. Sarah Palin got on broadcast TV and tried unsuccesfully to do what the analysts/personalities in that CNBC clip do every day: pretend they're part of a real conversation on an issue, string together a sequence of words that make you sound like you're speaking intelligently on a topic. Because apparently, that's all you need to sell yourself as a journalistic outlet.

I can't remember where, but John Hodgman's talked about how his book The Areas of My Expertise basically grew out of a realization he had while doing journalism: that the idea that he was actually supposed to speak with an authoritative voice on so many different topics was actually more than a little bit ridiculous. And the sad thing is that I didn't get that particular part of the joke until he pointed it out.

And it is ridiculous. I think about the number of topics that I really actually know quite well, and it's small. Half the time I'm not even sure the depth of my knowledge in my career of over a decade is adequate. I like to think I could at least ask intelligent questions about a broad range of topics, but there's a lot of fields where I'd have trouble sifting out the quality of the answers on a truly informed basis. I could (and do) make guesses based on the quality of rhetoric and narratives I trust, based on body language and social cues, basically on external signals... but my guess is those are the kind of heuristics you can use to fool most people on broadcast television.

And my career experience suggests to me the business world is ripe for abuse here. Because within it, there are rewards, both cash and status, readily available for people who are willing and able to work at shaping perception and pretend to be and know more than they are. Then add the fact that success is a terrible teacher even for basically smart and competent individuals.

Now throw a layer of the kind of journalism we're talking about over that. Mix in a culture-wide narrative about faith in markets, American exceptionalism, and ever-increasing prosperity....

It's not a wonder most of modern financial "journalism" missed it. It's a wonder there was anybody at all to chime in on Buffet's skepticism of derivatives, Schiller's work on housing prices, that Krugman even had a column in the NYT, that someone like Taleb could emerge and thrive. Which means there's something good at work, because an active and conscientious media consumer could find these things 3-4 years ago. I'm also upbeat as I've seen certain kinds of journalism (say, the Planet Money podcast) come up. I think a some people have realized there's a place for genuine investigative and educational journalism. But I don't know. My Dad still watches the cable news networks and when I'm in the room, it still looks like the intellectual equivalent of fast food.
posted by weston at 3:23 PM on February 11 [21 favorites has favorites]

It was even posted to MeFi.

Did we ever give muppetboy a medal for that prediction?

Or do predictions made by time travelers not count?
posted by pokermonk at 3:31 PM on February 11 [7 favorites has favorites]

Probably because finance is crazy-hard and it's difficult to explain without getting technical. If you simplify it, or worse, appeal to the lowest common denominator (i.e. USA-Today), you're going to get a bunch of articles about how real-estate is hot and ohmygod it never goes down!!111eleven

The Economist and Financial Times don't have this problem (and accurately describe what was coming, with a lively debate about commodities and "decoupling", which was the real question — not whether we were going down). However, they are impenetrable for the casual reader that doesn't understand the difference between debt and equity.
posted by amuseDetachment at 3:32 PM on February 11

You know that thing, that people do, where the run their index finger up and down over their lips, making a noise not unlike a motorboat? Blubba-blubba-blubba? Then they open their eyes wide, and look at you, and say "awhaaaat?" Yeah. That.

You know, you could point out the factual errors in the theory and reply with meaningful commentary. Instead of, you know. Being a dick.

If you do reply, please give some thought to the possibility that the market is a hell of alot more gamed than anyone's admitted.
posted by effugas at 3:44 PM on February 11

If you simplify it, or worse, appeal to the lowest common denominator (i.e. USA-Today), you're going to get a bunch of articles about how real-estate is hot and ohmygod it never goes down!!111eleven

I see you've read Money Magazine.
posted by ryoshu at 3:46 PM on February 11 [2 favorites has favorites]

effugas: your original point does make sense. If you were hypothetically shorting Mortgage Backed Securities contracts, I suppose the counterparty could take that short and create a synthetic contract and use the short premium to pay interest to those pension funds or whoever own the MBS. (Being short here is more like buying a put option (and less like shorting a stock), so there would be a fee to be paid out immediately) So instead of owning a bunch of houses, they really own the short position which paid for their interest already. You could do this using swaps and a bunch of crazy math. I wouldn't be surprised if that happened wholesale considering the fact that there simply weren't enough mortgages out there for the demand for high-interest debt due to low fed interest rates, in fact the banks would LOVE it if you shorted it, it just means more business to sell more securities. It is technically possible, not sure how much it happened, though.
posted by amuseDetachment at 3:55 PM on February 11

The title of this post contains a premise : that the business press failed, by missing the cover story of a lifetime.

Yet I find it hard to believe that not one in this little army was able to smell that something so big was brewing, while at the same time some blogs on the web probably contained a lot of hints about a big storm brewing, who just needed to be collected, checked and written in one single piece.

But does a failure so big "just happen" without any cause ? I guess that some factors are likely to make it happen more than others. Instead of looking for yet another conspiracy theory of a restricted group of evil masterminds to keep the public misinformed or disinformed (which would also be quite hard to prove) I'd look to some general "business as usual" behaviors that are likely to affect a number of people involved in the media business.

As I am currently writing about business issues on a local paper with its own mini reasearch center, I was able to catch a glimpse of how such a business works on a small scale and to verify that some of the problems affecting small business are now very well document and widely known, at least within the audience interested into how business really are ran.

What I saw and experienced first hand is hardly bleeding edge news, yet some of it seems rather odd to me:
- workers are often stretched thin over too many works (with respect to the size of the workforce);
- specialization, quite useful in investigative reporting, is nor financed nor discouraged, but shall not interfere with meeting deadlines or distract from the job at hand;
- small relatively less profiteable analysis jobs (runned to keep the biz indipendent of advertising as much as possible) are often ignored by default, favouring more complex
jobs which are likely to require more expertise, which is not hired for the sake of profiteabilty;
- the average level of the analysis is considerably deeper than "mainstream press", but the business lack the resources (and apparently the will as well) needed to do a very detailed analysis of a single complex subject.

So far, some conventional wisdom would suggest that this business is more likely to implode than to expand, as we are losing a number of small jobs by choosing a segment that pays more, but that's harder to reach and maintain, therefore making the biz dependant on few clients and very sensible to their demands, even if they are sometimes more likely to damage the credibility of the brand than not.

Yet this business has been floating for at least 20 years, with little changes to the business model. The employees are increasingly miserable, as the wage is slightly above what is needed to survive, and any attempt to improve the quality of the work is just ignored, if it requires any significant investment or deviates too much from the model.

A intellectual sweatshop, one might reasonably argue. So far, I believe that the only thing that has kept the business aflot is the fact that no one argues the shallowness of some of these works, which is not caused by the will of the writers to do a poor job, but is primarily caused by the relative success of the business model of producing works that are mediocre and questionable, but slightly above the nonsense we're are getting used to these days. Not surprisingly, the writers are also adapting to their workplace as there's no incentive to work -better- or harder and many of them are letting themselves go.

Now let's consider a big media business that has detected this trend and isn't ignoring its profiteability. While the resources needed to prepare relatively long term works are avaiable, they probably accept a great number of advertisements coming from a variety of advertisers, in order to keep a bigger infrastructure afloat. Yet as the advertisers are likely to be very sensible to any hint of criticism and it's quite hard to gauge exactly which interest isn't going to be offended by a piece, it seems that playing safe is an optimal business choice by publishing harmless fluff, scandals of no consequence (celebrity style) and already-happened events, maybe focusing on hardly relevant aspects.

Only the incredibly evident and undeniable events are not ignored, but no one has an interest (save for expecially poweful interests, which smells politics to me) to start messing around, anticipating and forewarning of problems and misconduits, as the consequences may not be easy to anticipate. Similarly, there's no incentive to criticize other works, as doing that is just seen as an incentive to retaliation.
posted by elpapacito at 4:20 PM on February 11 [1 favorite has favorites]

I'm sure plenty of business journalists knew the score, and weren't in a position to write it up. Here in the UK, a number of senior financial journalists, including the BBC's Robert Peston, have been hauled in front of MPs to face allegations that they helped precipitate the crash. And that was when they were responding to events. Had business journalists been ahead of events, then they would have been obvious first-rank scapegoats, wide open to blame from the bankers: "A panic caused by the media." And I daresay the politicians would have colluded in this scapegoating, as they never seem to miss an opportunity to attack media freedom. Given that risk, I can see that this "scoop of the century" might not have looked like a very tempting prospect.

I'm not a financial journalist but if I may briefly toot my own horn, I wrote a lengthy feature that revealed rampant mis-selling of sub-prime mortgages to people who never had any hope of paying them off back in March 2006. That feature spoke of an impending housing bust. (It's in the March/April 2006 issue of ROOF, Shelter's magazine, if anyone wants to look it up.)
posted by WPW at 4:54 PM on February 11 [4 favorites has favorites]

Why? Two words: Rupert Murdoch.
posted by aeschenkarnos at 4:58 PM on February 11 [1 favorite has favorites]

How Could 9,000 Business Reporters Blow It?

Because it feels good and it is good for you.
posted by pianomover at 5:23 PM on February 11

metafilter: why is there hair?
posted by thsmchnekllsfascists at 5:37 PM on February 11

weston's comment cannot be favorited enough.
posted by JHarris at 5:59 PM on February 11

^ agreed.

Also wrt "that Krugman even had a column in the NYT" The Times thought they were getting a center-right Clintonian technocrat when they took Krugman on, not what we has turned out to be, a bomb-throwing counter-conservative.
posted by troy at 6:52 PM on February 11

I know a reporter who was working on a story about subprime lending before it all went down. None of her colleagues knew what she was talking about, her topic didn't strike them as particularly sexy or exciting, and her story was postponed multiple times over the course of 2007 and early 2008 and then ultimately canned a few months before the storm hit.
posted by limeonaire at 7:59 PM on February 11 [1 favorite has favorites]

when we say 'journalists' are we also talking about 'editors'? because a 'journalist' is only going to get another assignment or get kept around on staff if his/her reporting reflects the opinion of the editors and editorial board of a magazine/newspaper. So, I'm sure there were plenty of 'journalists' out there who did get it, but whose first pass spec work was probably rejected by editors. if you know very well which side of your bread is buttered, you are not going to keep turning in stuff that won't get printed. and we all know that most magazines/newspapers are simply cheering squads when it comes to the business sections. because 'wooooo everyone is making bucks in the market' sells papers until all of a sudden something ginormously un-ignorable happens, like the last 6 months, and now, lo and behold "HOLY SHIT THE WORLD IS FALLING APART GAAAAAAAAAAAHHHHHHHHH" sells newspapers.
posted by spicynuts at 8:51 PM on February 11 [1 favorite has favorites]

Starkman points out Michael Hudson's 2003 expose of CitiFinancial's abhorrent practices which won a Polk Award. That article is available here:

Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South; Southern Exposure 31.2 (Summer 2003)
posted by gen at 9:27 PM on February 11

Rant alert!
This is how I think it works:
An "analyst" at a well-known bank writes up a report on a security he has been asked to follow. The quality of the report is irrelevant as long as it contains evidence of "facts" and number crunching with a generous sprinkling of topical financial vocabulary.
Among other investigations, the "analyst" speaks to the company in question for research, but he interacts, for the most part, with a person in investor relations who knows only superficially what is going on in his own firm. What the IR person does know is how to deflect nasty questions and make up nice stories.
The analyst's report is published and then restated by all other "analysts" in ways that suggest that each has done independent work. "Analysis" is done on the "analyst's" original work leading to a spread of opinion.
The press is a huge and amorphous beast--each part of it with vastly varying interests. It will likely be the same for individual reporters as it is for "analysts." My humble suggestion: read lots and especially significantly different takes on the same subject matter. To find the truth in the pile of nonsense, you and your common sense are on your own.
posted by impuls at 12:09 AM on February 12

largely thanks to the info-dumps via the Calculated Risk blog

Me too. Please, God, let Tanta get the Pulitzer this year, posthumously.
posted by Asparagirl at 9:22 AM on February 12

anniecat, here's a working link to that PDF.
posted by elizardbits at 11:31 AM on February 12

I really appreciate the comments here. I've been puzzling about this question for months now. And there's still part of me that doesn't quite get it. I have a relatively shallow understanding of the issues at hand, but when I did some preliminary research on CDO's for a freelance project I understood immediately that we were in really big trouble. I'm not smirking or congratulating myself on my supposed foresight- again, I don't have the most detailed grasp on these issues. But it was staggeringly obvious to anyone who did even the tiniest bit of digging that something was about to go very wrong.

It seems that the most plausible explanations come down to psychological factors -- group mentality, not wanting to be a downer, etc. This all seems part and parcel of a boom that seems to have been build on wishful thinking, baseless confidence, and "squint and it will make sense" logic.
posted by foxy_hedgehog at 1:18 PM on February 12

foxy--

It kept working, so it had to be good.

Our memories are very, very short.
posted by effugas at 2:16 PM on February 12