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February 2, 2014
David Warsh, Proprietor


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The Newspapers Are All Right

The news last week was that The Washington Post had embarked on a major expansion.  New York Times executive editor Jill Abramson told an interviewer that, with 800,000 subscribers and a high renewal rate, she expects the Times will be publishing a print edition for decades to come. Rupert Murdoch’s Wall Street Journal seems to go from strength to strength.

Major metropolitan papers, nearly all of them sold at too-high prices before the impact of search advertising was understood, are still looking for owners with profitable strategies, the Chicago Tribune and the Los Angeles Times, both now on the block, in particular. The Boston Globe, where commodities-trader-turned-sports-magnate John Henry took the title of publisher last week, identified one possible direction when it hired the National Catholic Reporter’s Vatican specialist to cover the Catholic Church.

A good deal of excitement is to be found on the Web. Last week Vox Media hired Ezra Klein away from the Post to create a general news operation to augment its series of specialty sites. Klein is one of several star journalists who recently have struck out on their own, including technology experts Kara Swisher and Walt Mossberg from WSJ and Nate Silver, the political statistician, from the Times. (EP, a star of low magnitude, moved to the Web twelve years ago, following Andrew Sullivan and Mickey Kaus.)

But advertising revenues have remained meager for strictly digital sites. “We would never build  a media product based around [Web] traffic and advertising,” Jim VanderHei, CEO of the successful startup Politico, told The Wall Street Journal last week. “That is a fool’s play in this day and age.” Politico gains most of its revenue from an ad-rich giveaway paper in Washington, D.C., that contains some of its website’s contents.

Meanwhile, a steady stream of books flows out of schools of journalism, mostly from reporters unhorsed in the tumult. One such is Out of Print: Newspapers, Journalism and the Business of News in the Digital Age, by George Brock, head of the journalism program at City University London. It is interesting enough, as long as you understand the title one way instead of another (print newspapers learning to put down deep digital roots rather than giving up their paper editions altogether). A more interesting example is The Watchdog that Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism, by Dean Starkman, a long-time reporter for the WSJ, now an editor at the Columbia Journalism Review.

The causes of the deep recession are still not well understood. It was the banking panic, not the subprime bubble, which was so damaging. (For a primer, see Misunderstanding Financial Crises: Why We Don’t See Them Coming (Oxford, 2012), by Gary Gorton, of Yale University’s School of Management.) Ben Bernanke himself has pointed out that the value of the total quantity of subprime mortgages outstanding in 2007 was barely $1 trillion, and losses from them over the duration of the crisis were less than global stock markets sometimes lose in a single day.  Yes, $7 trillion in home-price paper wealth evanesced, but that was a consequence of the panic, not a cause.

When $8 trillion of paper wealth had vanished in the dot.com crash in a short time a few years before, the result was a short and relatively mild recession, Bernanke noted.  “Losses on subprime mortgages can plausibly account for the massive reaction seen during the crisis only insofar as they interacted with other factors – more fundamental vulnerabilities – that served to amplify their effects.”

So Watchdog is no help in that respect.  If anything, by conflating the subprime trigger with the underlying forces of the financial crisis, it makes the misapprehension worse. Nor does he give a clear account of what happened to newspapers after 2002, when, he says, “once-great newsrooms were cut down beyond recognition.” (Beware of tomes about the future of newspapers that lack a substantial index entry for “search advertising.”)

Where Starkman makes a valuable contribution is by tracing the history of reporting on subprime lending at the ground level.  There he offers a glimpse of how shoe-leather beat reporting at the consumer end failed to link up with high policy. It is an important part of the story.

It was in the late Eighties that the regional press began paying attention to mortgage-lending practices.  In those days the story was “redlining.”  A financial  boom in house prices had begun, fueled by a boom in financial asset prices; the only thing dumber than not owing a house was not owning two houses, insiders  joked.  But African-Americans living within communities which banks deemed unstable couldn’t obtain mortgages, no matter how good their credit ratings.

So the press went to bat.  First the Atlanta Journal-Constitution, then the Boston  Globe, weighed in with major series.  Researchers at the Federal Reserve Bank of Boston, under the leadership of Alicia Munnell, documented the practice. (It cost Munnell an appointment as a governor of the Fed after the banking lobby went to work.) Gradually the story morphed into an investigation of predatory lending practices – high pressure sales of home equity loans to equity-rich, income-poor families who had no realistic hope of repaying their loans. These were great stories and they substantially raised public awareness.

By the mid-nineties, the industry had a new name – subprime – designed to convey the message that much in the nature of home mortgage lending had changed. Indeed it had.  The hero of Starkman’s story is Mike Hudson, a reporter for the Roanoke Times when we meet him in 1991, interviewing a legal-aid lawyer for a series on poverty. The lawyer tells the young man he is missing the important thing, the path out of poverty, which consists of a house, an education, and a car, and ideally all three.

It’s at that point that Hudson becomes interested in the netherworld of pawn-brokers, check-cashing stores, consumer-finance agencies, for-profit trade schools and second-mortgages lenders which, to that point, were the sources of credit for the poor. Starkman follows Hudson as he discovers the increasingly strong links between the low-end lenders and their high-end sources of funds. Hudson writes most of a book, Merchants of Misery: How Corporate America Profits from Poverty, in 1996; in 2003 he writes an epochal indictment of Citigroup’s subprime acquisition binge for Southern Exposure, a muckraking magazine based in Durham, N. C.; in 2004 he is writing about Ameriquest Capital Corp. for the Los Angeles Times.

By 2006 he has been hired by the WSJ to broaden its coverage of mortgage markets, which are clearly beginning to come apart.  Starkman’s description of Hudson’s eighteen months there on the eve of the crisis – “unproductive, frantic and short” – has the ring of truth.  Today Hudson is a senior editor for the Consortium of Investigative Journalists at the Center for Public Integrity, a non-profit news organization funded mostly by foundations.

It’s a great story, but there it ends. There is very little about the beat reporting that took over the story in 2007 (Starkman calls it “access journalism”) and which has done a pretty good job with keeping abreast of the crisis and subsequent developments. He’s full of admiration for Financial Times reporter Gillian Tett’s early coup on how a big bank developed the market for collateral default swaps (Fool’s Gold: The Inside Story of J.P. Morgan, and How Wall Street Greed Corrupted Its Bold Dream and Created a Financial Catastrophe), and he says that Andrew Ross Sorkin’s Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves is “perhaps the leading post-crisis book;” but there’s precious little about the other high-end daily journalism that helped explicate what happened next, beginning with the neglected confessional Busted: Life Inside the Great Mortgage Meltdown, by Edmund Andrews, of the Times, which surfaced the role of Fed Governor Edward Gramlich in unsuccessfully seeking to rein in runaway subprime lending.

Instead, wrapped around the story of Mike Hudson and the rapidly changing organization of mortgage lending in the years after 1977 (when securitization of debt was first introduced), there is a somewhat potted history of the US financial press  in the twentieth century in the United States, especially the WSJ. Starkman knows a lot, but he tries to tell it all, with the result that the very good book at the center of things never quite gets out.

It’s a hell of a thing that the techies invented the Web and search advertising and took away our golden age of newspapers, and that everyone involved, high and low, has had to scramble to find new ways of going about the news business. But investigative journalism has hardly disappeared. Many of the best accounts we have about the crisis have come in the form of quickly-written books by newspaper reporters: Tett of the FT,  Sorkin, Joe Nocera (with Bethany MacLean of Vanity Fair) and Gretchen Morgenson  (with Joshua Rosner, a mortgage consultant) of the Times, Neil Irwin of the Post, David Wessel, Scott Patterson and Gregory Zuckerman of the WSJ. I don’t like Rupert Murdoch much, but to pretend that the WSJ team didn’t greatly outperform the other papers in covering the crisis and its aftermath is to live in a fantasy world.

.                                  xxxx

I don’t follow the Bitcoin story closely, but I suspect Felix Salmon was dead right last week when he reckoned that the world’s financial regulators will eventually have to put the payment system out of business. (By all means click through to on his link to Nick Dunbar.)

If it weren’t for the libertarian founding impulse, Bitcoin might grow to become many, many times bigger than Google. Remember Steelyard Blues, the 1971 movie in which Donald Sutherland, Peter Boyle and Jane Fonda outfit a Flying Boat in order to fly to a land where there would be no police?

As Salmon says, financial systems must be regulated, not just to keep tabs on the crooks, but to prevent (or last least greatly mitigate) the periodic panics that inevitably arise in systems of credit.

Still, only a new and better virtual currency will beat one that already has come into existence. Credit cards have been a great fix to this point, but there is no reason to continue much longer to pay the 2-3 percent round trip between the merchant and the bank. I expect the Federal Reserve Board, the Treasury Department, other various other regulatory bodies, the Internet Engineering Task Force and, of course, the National Security Agency are all working overtime to develop the kernel of a virtual currency.

In due course, we’ll all probably all park our cash at the Fed, and make our investments very differently than we do today with the banks. Kenneth Rogoff said as much (at 43:40) at the International Monetary Fund the other day.

(The copy editor says, correctly, that each of the preceding six sentences is worth a column of its own. He continues, less accurately, “You can’t make sweeping statements like these and not back them up.” He adds, “You may well be right in each case, I have no idea – which is why I want you either to elaborate or not assert in the first place.”  In keeping with the overall spirit of this weekly piece, the Salmon item was too interesting not to call to readers’ attention. So there the matter stands.)

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5 Comments

  1. Dryly 41 wrote:

    Isn’t it the fact that the September 2008 crash paralleled that of the 1920′s. In the 1920′s there was massive fraud related to securities coupled with massive leverage in the run up to October 1929.

    In the 2000′s there was massive fraud in mortgage lending while the securities were Collateralized Debt Obligations of subprime mortgages made easier to sell by reason of Triple AAA ratings paid for by the Wall Street banks which also provided the funding to the mortgage brokers. At the same time the “shadow banking system”, born of the return to laissez faire, meant that when Lehman Bros. filed for bankruptcy one of the Money Market Mutual Funds, Reserve Primary, “broke the buck” meaning the value of $1 fell below $1 triggering a run on all such MMMF’s freezing up the Repo market. This was not stanched until the Treasury and Fed guaranteed the deposits of all MMMF’s.

    Alan Greenspan says no one could see it coming. Not true, there was evidence all around of the mortgage fraud. Greenspan was a member of Ayn Rand cult who didn’t believe in any regulation of finance telling Brooksley Born he didn’t believe in prosecuting fraud as the market would take care of any fraud as no one would do business with fraudsters.

    From erstwhile FDR New Deal Democrat Ronald Reagan came to power in 1981 and deregulated the Savings & Loan banks the march to repeal the “strict supervision” of finance, by both political parties, led to this catastrophe. I simply do not believe it’s that much of a mystery. The 78 years and 11 months from October 1929 to September 2008 represented the longest period of financial stability in the 225 years of American history. In you want to have a functioning economy you must have a safe and sound financial system. If you want to have a safe and sound financial system you must have “strict supervision” of finance, and, cannot have a “laissez faire” approach to finance.

    Monday, February 3, 2014 at 2:26 pm | Permalink

  2. Dale wrote:

    You write, “Major metropolitan papers, nearly all of them sold at too-high prices before the impact of search advertising was understood …”

    I notice that there is a pattern in multiple industries of insiders selling major assets to outsiders just before the ugly crash hits. For instance, the owner of Countrywide Mortgage sold it to Bank of America at a price that reflected an expectation that its rapid growth would continue. In the case of newspapers, I wonder if the owning families had a better vision of the future than the buyers?

    Monday, February 3, 2014 at 3:54 pm | Permalink

  3. Hi, David,
    You know I’m a big fan of yours, right? But I disagree with some points in your Sunday column.
    I started my web site, repowatch.org, to get reporters to cover the repurchase market. Deep in my heart – as an IRE mentor, SABEW member, and business reporter – I wanted to make amends for our failure leading up to 2008 and fix it going forward.
    So I know a lot about who covered what.
    Bottom line: The only reporters who understood the crisis and covered it like a wet blanket were at the Financial Times.
    Accurate coverage of the financial crisis required writing about the repurchase market. Only the Financial Times did that. All U.S. publications were hung up on mortgages and derivatives.
    I send the following because I think it’s so important that we U.S. business journalists recognize what we did and didn’t do.

    While the Financial Times was churning out story after story, here’s the Wall Street Journal record on repo and the financial crisis. Might I have missed something? Of course. That said:
    – Peter Eavis did three good columns between March 2010 and February 2011.
    – WSJ did two good stories in 2011 about “short-term debt,” never using the r-word (repo).
    – WSJ did 5 other decent repo stories in 2011, two in 2012 (though one was still calling repo an “obscure market”), and four in 2013.
    – Among those four in 2013 was this great quote from David Weidner that finally, finally nailed it. “The repo market wasn’t just a part of the meltdown. It was the meltdown.” I emailed him a thank-you.
    – If you search for “repurchase market” at wsj.com (search only goes back to February 2009) you get 8 stories. If you search for “repurchase agreement” you get 115 stories. Check them out. You’ll see that the WSJ is now covering the shadow-market crisis in China the way it should have covered our financial crisis. It’s doing good reporting on the risk embedded in today’s mREITs. But on the financial crisis it lists only one story in 2010, five in 2011, four in 2012, and five in 2013.

    Some other points:
    – I agree with your concern about the Starkman book, that he stops with subprime. I “talked” to him by email several times while he was writing, to no avail.
    – Sorkin didn’t analyze anything.
    – Nocera and MacLean call repo “the deepest, darkest, least noticed part of the market’s plumbing” and, in a 264-page book, give it six paragraphs and a later brief mention when Bear failed.
    – Morgenson never mentions repo (and didn’t mention it in her column until Sept. 14, 2013.)
    – At repowatch.org you can click on the topic “Never say r-word” to see 3 1/2 years of my frustrated postings on this issue.

    Thanks for letting me rant.

    Tuesday, February 4, 2014 at 3:15 am | Permalink

  4. admin wrote:

    All to the point, Mary, though if you broadened the search terms to “inter-bank lending” and “short-term wholesale funding.” more material would turn up. the highly evolved state of the money markets surprised everyone, including the press. repowatch.org is a notable effort to catch up. i’ve thought for a long time that it warrants a weekly. i’ll do it as soon as i’m able.

    Tuesday, February 4, 2014 at 1:42 pm | Permalink

  5. Dale wrote:

    If you’re interested in what happened to the repo market (and I suppose reporting on it, in some sense), there’s an interesting analysis in “Leverage? What Leverage? A Deep Dive into the U.S. Flow of Funds in Search of Clues to the Global Crisis”. (https://www.imf.org/external/pubs/ft/wp/2012/wp12162.pdf)

    Tuesday, February 4, 2014 at 4:41 pm | Permalink

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