Cross-posted from epluribusmedia.net.

Hat tip to lambert on correntewire for providing the link to the latest cover story in the Columbia Journalism Review, Power Problem: The business press did everything but take on the institutions that brought down the financial system, by Dean Starkman.

Starkman and a team of researchers set out to examine how well the nation’s business press did in providing warning of the coming financial crises in the past decade. They selected a list of the nine business-news outlets they considered the most important (The Wall St. Journal, The New York Times, The Washington Post, the Los Angeles Times, the Financial Times, Bloomberg, Forbes, Fortune, and BusinessWeek) and the financial institutions with leading roles in the collapse (Wall Street: AIG, Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley. Lenders: Ameriquest, Citigroup, Countrywide, Fannie Mae, Freddie Mac, IndyMac, New Century, Washington Mutual). They then ran a series of search terms (Wall Street: Mortgage backed securities; Securitization AND mortgage; Collateralized debt obligation(s); Derivatives. Lenders: Mortgage lending; Predatory AND lending; Subprime AND mortgages; Bubble AND housing) through the Factiva database, and complied a list of 737 articles from 2000 to 2007 that either warned of the developing problems in financial markets, especially sub-prime mortgages, or were egregiously incorrect in cheerleading for the financial institutions selected.

It is true that few sectors of journalism, with the possible exception of the Washington press corps, are as infected with the extreme form of know-it-all-ism as the business press, which wields the complexities of its subject area like a cudgel against non-cognoscenti. But readers should not shrink from asking relevant questions merely because they don’t know the precise mechanics of a credit default swap and don’t read Fortune as closely as they might, say, the Torah.

The fact is, you don’t need to be a media critic or a quant to assess whether proper warnings were provided. What’s more, I suspect most rank-and-file reporters would welcome scrutiny, as long as it’s fair. And so we undertook a project with a simple goal: to assess whether the business press, as it claims, provided the public with fair warning of looming dangers during the years when it could have made a difference.

I’m going to provide a sneak preview of our findings: the answer is no. The record shows that the press published its hardest-hitting investigations of lenders and Wall Street between 2000–2003, for reasons I will attempt to explain below, then lapsed into useful-but-not-sufficient consumer- and investor-oriented stories during the critical years of 2004–2006. Missing are investigative stories that confront directly powerful institutions about basic business practices while those institutions were still powerful. This is not a detail. This is the watchdog that didn’t bark.

To the contrary, the record is clogged with feature stories about banks (“Countrywide Writes Mortgages for the Masses,” WSJ, 12/21/04) and Wall Street firms (“Distinct Culture at Bear Stearns Helps It Surmount a Grim Market,” The New York Times, 3/28/03) that covered the central players in this drama but wrote about anything but abusive lending and how it was funded. Far from warnings, the message here was: “All clear.”

There is a link included that will give you an Excel spreadsheet listing all 737 articles CJR found in its Factiva search, many with excerpts and / or comments. This listing is an invaluable aid to anyone interested in the full story of the past decade.

Starkman’s article is chock full of additional citations from other press outlets that did pick up and publish warning signals, just to show that such reporting was possible. There are also a number of shocking excepts from the warning stories that were published, such a from the March 15, 2000 New York Times article by Diana Henriques, “Mortgaged Lives: Profiting From Fine Print With Wall Street’s Help,”

which captures the boiler-room culture that was then overrunning traditional mortgage underwriting, here with a quote from a twenty-seven-page sales manual:

“Establish a common bond,” the loan officers were taught. “Find this early in the conversation to make the customer lower his guard.” The script listed good bond-building topics (family, jobs, children, and pets) and emphasized, “It’s really important to get them laughing.”

Starkman also puts his story in the context of what was occurring nationally, with details on how traditional Wall Street firms muscled in on subprime mortgage lending, and statistics on the steep increase in mortgage defaults.

Behind those numbers were the boiler rooms, underwritten by the Wall Street masters of the universe depicted on business magazine covers. Yes, we must beware of hindsight-ism. But let us acknowledge that today, at least, we know that the lending industry from 2004 through 2006 was not just pushing it. It had become unhinged—institutionally corrupt, rotten, like a fish, from the head.

I argued last fall (“Boiler Room,” Columbia Journalism Review, September/October 2008) that post-crash reporting has given short shrift to the breathtaking corruption that overran the mortgage business—document tampering, forgery, verbal and written misrepresentations, changing of terms at closing, nondisclosure of fees, rates, and penalties, and a boiler-room culture reminiscent of the notorious small-stock swindles of the nineties. Now the muck is finally bubbling to the surface as the Justice Department and several states gear up to prosecute “dozens” of leaders (“Financial Fraud is Focus of Attack by Prosecutors,” NYT, 3/12/09) and journalists latch onto the story in all its lurid glory.

Business Week’s excellent Mara Der Hovanesian reports, for instance, that Wall Street demand for mortgages became so frenzied that female wholesale buyers were “expected” to trade sex for them with male retail brokers, according to “dozens” of brokers and wholesale buyers (“Sex, Lies, and Mortgage Deals,” 11/13/08). But:

The abuses went far beyond sexual dalliances. Court documents and interviews with scores of industry players suggest that wholesalers also offered bribes to fellow employees, fabricated documents, and coached brokers on how to break the rules. And they weren’t alone. Brokers, who work directly with borrowers, altered and shredded documents. Underwriters, the bank employees who actually approve mortgage loans, also skirted boundaries, demanding secret payments from wholesalers to green-light loans they knew to be fraudulent. Some employees who reported misdeeds were harassed or fired. Federal and state prosecutors are picking through the industry’s wreckage in search of criminal activity.

Here’s another little anecdote Starkman relates:

Lisa Taylor, a former loan agent at Ameriquest’s customer-retention office in Sacramento, said she witnessed documents being altered when she walked in on co-workers using a brightly lighted Coke machine as a tracing board, copying borrowers’ signatures on an unsigned piece of paper.

Starkman makes the point that the need for the investigative skills of the business press increased dramatically after the Bush administration came to power, and what remained of the financial regulatory apparatus in Washington gave way to an unrestrained culture of greed and fraud.

CJR’s study, I believe, provides strong support for the idea that sometime after 2003, as federal regulation folded like a cheap suitcase, the business press institutionally lost whatever taste it had for head-on investigations of core practices of powerful institutions.