How the Financial Media Missed the Recession

The serious print financial media is concerned about how it missed the signs which lead to the current sever recession. This is a provocative question and indicates the financial print media wants to correct its behavior, so it can see the big picture in the future.

Here are some observations about why the financial media missed seeing the forest because of the trees:

1--The emphasis on using on-the-record, official sources. Attribution is a key element of traditional journalism. The problem is that people who know about bad business practices do not want to be quoted. Better yet, since they are often major financial beneficiaries of creating unqualified mortgages or exotic derivatives, they do not normally associate with reporters. IN turn, reporters often don't understand or cannot gain the confidence of a top player to get the inside story.

I broke the story about John Phelan, the former chairman of the NYSE, and his secret $10 million bonus about 1990. As a former NYSE employee, I had good sources, but none who would talk to the Journal or the New York Times. As a result, I broke the story in a trade publication in London (Futures & Options World). I then met the editor of Investment Dealer's Digest at an informal gathering and he picked up the story. Then, the Wall Street Journal finally picked it up and ran the story on page 3.

2--Reporters missed the new corporate ethos of "anything goes." This was evident years earlier when Enron, Worldcom, Global Crossing, Tyco, Adelphi, Arthur Andersen and other corporations adopted sociopathic and illegal practices well before they became public knowledge. More recently, the difference with the exotic mortgage products used by AIG and the other major banks is that they were less known even inside the institutions, plus they generated huge amounts of money for a small group. This combination of huge money shared by a small, select group made it very difficult for the average financial reporter to decipher the scheme.

3--Wide-scale frauds are harder to detect. Reporters focus on individual events, but when it comes to an entire industry, such as the mortgage business succumbing to widespread fraud, reporters are loathe to paint the entire industry as tainted.

This is the case with the mortgage business where a large number of people created fraudulent mortgage documents, so people who did not qualify for loans could get them. Reporters are trained to focus on individual events, such as the Bernard Madoff scam, not on mass behaviors. This was the problem which prevented the financial media from sounding the alarm about the widespread sociopathic behavior which hit the financial industry and paved the way for toxic mortgages to be passed into the global markets.