The Watchdog That Didn't Bark
| Published May 4, 2014 |

Book review by R. Alan Clanton
Thursday Review

Back a few months ago an anniversary was celebrated in the media and among cable TV professionals. CNBC, the cable network founded in April 1989 and owned by NBC Universal (which is owned now by Comcast), turned 25 years old. Originally the brainchild of Tom Rogers, CNBC at first struggled mightily to find its way. It suffered from several interlocking problems: it was a newcomer to the cable business news line-up, and faced withering competition from the older and much more established FNN (Financial News Network); it was underfunded by its parent company NBC, which had its hands full with other operations and other cost-intensive obligations; and, as a result of both of these issues, cable TV companies were reluctant to add CNBC to their channel line-ups. In addition, most cable companies, large or small, doubted that their paying customers wanted two business channels at a time when the content in highest demand was children’s channels and sports content.

Still, NBC backed CNBC and the little network struggled onward to limited audiences. Then, an ironic thing happened: FNN ran aground financially, caught up in inextricably—even poetically, some would say—in an accounting scandal and accusations of vast misappropriations of funds by its chief financial officer. Two audits by different auditing firms determined that the damage was fatal. In a matter of months in 1990 FNN went from profitability to near-bankruptcy, unable to pay its debts and reporting a $72 million dollar loss. It was the auction block for FNN. A nasty, high-profile bidding war ensued between General Electric-NBC and a partnership between Westinghouse-Group W and Dow Jones (the fight got so ugly that it ended up in court). But with the help of NBC and other investors, CNBC won the day, purchasing FNN outright, merging operations, bringing many of FNN’s reporters to the new team, and taking control of the same transponder space it once coveted.

CNBC’s audience doubled, literally, overnight. With that merger, business news quickly changed. Prior to CNBC, the vast majority of Americans got their business news from their local newspaper, or from short, bullet-point reports on the nightly news. Outside of Wall Street, the avant garde and the obsessed had their own subscriptions to The Wall Street Journal, but most of Main Street just read Money magazine. But was adding glamor to the process of reporting financial news, and the network was not only challenging the dusty, dry delivery of business news—it was on the verge of re-inventing it.

Indeed, in August of 1995, CNBC scored a coup when it persuaded the New York Stock Exchange to allow—for the first time ever in NYSE history—a TV reporter live, unfiltered access to the trading floor during trading hours. The reporter’s name was Maria Bartiromo, a former CNN analyst and a protégé to Lou Dobbs. Bartiromo and her many colleagues at CNBC became, very quickly, a part of the system they were covering.

And what better time to be covering business news and markets? The Roaring Nineties saw many millions of Americans migrate their savings into the stock market, into mutual funds, and into 401k’s. Anyone with a 401k could watch their money grow, often daily. Amateurs entered the markets by the tens of thousands, the era of the day trader was in full swing, and quick access to TV stories about current stock performance was de rigueur. One friend of mine in those days called it profit porn. In addition, real estate and home mortgages were starting to look like a great place to be. By the end of the 1990s, the dream of home ownership seemed very nearly available to everyone, in some cases with little more than a signature and a tiny down payment (some loans were packaged with no down payment).

In the financial sector—among mortgage lenders, real estate executives, banks, savings and loans and investors—so much money was being made, by so many people, at so many levels, that few were willing to question the strength and durability of what was happening. Furthermore, home values were rising with such astonishing force, that there were even fewer people (even among the “experts”) brazen enough to challenge the solidity or sanity of the process. It seemed that home values would continue to rise indefinitely. Even those scant few skeptics conceded that, at worst, a bursting housing bubble would simply mean a period of relatively flat home values.

But the bubble did burst, and with that rapid implosion came a cascade of seemingly unstoppable crashes. When the big shock came, if carried with it powerful, game-changing political consequences.

Throughout late 2007 and early 2008, during the time that his presidential candidacy was re-emerging from single digit polling to the front of the pack, Senator John McCain was quoted on several notable occasions as saying that the U.S. economy was basically healthy and strong. Most Democrats agreed as well. Though the housing markets were showing early and demonstrable signs of trouble, McCain—like millions of others at the time—assumed the dynamism and elasticity of the American economy were enough to counter any disruption in housing. After all, the U.S. markets had shown remarkable resilience through tech bubble bursts, Pacific Rim market meltdowns, oil and gas price shocks, the post-millennia recession and subsequent advertising recessions, the slumps following 9/11 and Katrina, and various other market disruptions.

But in presidential politics, such broad, unqualified proclamations can be hazardous. By the time the conventions had ended in late summer 2008, the race between McCain and candidate Barack Obama was shaping up to be a close one. Even the fracas over Sarah Palin’s selection as McCain’s running mate had been largely redirected into a positive for the McCain campaign—a component of the growing red-blue divide of perception, and a way for the GOP to rally its increasingly fractious constituents around a candidate distrusted by some conservatives. Palin would prove to be a sideshow; her presence in the campaign narrative—though a source of entertainment to some political reporters—had little effect on why McCain lost so grandly to Obama months later.

The collapse of the McCain campaign began during the hours and days following the collapse of Lehman Brothers. McCain’s political downslide was linked inexorably to the ignominious crash of Lehman, the Wall Street meltdown, a plummeting Dow, AIG’s near collapse, frozen credit, and the general panic which set in over the next weeks and months. Recession set in with a vengeance not seen since the 1970s, and the crisis was likened to—and still often compared to—the Great Depression. The Great Recession, as it is now commonly called, destroyed John McCain's presidential ambitions in less than three weeks.

Was the financial crisis McCain’s fault? Hardly, but McCain had chosen to link himself to the grand economic boom that had lasted for decades—a long period of general prosperity and growth which seemed unstoppable despite cultural and political changes, and administrations both Democratic and Republican. In the George W. Bush years (as in the Bill Clinton era), no amount of gale-force buffeting seemed able to dislodge the idea of a U.S. economy in a permanent state of growth, with upward mobility within the grasp of any person, and, by extension, home ownership as the ultimate reward for participation in the American economy.

But there was a problem: that mass growth in home ownership was almost entirely detached from earnings and savings, and worse still, disconnected from realities about the long term effects of all that debt on people who could ill-afford even a tiny disruption to their cash flow. The ensuing economic constriction and recession would have crippling, long term effects still felt today: unemployment and underemployment, anemic jobs growth, a widening of the divide between the haves and have-nots, and a gloomy outlook by most Americans.

There was plenty of blame to go around. Indeed political parties, state and Federal regulators, consumer groups, banks and businesses all spent vast amounts of time and energy pointing the finger at each other for the disaster. Ultimately the housing bubble and its inevitable burst was blamed on poor—or lightly enforced—regulation, overzealousness on the part of those selling homes and home loans, and a complex system of mortgage packaging and repackaging that scant few had the ability to fully understand.  But were there other factors?  Were there opportunities for the U.S. public to have more fully understood the danger inherent in the housing market and its too-good-to-be-true cash machine?

A new book by Dean Starkman, The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, New York), sheds a harsh and unsparing light on the role of the media—not in the crisis itself, for there was plenty of blame to go around the table on that, but on an institutional failure of business journalism. Where were the investigative reporters during the decades-long run-up to the crisis? Where were those editors and publishers whose job it was to carefully deploy their best writers and investigators? Where were the analysts and reporters on CNBC and the other networks (CNN, Fox News) who should have been more attuned to the serious risk that the country was facing? Where were the long-form writers who may have been best able to drill down into the developing crisis—before it became a crisis—and illuminate the problem, explaining in middlebrow terms a systematic abuse that was almost entirely beyond the understanding of the average homebuyer or homeowner?

In his well-written introduction, Starkman makes it clear where he intends to take the book.

“The U.S. business press failed,” he writes, “to investigate and hold accountable Wall Street Banks and major mortgage lenders in the years leading up to the financial crisis of 2008. That’s why the crisis came as such a shock to the public and to the press itself.”

The crisis also came as a shock to the political culture. Congressional leaders and White House advisors were astounded that such a meltdown could have happened, and that the great institutions of American capitalism were on the brink of total collapse. Who was it that had failed to provide the crucial information and the early warnings of a system apparently rife with not merely extreme risk, but also abusive practices and behaviors? Where were the watchdogs?

Starkman traces in great detail the development of the early American and British business press, especially the innovations wrought by an early Wall Street Journal editor, Bernard Kilgore. Starkman also looks at the great tradition of the muckraking journalist—also known as the investigative reporter. A once reliable fusion of these two schools of press provided the United States with a reliable, trustworthy lens through which to view the financial systems upon which we depended so completely.

But in the 1990s, parallel to the ascension of CNBC as an entertainment vehicle for the delivery of business news came the slow but inexorable deterioration—and eventual demoralization—of the “news” itself. Journalism was not merely being fragmented, as was all forms of news and entertainment, but it was being undermined as an institution, and incisive business news, especially the sort of investigative work needed to keep financial firms honest, was being lost almost entirely. Access news replaced genuine journalism; entertaining anecdotes and “inside” stories replaced true gumshoe work. Infotainment replaced investigation. Personalities replaced penetration.

By the early aught years, while the banks, the lenders, the mortgage firms and their insurers were building up their most dangerous forms of imbalance, the business press had grown almost unanimous in their silence. Few reporters bothered even to venture into the complex business of the riskiest of the loans. Many editors assumed that since no regulators were shouting fire, there must not be a fire—even when presented on those rare occasions with tangible reporting by journalists willing to drill down deeply into the sometimes byzantine subject matter.  Starkman gives specific examples of reporters (the very few) who were taking a closer looks at some of the most dangerous forms of mortgage packaging, as well as the predatory lending practices being used by some firms.

But in short, the form of journalism known as accountability reporting was leaving, being replaced by TV stars who spent their on-camera time reporting on stock performance and giving us close access to the personalities of Wall Street and business. When the crisis hit full stride in the fall of 2008, it came as a shock to almost everyone...save for those few lonely curmudgeons and gadflies who were largely dismissed as naysayers back in the early aught years.  A revolving blame game ensued, with political parties and politicians blaming each other, progressives blaming sleeping regulators, conservatives pointing the finger at Fannie Mae and Freddie Mac, but all claiming shock at the debacle.

Starkman’s last chapter is an analysis of how digital journalism and the internet have reshaped not only journalism, but also what we expect from the news itself in terms of genuine information. He concludes that it is not too late for business journalism to regain its effectiveness.

Here are a few things to expect from Starkman’s important book: First, readability. We’ve used that word a few times before in these pages, but in this case the description is perhaps more apt than anything we can offer. This book reads smoothly and quickly. Also, fear not if you have only a limited understanding of markets or mortgages or banks: Starkman wastes little time on the algebra or arcane details, and there is hardly a single page one could describe as boring.

This book also illuminates the newsroom—distant past, recent past, and present—and offers a clear breakdown of the systematic failures of business journalism. Indeed, Starkman was himself a Wall Street Journal reporter, now a frequent contributor to the Columbia Journalism Review, and his ability to understand and dissect the newsroom culture makes this book even more resonate and compelling.

Thursday Review recommends this book to anyone who wants a full understanding of how journalism in a fragmented entertainment-dominated culture must fight for its survival, as well as how the digital age is transforming the way we receive and disseminate the news.


Related Thursday Review articles:

A Brief History of Debt; book review: Debtors’ Prison; review by R. Alan Clanton; May 25, 2013.

The News Gap; book review by Earl H. Perkins; Thursday Review; February 12, 2014.