Reporting on the 2008 Financial Crisis, and the Next One
By Robert Lenzner
Joan Shorenstein Fellow, Spring 2014, Forbes Media contributor
The following is an excerpt from a new paper by Robert Lenzner, “Reporting on the 2008 Financial Crisis, and the Next One.” Read the full paper.
Spotting the Next Crisis: A Preliminary Guide for Journalists
I list here some of the sources and background knowledge that I think can arm journalists with far more ability to understand the deep and often invisible forces at work in the financial system, since public statements by both financial institution CEOs and their regulators are self-serving at a minimum, and often worse. Yet this, you must know, is only the start.
1. To understand what’s happening today, a financial journalist must learn how to read a balance sheet — and especially the footnotes to financial statements that often highlight a problem that could be the story. This has proved true time and time again, because companies try to hide their nightmares in footnotes, in tiny print and phrased in language that is sure to be murky. When you spot these curiosities, call everyone you can think of — the bank itself, the credit rating agencies, the Fed and SEC, other regulatory agencies — and ask questions until you begin to get answers.
2. Get yourself the transcripts of Federal Reserve board meetings during the crisis, because you’ll recognize right away the compelling issues that challenged our central bankers. Then skim through the 2011 Financial Crisis Inquiry Report that brilliantly spells out the narrative of a systemic crisis — yet seems to have been read by few. You might also dip into MIT economist Charles Kindleberger’s legendary book Manias, Panics and Crashes: A History of Financial Crisis, or John Galbraith’s The Great Crash, 1929 — because you will find two wise mentors who were always independent of Wall Street.
3. I can also tell you from experience that it often takes weeks — or months — of digging before you hit pay dirt. Never give up; think of yourself as a miner looking for gold. The deeper you go into the mine, the better your chances of finding an even bolder, edgier story than you thought existed. Use the Internet to spot studies by economic institutes or private-sector economists who specialize in finance. I wish I’d read Paul McCulley’s September 2007 note about the Jackson Hole central bank meetings where he raised the specter of the “shadow banking system” for the first time. There are sources out there who know valuable things or can interpret for you the deeper meaning of what is happening.
4. If your first sources will speak only off-the-record, search out others — competitors, outside directors, Wall Street traders — who can tell you what you need. Use your mentor: late in the game I met a former Federal Reserve official who wised me up to several surprising policies that I had never heard of. Failing that, go back and try to get your source to put at least some information “on background.”
5. For forward guidance I advise always reading the latest speeches of the Federal Reserve’s presidents or board members, especially Janet Yellen nowadays — because they’re often pointed presentations on the dangerous issues that are the foremost concerns of the central bankers. (It’s how I found out about the remaining holes in the system still plaguing Wall Street.) Also listen to discordant voices, whether they’re academics with an axe to grind or bloggers with their own unique understanding of the system. (Always remember though: everyone is talking from their own book, especially the radical reformers.)
6. Often you can learn about trends in American finance from foreign publications like the Financial Times or The Economist. I discovered the terrible weaknesses of European banks through reports of the BIS (Bank for International Settlements) that were brilliantly interpreted for me by Columbia University Business School professor Charles Colamiris and by a couple of hedge fund managers going short on European debt. (Note though that everyone’s fallible: The Economist and the Financial Times were six years late when they finally featured the “shadow banking system” in 2014.)
7. As for books, I must tell you that on the advice of former Financial Times editor (and former Shorenstein Fellow) Richard Lambert, I read The Banker’s New Clothes by Anat Admati and Martin Hellvig, which does first-rate discovery work on the structural and financial weaknesses of major US banks, especially J.P. Morgan Chase, and makes a compelling argument for substantially limiting the leverage used by the major banks. (The book’s voluminous footnotes reveal plenty of systemic weaknesses, especially by accounting policy issues.) I found Timothy Geithner’s Stress Tests a fairly candid and revealing story of lax regulatory activities. Read also Martin Wolf’s The Shifts and the Shocks: What We’ve Learned — and Have Still to Learn — from the Financial Crisis, especially the chapters “How Finance Became Fragile,” and “Central Banking After the Great Recession, Lessons Learned, Challenges Ahead.”
8. Read what the big bank chairmen write in their annual reports, which sometimes can be quite frank. Jamie Dimon’s 32-page letter to J.P. Morgan Chase shareholders in 2013 not only expressed his anxiety about future systemic problems, but sent a major signal to the knowing — that the bank held $740 billion in highly liquid assets, or almost a third of its balance sheet — as protection against another financial crisis. Read Goldman Sachs’ latest shareholder report and you will learn that it has more than $184 billion in cash meant to keep the firm operating for up to a year without needing to raise additional funds, or requiring a bailout.
9. Think about the nature of risk. Make a list of what you see as the risks to the system, whether it’s monetary policy, interest rates, too big to fail banks — whatever. Above all, remind yourself that a single event is never the story; it’s the amalgamation of a great many single events that causes a crisis. Think about finance as a system, not just about the dangers of single products like mortgages, or a single event like the bailout of Bear Stearns. Thinking systematically is the most profoundly difficult lesson a reporter must learn. (Read, if you haven’t yet, Harvard Business School’s case study of AIG’s chaotic risk-taking in derivatives and the George Washington University Law School article “Citigroup: A Case Study in Managerial and Regulatory Failures” by Arthur E. Wilmarth Jr.)
10. I leave the most difficult lesson for last: how to evaluate the five-too-big to-fail-banks and their huge derivatives positions. Here there is no clear guide for the perplexed, because you’ll see that each bank reports the information differently. Recognize too that foreign banks’ accounting rules make their total derivatives exposure greater than if they used US accounting standards. Understand this from the start: no bank tells you either its revenues or its profits from derivatives — ask why. Don’t believe anyone who tells you it’s all straightforward and lacking in danger. Memorize this passage from Admati and Hellwig’s The Banker’s New Clothes:
Some of the risks that make J.P. Morgan dangerous cannot actually be seen by looking at its balance sheet because the positions that give rise to them are not included there… The bank’s commitments to these units amount to almost a trillion dollars, but these potential liabilities are left off the bank’s balance sheet. Yet they are quite relevant to the financial health of J.P. Morgan Chase.
Finally, be doubtful of anyone who tells you “this time it’s different.” Hold onto your skepticism; do your homework. You might end up knowing more than they do.
