March 18, 2012


Bulls, Bears, and Bailouts: The Top 10 Questions From Our Wall Street Q&A
by Blair Hickman | ProPublica

(March 15, 2011) Yesterday, our Wall Street reporter Jesse Eisinger hosted a Reddit chat to answer readers’ questions. We rounded up 10 of the best — on everything from the roots of the financial crisis, to investigating a “notoriously nebulous and secretive” industry, to where Jesse wears his Pulitzer.

This was our first Reddit chat, a kind of lively discussion board, and we want to give a big thanks to everyone who joined for the great questions.

Here’s a look at the discussion.

When do you think the financial crisis began? Not when the housing collapse actually happened, but when were laws enacted that enabled this type of thing to happen, and what laws were they? - badhatharry

The financial crisis began, in my view, in August 2007, when the short term funding and securitization markets began freezing up. By the fall, we had a serious crisis on our hands. I am undecided whether by the fall, all the losses were there – and it was just a matter of realizing them – or whether something still could have been done to save the system from the collapse in the fall of 2008.

The seeds of the crisis were laid much earlier. One big thing was the Commodities Futures Modernization Act, which prevented the regulation of derivatives. It was a Phil Gramm sponsored law that Clinton signed as he was walking out the door of the White House, in 2000.

I always liked this quote [by Abraham Lincoln]: "If the American people knew tonight, exactly how the monetary and banking system worked, there would be a revolution before tomorrow morning." How true is this sentence today? Is the financial system really so bad and, for a lack of a better word, dishonest? - Rosthouse

Interesting quote. I hadn't heard it and wonder what he was referring to.

We have a seriously broken financial system. The leaders of the nation's banks are overly concerned with their own pay first, and the profits of their firms second. Mostly customers are there to be fleeced rather than served. They have captured our political system.

The great scandal of the post-crisis period is that there have been no criminal prosecutions of top executives at failed institutions, or institutions that sold products that fleeced customers. What kind of signal does that send to bankers today? Obviously, one that they can get away with it.

There are many good, decent – and especially smart and thoughtful – people WITHIN our biggest institutions. But they aren't in leadership positions.

I don't think people became worse human beings than they were in the 19th century, when there were financial frauds, frequent crisis and bank collapses. But when they failed back then, the partners typically lost money. Now when a bank collapses, the top executives are largely playing with Other People's Money, as the cliché has it. And when they do really bad stuff, as I say, our prosecutors can't figure out how to charge them.

My understanding is that what they did was unethical, but not illegal, which is why there haven't been prosecutions. Also, a lot of prosecutions are just now starting to go through, since the legal process takes so long. - TopperHarley86

Yeah, I don't buy either of those things as an excuse. Sure, one big part of the financial crisis was that a lot of the terrible things were not illegal. But misrepresenting your books, for instance, is. Prosecutors have been overly risk-averse. There is enough serious smoke, for instance, to bring charges against Countrywide's Angelo Mozilo and Lehman's Dick Fuld – or some high level execs – [yet they] have not been charged with anything. The Lehman bankruptcy examiner report had enough for an aggressive prosecutor to follow as a roadmap.

Look at the MF Global case, which was the subject of an excellent Joe Nocera column in the New York Times yesterday. How can there not be charges from that situation?

What are the one or two policy changes you think would make the financial industry work better for individuals and "real" businesses? - Hovercraft _ mechanic

One that is realistic is much more serious capital requirements at banks, especially large banks. Maybe start at 15% or even higher. Then they should go up with size.

Something slightly unrealistic would be to break up the banks to make them significantly smaller. That wouldn't prevent financial crises – the Great Depression was a financial crisis of thousands of small banks – but it would help, especially in this day and age of rapid responses and communication.

Should the bank bailouts have taken place? What would have happened had they not been rescued? - henryvick 304

Yes. I believe we needed to save the financial system. The Fed needed to do its massive lending programs. But we should have had many more strings attached. Probably the government should have bought common stock with voting rights (and exercised them) and/or bought majority stakes in the banks that had failed. We should have wiped out or haircut bondholders, who were irresponsible to lend their money to fragile institutions. We should have cleared banks' boards out, restricted bonuses, restricted dividends and stock buybacks.

We should have made the banks write down their assets and recapitalize so that no one would have any doubts about the balance sheet quality or the capital levels. Today, investors continue to be deeply wary and cynical about whether banks' balance sheets reflect the true value of their assets.

And we should have had some prosecutions.

How do you go about conducting investigative reporting in an industry that's notoriously nebulous and secretive? Is it largely based on relationships you’ve made over time?
- Romanovachev

It's hard. But if it were easy, I'd have more competition. Yes, one thing is to develop relationships. One thing I try to do is to explain to my sources and potential sources that I care deeply about fairness and accuracy. I try to honor their professions by listening and really trying to understand their business. I'm not talking to them for a quick quotation before I move onto the next story. I think people appreciate that, even if I have a different take on a subject than they do.

Banks make things opaque on purpose, and the disclosures are often of little help. So you have to work hard to find people who will explain to you what is really going on.

If the Glass-Steagall Act [10] were re-instated do you think it would be powerful enough to rein in some of the excesses of Wall Street? Can you remember any of the predictions about how its repeal in 1999 would yield a disaster? How different is the Volcker Rule that was passed under Dodd Frank? - blobbohen

The Volcker Rule is a kind of backdoor, mini Glass-Steagall. It would be better to have just reinstated Glass-Steagall, which separated investment banking from commercial banking.

Now, it is true that Bear Stearns and Lehman were I-banks that failed (and Merrill virtually failed), and those firms didn't have commercial banking operations. So there was a lot more wrong with the system  in the late 1990s, as Glass-Steagall was being eroded and then repealed. There were lonely voices of skepticism, but they were few and far between.

I see certain stocks being written about every day at a much greater rate than others. Pandora, Sirius, Netflix. I feel these stocks are being purposely manipulated. What say you? - markstretch

There are always cult stocks. Or story stocks. I've often gravitated to writing about them, because they are often hyped and ripe for a good de-bunking. I wrote a piece on Sirius at the WSJ in 2004, for instance, that really whacked the stock, and I think it never regained its highs.

Some of them are purposely manipulated, but others are just in hot markets or have hot growth stories. Any stock that has a high retail investor following and a high short interest (meaning the sophisticated hedge funds are betting against it) is something the average investors should probably stay away from unless he or she doesn't like having money.

In your educated opinion, who was the best Fed chairman in the past 100 or so years and why? –  -4-8-15-16-23-42

Volcker. Took a deeply unpopular move to crush inflation. Some inflation isn't so terrible, but clearly the rate in the 1970s was. And since, he has been a voice for reason and reform. He benefits from his competition, which in my lifetime has been pretty dismal. Bernanke isn't terrible, just timid – about monetary policy and especially about banking regulation. Greenspan is clearly the worst in my lifetime.

How do you think journalists have done in terms of explaining Wall Street and the financial crisis? We have literally thousands of articles on the topic, and yet few people who have tried their best to understand the crisis and business could even explain it to themselves. What can we attribute this failure to, and is there anything that, as journalists, can be done about it? - kskxt

I think journalists have explained the crisis pretty well, actually. One of the things I'm most proud of with our series is that we strived – we sweated blood – to make it clear to any reader.

The press did a terrible job, an outrageously awful job, of covering the financial system before the crisis. We failed miserably. I include myself in this, though in my defense, I was one of the few writing stories about the risks in the system. Here's a piece in which I predicted the failure of Bear Stearns and Lehman.

But I was nowhere nearly as aggressive in my coverage as I should have been.

By the way, I think the press did a good job of covering the housing bubble. And no one paid the slightest attention.

Pulitzer winners are awarded a medal, right? Is it pretty heavy, and do you ever wear it at dinner parties or get-togethers? - keatsandyeats

I wear it constantly. Usually under my clothes. Mainly to remind my wife.

Actually, we didn’t get medals. We got a lovely certificate, which is now in a closet in my apartment.