As readers may know, a recent post, “Frontline’s Astonishing Whitewash of the Crisis,”discussed the first half of the Frontline series, “Money, Power & Wall Street.” Producers Mike Wiser and Martin Smith sent a letter taking issue with this review, and I made an exception to my usual practice and posted their missive.
The major dispute is over whether their series lets the financial services industry off too lightly. The producers contend they attempted to provide “an accurate and informative telling of the crisis,” that they were indeed tough on financial firms, and that I “misunderstood” their program. The bulk of the letter then consists of extracts from the program meant to address specific criticisms.
I’ll deal with their particular claims in due course. But most important, their letter fails to engage the basic issue raised in the initial post: that of the overall message conveyed by this segment. Their assertion is that I misunderstood, when it it the obligation of Frontline to make sure its message is clear. And as we’ll also see, I am far from alone in “misunderstanding” their show.
Any form of storytelling, be it print or televised journalism, fiction, even scholarly work, involves choices as to what material present, how to guide the reader/viewer through the information, and what points to emphasize. Emphasis can take place in numerous ways, including by presenting information early (first impressions stick and are hard to dislodge), repetition, amount of time spent. One major choice is whether to provide a range of points of view and let viewer decide, or supplying a clear perspective. The use of a narrator (and this series had a narrator) signals that the producers intended to provide a perspective.
What happens if you fail to give non-expert viewers sufficient guidance through a complex fact set? The audience not only gets little in the way of illumination, but it also reionforces the idea that the situation is complicated and hard to grasp. That message is bank friendly. We’ve stressed repeatedly that complexity, opacity, and leverage serve the interests of financiers to the detriment of society at large. Treating this evolution as something that just happened is far too kind to the authorities and big banks. It represents a fundamental shift from the financial services industry providing mainly valuable services to becoming increasingly extractive. As we said in our original post:
So thus far, we have some populist decorating of a profoundly pro-Establishment account. Yes, the system got really out of control, but whocoulddanode? It just got SOOO complicated no one could understand it, not even those super well paid top Wall Street executives. There isn’t a single mention of ideas like looting, bogus accounting (remember the fictitious Lehman balance sheet, or Merrill’s CDO-hiding Pyxis, or the $40 billion of Citi CDOs that appeared out of nowhere?) or abuses in other areas (like swaps sold to municipalities all over the world, or rapacious privatizations, the auction rate securities blow up, or chain of title abuses). Nah, it’s just a bunch of fundamentally good ideas taken too far. And they really expect you to believe that.
In fairness, Part 2 does cover the swaps sold to municipalities in some detail, but even then, as we’ll discuss in a later post, this discussion also falls short.
But the most charitable conclusion you can reach is, in the words of a colleague who has taught at the Columbia School of Journalism for over ten years, is that this is “mediocre journalism,” that the producers didn’t recognize that the story they thought they were conveying was different than the one they actually presented.
Various viewers of the program also found that the overall message was favorable to Wall Street. I’m told there were many critical tweets on the first and second program. This assessment came via e-mail:
I happened to watch the two hours in one sitting yesterday as a film and I came away sharing most of Yves’ observations. The overall criticism that it was more a People Magazine expose (well done at that level with its bevy of interviews of key players!) that was heavy on characters and narrative and light on illumination is valid. While the narrative did have some great general quotes like the ‘infectious greed” described by Frank Partnoy, “the greed of Wall Street broke Main Street” by Roy Barnes and Reich’s “Wall Street got away with bank robbery” they were used more as attack lines on the “bad people” on Wall Street rather than the system.
Of course, the proof is simple: What conclusions is the viewer of the first two hours led to? Forget the throwaway lines here and there used for cover. I see three simple ones that were artfully laid out. Obama is smart and capable. The Republicans are stupid and incompetent. The bailout was flawed but necessary.
In other words the Frontline programs provided some great quotes, especially those of Alan Greenspan mumbling his bizarre bible that people in white shirts can be trusted to be more moral and aware than the 99%. The show did not deal with the inherent racist and classist attitude of our plutocrats that the 1% are less criminally inclined than the 99% and do not need the policing that the rabble do when, in fact, they need more because of the perverse economic “incentives” they face.)
And this e-mail reacted to the producers’ letter:
I find the response by Frontline is in denial regarding your criticism of the general tenor and overall effect, which really is what you were saying. In fact, the more I read of their apologia, the more annoyed I get. It’s a long set of excuses, with a few finger-pointings at you for writing overly fast.
Frontline response refused to acknowledge that it WAS bank friendly. It criticize you for pointing out that JP Morgan Chase was trying to solve its OWN problem.
You’re right. The Frontline show GENERALIZED the description, as if economists were trying to solve risk IN GENERAL, not shift their OWN risk somehow onto their own counterparties.
Your points are specific. Without concretizing what is happening, viewers are left with a lack of focus (“solving problems”) as to Cui bono?
Regarding the other “warnings” the Frontline show cites, these are like warning labels on a pack of cigarettes or liquor bottle (“Don’t drink to excess. Be responsible.”) They tend to get lost in the overall spirit of the show.
The Born comment simply got lost. Here was a real boxing match. They somehow glossed it over in a way that ONLY the people who actually had followed the story would know what was being said. It’s like a literal translation of Sumerian cuneiform — so brief that only someone who knows the context can understand what the tablet is all about.
What really is at issue is the importance of how to FRAME a point to highlight and explain it. They SAY that they explained that securitizing junk mortgages was what caused the problem. But this just wasn’t done effectively and straight-forwardly. Again, only the insiders who have been following things will get the message. It’s as astutely buried as cigarette companies bury the cancerous effects of their products. What Frontline did was “UNFRAME” the issue, to coin a verb, where this would really be confrontational with Wall Street. In a more popular word, it was simply wimpy.
I.e., “SOME of these mortgages MAY BE subprime.” “I wanna buy A LITTLE BIT of CDO” C’mon! They reduce it all to technocratic stuff — a problem to be solved, not a plan for a rip-off!
It’s like God drove a steamroller over the earth, flattening out the mountains, so that nothing stands out. Or like a composer of a symphony that had everything mezzoforte, no high points, no focal points. It was … blah.
You’re absolutely right. There didn’t HAVE to be a choice between bailout or “meltdown.” So the bondholders would have lost — the money they doubled as a proportion of US income and wealth 30 years ago. So what?
The Angelides quote implied that Obama DID have to “save the economy.” Not that it was NEEDLESS, as you say.
Bottom line: I’m “baffled” that Mr. Wiser is “baffled” at your comment. Perhaps Frontline needs someone who is NOT baffled!
Let’s now deal with their responses, many of which do not engage the issues raised, but instead seek to cast doubt about the accuracy of the post.
First is their objection to the idea that they “cribbed” from Gillian Tett’s account of the development of the credit default swaps market, Fool’s Gold. In fact, the series starts with the same narrative that Tett used, that of JP Morgan staffers first coming up with the idea of CDS at a corporate retreat, and even has the same hijinks. While people who read Fool’s Gold would see the inclusion of Tett in that part of the documentary as a way of acknowledging her influence, that does not obviate the fealty of Frontline to Tett’s storytelling. While “cribbed” may be deemed to be unduly strong, some readers saw this comment as “the lady doth protest too much.”
The much more important issue with starting with the genesis of credit default swaps is it launches the program on a pro-Wall Street footing (yes, there is the meant-to-rivet-your-attention, “we had a meltdown” juxtaposed with Occupy Wall Street protestors, but that is quickly undercut by various statements by apparent experts as to how complicated this all is, so the criticism is almost immediately diffused).
The producers chose to start with the genesis of the corporate credit default swaps market, which is a bizarre place to begin. Corporate credit default swaps had nothing to do with the crisis. The narrator describes their creation as “innocent” (!). CDS are depicted as an “innovation” repeatedly, with all of its positive overtones (and recall that no less than Paul Volcker begs to differ). They are also presented simply as a way to transfer risk, and that is presented as salutary, as opposed to a way to solve a big problem for JP Morgan and other banks (as the readers above noted, lack of agency is all too common in this broadcast).
The only reason to go that early might be to depict the missed opportunity to regulate them and prevent the creation of a standardized template for CDS on asset-backed securities, which as we described long form in ECONNED, is responsible for the toxic phase of subprime origination (third quarter 2005 to summer 2007). They try to have it both ways in their letter, saying they covered that ground in another Frontline documentary. Sorry, that doesn’t pass muster. A presentation needs to be self contained. And even with hard core Frontline viewers, this also demands that they recall content from an earlier program, when in our information-overloaded society, that is a lot to expect of those who do not follow the finance beat.
The letter continues to argue that the program did cover the notion that corporate credit default swaps were devised to transfer risk, which benefited banks. But this softpedals the motivation, which was set forth in our post: that JP Morgan was carrying more corporate credit risk than it was comfortable with (my recollection is that Fool’s Gold discussed specifically that JPM’s growth would be constrained). And recall in the viewer quotes above, that they also found that the issue of “cui bono” from the creation of CDS was skipped over. (I also have to note that one of the people they quoted in this section is Mark Brickell, identified in the program as a former JP Morgan employee. Most viewers would assume that that means he would give an unbiased take. In fact, Brickell is an uber financial services and even shows up twice in Frank Partnoy’s Infectious Greed as a bad guy of sorts).
Next, they shift to arguing that their discussion of CDS did cover the idea that they were tantamount to unregulated insurance. But merely citing text where CDS are referred to by various interviewees as insurance is inadequate for a generalist audience.
Contractually, a financial product cannot be both a “derivative” (price or payoff defined in terms of a readily priced underlying instrument) and “insurance” (payoff when an event of loss takes place). The JP Morgan misbranding of CDS as derivatives has been remarkably effective.
If you look at the transcript, the CDS are referred to a full 22 times as “derivatives” and there are three additional mentions of general concerns about derivatives that in context before you even hear the word “insurance”. These include seven separate comments by the narrator, some of which use the word “derivative” multiple times with reference to CDS, starting with this one:
NARRATOR: Credit default swaps, a kind of derivative that insures a loan against default.
This was a very new concept. Traditionally, derivatives were a way to bet on the future value of something. For hundreds of years, farmers have traded derivatives to protect themselves against fluctuating crop prices. It is this type of derivative that has been traded on the Commodities Exchange in Chicago, along with the futures of fuels, currencies and precious metals.
In Boca Raton, the JP Morgan team realized that they could use credit derivatives to trade their loan risks.
So get this: the narrator, the proxy for the producers, defines credit default swaps as a derivative, and presents them as being part of a proud history of derivatives. And how does the booming narrator first use the word “insurance” in the CDS discussion?
NARRATOR: Others wanted them to be regulated like insurance.
In other words, this is presented as a minority view, well after “CDS = derivatives” is well cemented in the viewer’s mind, and not adequately explained. Even before getting to the way CDS are described in the documentary, given the common lumping of CDS with true derivatives, it would take a clear statement that CDS are tantamount to insurance, likely with some factual support, to overcome the sloppy use of terms.
In context, the narrator comment presents “CDS are insurance” as a minority position. Yet the implications of it being economically equivalent to insurance are fundamental to understanding why the product blew all the major guarantors up. Insurers receive money up front. They may not take enough money (they underestimate the risk and price it too low) and/or they don’t husband it well (among other things, they pay too much in bonuses and dividends, leaving too little for policyholders). If that happens on a big enough scale, they go bust when the payments come due (or alternatively, engage in all sorts of fraud to escape payment on legitimate claims). Satyajit Das, who was interviewed for this program, and others have stressed that if you required protection-writers to post enough margin to allow for jump to default risk, CDS would be uneconomical. Pretty much no one would buy it. Underpriced insurance produces over time losses to insurers, and insurers who write enough are pretty certain to hit the wall, eventually. And that is pretty much what happened.
So we have the show coming out firmly behind industry PR, yet denying it when challenged.
The next new charge they turn to is our remark:
Similarly, the account hews to conventional lines in making Goldman out to be the poster villain in the CDO market, yet merely in passing, has Deutsche Bank CEO Joseph Ackermann admitting to being one of the banks that stuffed Landesbanken like IKB full of toxic debt. Crisis junkies know that Deutsche Bank trader Greg Lippmann was the most aggressive middleman in helping subprime shorts like John Paulson create and sell CDOs designed to fail (and they had their own program, Start, which was a synthetic CDO series just like Goldman’s better known Abacus trades).
They argue that they thought this oversight was OK because Goldman made “millions” while Deutsche lost “billions.”
That isn’t true. Goldman lost $1.2 billion on mortgage securities. It appears to have made boatloads of money on a net short position 2007, but the subprime short traders at Goldman were eating more than half the firm’s total risk exposure, and Blankfein and senior management told them to cover their short. They appear to have traded the February 2008 swoon and March rally in subprime well, but they went into the worst of the crisis net long and took losses that more than offset their earlier short gains (admittedly, they were behaving badly in 2008 in scrambling to offload risk, but they had lots of company in that exercise).
The producers next turn to this charge:
The segment provides anecdotes of the crazed subprime lending, but fails to explain how mortgage backed securities and CDOs were linked to lending (or most important, that CDOs came to drive demand for RMBS, which in turn drove demand to the worst loans).
They next quote a former Georgia governor stating that mortgage loans were securitized tranche and a “feeding frenzy” resulted. That is not an explanation.
The next bit they quote was one I had pointedly avoided addressing because it so embarrassingly wrong and hate criticizing Chris Whalen, who is very sound when it comes to traditional banking:
Chris Whalen (Tangent Capital Partners): Let’s say I have a pool of mortgages– I have a thousand mortgages from California and I want to package these up. But I decide, “Well some of these mortgages may be subprime and I wanna buy a little bit of credit default insurance.
Martin Smith: And by doing that, you improve the profile—
Chris Whalen: In theory, yes.
Martin Smith: –of your CDO—
Chris Whalen: That’s right.
Martin Smith: So you can sell it better.
Chris Whalen: And I can go get a rating for it, too. I could go to Moody’s and say, “Look. I have laid off 2% of the risk on this portfolio. Shouldn’t I get a better rating than if I just sold the pool as it was?”
Martin Smith: So you take a lot of crap—
Chris Whalen: That’s right.
Martin Smith:–a lot of mortgages that are—
Chris Whalen: Hi– hideous crap.
Martin Smith: But you insure it and the credit agency says, “Hey. That’s a good idea.”
Chris Whalen: Yes. Yes.
I’m sure Chris knows the difference between a mortgage-backed security and a CDO, but listening to this, you’d have no idea they were two different beasts. And he is completely wrong about CDS being used within any CDOs (and only an extremely limited basis in RMBS in the late 1990s) to lay off risk and get a better rating (there are such things as synthetic and hybrid CDOs, where all or most of the assets are credit default swaps, but that bears no resemblance to what Chris is discussing).
There’s no excuse for including this garbled bit of an interview. I know Frontline spoke at length to at least one serious CDO expert who could have prevented misinformation like this being conveyed.
They also quote Gillian Tett saying that “many investors” took more risk (RMBS risk? CDO risk?) because they thought they had laid most of it off with CDS. I beg to differ. “Investors” ex hedge funds rarely use CDS. The reason is that it typically requires the creation of a unit that can post collateral and that in turn requires regulatory approvals for most fiduciaries.
And the use of the term “investors” obscures which player were the biggest holders of CDOs and users of CDS to reduce the risk: the banks themselves. We described in ECONNED The “investors” that did that in a serious way weren’t what viewers would consider to be investors. It was Eurobanks who (remarkably) retained or in some cases even bought AAA tranches of CDOs, then hedged the risk with CDS, which their firms treated as “freeing up capital” which was tantamount to discounting all the future profit of the trade (interest from the CDO less hedge and funding cost) and booking it in the current period. This was system gaming on a massive scale, and was one of the big culprits in the crisis (US firms like Merrill and Cit wound up in similar positions through different mechanisms).
So let me repeat: the program never makes clear the relationship between RMBS and CDOs, and it fails to explain that CDOs kept the subprime party going well beyond its sell by date, and were directly responsible for driving demand to the very worst mortgages.
The discussion of the second hour contains a remarkable display of cognitive blindness. We pointed out, as did many readers, that the program set up the false dichotomy of “bailout versus disaster”. In any complex situation, there are always alternatives besides taking a specific course of action and doing nothing. There was robust debate before the crisis of various options for dealing with insolvent banks, including the approaches used by Nordic countries in the early 1990s and forced haircuts of bondholders (Nouriel Roubini was early to argue for this remedy).
Yet remarkably, in trying to defend that the show did not convey that message, Mike Wiser repeats a quote from Phil Angelides, which was particularly prominent by closing April 24 program (emphasis mine):
The real question is, how did it come to be that this nation found itself with two stark, painful choices, one of which was to wade in and commit trillions of dollars to save the financial system, where we still end up losing millions of jobs, millions of people lose their homes, trillions of dollars of wealth is wiped away, and the other choice is to face the risk of total collapse.
I’m gobsmacked that Wiser can’t see that the section he quotes supports my point perfectly. He provides more material from Angelides, Born, and Stiglitz which all talk about how regulators had become lax well before the crisis. And he also boldfaces this bit:
NARRATOR: For three decades, Washington had steadily moved to a hands-off attitude towards Wall Street. And with little oversight, inside these black boxes, Wall Street had created a host of complicated but lucrative financial products.
This is completely besides the “bailout or disaster” message. This accepts and reinforces the meme that by 2008, the authorities’ hands were tied, they had no choice other than rescue the now-terribly-important financiers they had allowed to run wild.
This is nonsense. I’ve said, for instance, that I’m not convinced that Bear was insolvent, as opposed to illiquid (remember how Jamie Dimon kept crowing what a great deal he had gotten, until he seemed to realize that if he kept saying that, any future rescues might not have such generous subsidies?). Bear was initially offered a 28 day loan by the Fed, which, with no explanation ever given, was turned into an overnight loan, enough to carry the beleaguered firm into the weekend. Why no 28 day loan? That would have given the Fed and Treasury a ton more time to look at Bear’s books and make a much better assessment of the impact of a firm failure on the markets, particularly CDS counterparties, and make other provisions for dealing with any fallout if the run on Bear was warranted.
And as we mentioned in our original post, the “we lacked authority” is also bollocks. Regulators have powerful tools. Frontline reported Paulson told Wells Fargo that it would be declared capital insolvent if it didn’t play ball. They could have threatened the investment banks with halting or curtailing their direct access to Fedwire (in simple terms, the Federal Reserve operated payment system used to settle net interbank balances at the end of day and for large payments during the day). The authorities didn’t just lack will. They had been part of the problem and were unable to recognize how disastrous their policies had been until the evidence was undeniable.
I recognize the Frontline producers strove to adopt a polite tone in their letter and they may take umbrage at this reply. But the stakes are too high to allow for courtesy to dilute a message they seem unwilling to hear. This disagreement isn’t a matter of mere aesthetic or reportorial choices. Most people in this country are not very well informed about the financial services industry. As you can tell from the comments on the Frontline website, many take this series to be gospel truth. For Frontline to let the banking industry off easy does the public and the cause of reform a great disservice.