Subprime journalism

Gretchen Morgenscreed and her enabler, the NYT, are determined to test the lows in financial journalism.

Last week Morgenscreed did a column on the mortgage-backed securities market. It was about how the subprime lenders were effectively hiding the problems by excessively tolerating defaults. As I noted at the time, Calculated Risk eviscerated her column. Here's some tastes:

• CR: "I’m fascinated by the way an Inspector General report that found perverse incentives by well-meant HUD regulations and field office interpretations thereof is now being used to “prove” that servicers do not exercise good business judgment, or that servicers use loss-mit to “hide” delinquencies."
• In response to Morgenscreed's statement that "it is worth remembering that the rollover of nonperforming loans was central to what made the savings and loan mess of the early 1990s so disastrous," CR says, "It might be worth talking to the 99% of students of the S&L crisis who thought that there were a whole lot of other candidates for the “central” problem. Holy Selective Memory, Batman. (Hint: can you spell “commercial loans”?)" [I should note that invoking past crises is a trademarked Morgenscreed trait which I've called cooking the journalistic books.)"
• Responding to Morgenscreed's statement, "how many of these workouts actually succeed is a question for which investors and even regulators have no answer," CR says: "So since we have no answer, let’s assume that it’s a bad thing. Absence of evidence means never having to say you’re full of shit.

In the end, CR makes the point that the investors knew or should have known the risks. How obvious is this? It's a point that even Ben Stein makes in today's NYT column:

What is a junk bond if not a loan to a subprime borrower? Why do lenders think that those bonds are called “below investment grade?” It’s not just a formality or a quaint term. Over long periods, junk bonds really do default at rates far greater than investment-grade bonds. That’s why smart lenders used to demand very substantial premiums for making those loans.

Morgenscreed follows up on last week's triumph with a front page so-called "News Analysis," not to be confused with her regular column playing on the business page (more about that problem below). And she's up to the same tricks as last week. Invoking Enron and WorldCom, she shrieks about the coming disaster. Once again, she's speculating with little support. Again she seems to be worried that sophisticated investors were fooled into thinking they were investing in treasuries.

The gist today is that the mortgage market is on the verge of collapse, with serious consequences to the real estate market. Of course it would be bad if the market did collapse, but Morgenscreed has nothing to add to this blindingly obvious observation than more innuendo and speculation.

This, of course, is Morgenscreed's usual game of grabbing attention at any cost (see my Morgenson archive). Unfortunately, this time she's tainting a market that, by reducing the transaction costs of borrowing, has enabled many people to realize the dream of home ownership. Of course that shouldn't give the market a free pass to engage in fraud – but again, this is a pretty sophisticated market. I doubt Morgenson will have much effect on investors.  More likely, if she's lucky, she'll be able to generate a Senate hearing or two, and maybe some unnecessary and costly regulation.

Finally, there's no excuse for letting an opinion piece, nearly identical in tone and approach to her column just a week ago, pass as a front page news story.  How ironic that a rant about the next Enron should be misleadingly packaged and presented. What exactly is this "news analysis" thing, when Morgenscreed's opinion is elsewhere in the same paper.  Is she getting two "opinions" or what?  This is not the first time for this questionable practice. Is it too much to expect the NYT to follow the usual standards of the business and demand clear separation between opinion and news?

Comments

[Robert Schwartz]

"Is it too much to expect the NYT to follow the usual standards of the business and demand clear separation between opinion and news?"

Standards? They don't need no stinking standards.

[Archer Martin]

I know from the tone of your comments you won't be even remotely receptive, but the Financial Times, admittedly without Morgenson's theatrics, has been saying pretty much the same thing (actually, no, the content has been more alarming) since mid-December. There have been many long investigative pieces and commentaries on the explosive growth of the collateralized debt obligation market (which is what she was discussing, but she referred to the securities as "pools," which they are, rather than using the term of art), its lack of transparency, the staggering leverage and periously little underlying equity,the lack of understanding of the rating agencies, and so on. I suggest you get a free two week pass and read a bit before taking aim at Morgenson, at least on this topic. She's largely right, except for her tone. Even the FT's very respected, award winning lead economist, Martin Wolf, has been predicting a decline in the equity markets (he finds them consideragly overvalued even after the events of two weeks ago) and as recently as this past weekend, John Authers had a column on how precarious the credit markets are, particularly mortgage credit. The FT is a sober paper read almost exclusively by finance professionals. I suggest you get the facts before you take aim at Morgenson again.

[Larry E. Ribstein]

How was my criticism of Morgenson's story inaccurate? The FT is not alone. I recently praised a WSJ story:
http://busmovie.typepad.com/ideoblog/2007/02/good_and_bad_re.html
The existence of good reporting on this topic hardly justifies Morgenson's rant -- indeed, it only makes it look worse.

[sa]

archer, the point is not that this market was headed of ran implosion, it is that people knew what they were doing. some subprime lenders will go under no doubt but so do many other companies evry other day, much to teh grief of their investors and employees. just because one can predict a crash doesn't mean the boom wasn't justified.

[Jason Bradfield]

After reading Morgenson's article I felt suspicious - it seemed like too much of an opinion piece. Thanks, now I know why. Journalism like this is going to fuel populist hysteria, which will lead financially illiterate politicians to propose new regulations.

The funny thing is I don't even know what regulations politicians are going to propose to fix the "problems" associated with the mortgage market, but I can say with almost absolute certainty that the cure will be worse than supposed ailment.

If there is economic hardship (real or imagined, deserved or undeserved, it matters not) then watch the political fall-out. Specifically, John Edwards will jump all over this issue like a fat kid on a cupcake.