The State of American Journalism

[Ral]

Would the Last Honest Reporter Please Turn On the Lights?
By Orson Scott Card

Editor's note: Orson Scott Card is a Democrat and a newspaper columnist, and in this opinion piece he takes on both while lamenting the current state of journalism.
An open letter to the local daily paper — almost every local daily paper in America:
I remember reading All the President's Men and thinking: That's journalism. You do what it takes to get the truth and you lay it before the public, because the public has a right to know.
This housing crisis didn't come out of nowhere. It was not a vague emanation of the evil Bush administration.
It was a direct result of the political decision, back in the late 1990s, to loosen the rules of lending so that home loans would be more accessible to poor people. Fannie Mae and Freddie Mac were authorized to approve risky loans.
What is a risky loan? It's a loan that the recipient is likely not to be able to repay.
The goal of this rule change was to help the poor — which especially would help members of minority groups. But how does it help these people to give them a loan that they can't repay? They get into a house, yes, but when they can't make the payments, they lose the house — along with their credit rating.
They end up worse off than before.
This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.
Furthermore, Freddie Mac and Fannie Mae were making political contributions to the very members of Congress who were allowing them to make irresponsible loans. (Though why quasi-federal agencies were allowed to do so baffles me. It's as if the Pentagon were allowed to contribute to the political campaigns of Congressmen who support increasing their budget.)
Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?
I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."
Instead, it was Senator Christopher Dodd and Congressman Barney Frank, both Democrats, who denied that there were any problems, who refused Bush administration requests to set up a regulatory agency to watch over Fannie Mae and Freddie Mac, and who were still pushing for these agencies to go even further in promoting sub-prime mortgage loans almost up to the minute they failed.
As Thomas Sowell points out in a TownHall.com essay entitled "Do Facts Matter?" ( http://snipurl.com/457townhall_com] ): "Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush's Secretary of the Treasury."
These are facts. This financial crisis was completely preventable. The party that blocked any attempt to prevent it was ... the Democratic Party. The party that tried to prevent it was ... the Republican Party.
Yet when Nancy Pelosi accused the Bush administration and Republican deregulation of causing the crisis, you in the press did not hold her to account for her lie. Instead, you criticized Republicans who took offense at this lie and refused to vote for the bailout!
What? It's not the liar, but the victims of the lie who are to blame?
Now let's follow the money ... right to the presidential candidate who is the number-two recipient of campaign contributions from Fannie Mae.
And after Freddie Raines, the CEO of Fannie Mae who made $90 million while running it into the ground, was fired for his incompetence, one presidential candidate's campaign actually consulted him for advice on housing.
If that presidential candidate had been John McCain, you would have called it a major scandal and we would be getting stories in your paper every day about how incompetent and corrupt he was.
But instead, that candidate was Barack Obama, and so you have buried this story, and when the McCain campaign dared to call Raines an "adviser" to the Obama campaign — because that campaign had sought his advice — you actually let Obama's people get away with accusing McCain of lying, merely because Raines wasn't listed as an official adviser to the Obama campaign.
You would never tolerate such weasely nit-picking from a Republican.
If you who produce our local daily paper actually had any principles, you would be pounding this story, because the prosperity of all Americans was put at risk by the foolish, short-sighted, politically selfish, and possibly corrupt actions of leading Democrats, including Obama.
If you who produce our local daily paper had any personal honor, you would find it unbearable to let the American people believe that somehow Republicans were to blame for this crisis.
There are precedents. Even though President Bush and his administration never said that Iraq sponsored or was linked to 9/11, you could not stand the fact that Americans had that misapprehension — so you pounded us with the fact that there was no such link. (Along the way, you created the false impression that Bush had lied to them and said that there was a connection.)
If you had any principles, then surely right now, when the American people are set to blame President Bush and John McCain for a crisis they tried to prevent, and are actually shifting to approve of Barack Obama because of a crisis he helped cause, you would be laboring at least as hard to correct that false impression.
Your job, as journalists, is to tell the truth. That's what you claim you do, when you accept people's money to buy or subscribe to your paper.
But right now, you are consenting to or actively promoting a big fat lie — that the housing crisis should somehow be blamed on Bush, McCain, and the Republicans. You have trained the American people to blame everything bad — even bad weather — on Bush, and they are responding as you have taught them to.
If you had any personal honor, each reporter and editor would be insisting on telling the truth — even if it hurts the election chances of your favorite candidate.
Because that's what honorable people do. Honest people tell the truth even when they don't like the probable consequences. That's what honesty means . That's how trust is earned.


read, in entirety, then discuss.

[rwh11385]

Exactly.

[e30sd]

god bless you, without a disclaimer i would have been so confused!

card is a crazy mormon dude. homophobe. evolutionary skeptic. voted for bush. characterizing him as a "democrat" to tug on hippy-liberal-pinko-commie heart strings and visions is quite clever.

while i agree that the state of news is in a veritable cesspool, blaming it on the operators would be wrong. look at media ownership. start from the top. the top 50 media outlets in the united states are owned by 5 mnc's. all they care about is teases, tag lines, tits, and something else with a t.

and i would hardly consider him as an ambassador of the fourth estate. for fucks sake i'd rather have elizabeth hasslebeck than that douche.

[ragged325]

Heeter, I think you need to explain your MC Hammer pants theory about who is to blame for the credit crisis to Navye30. Seriously, if any of that were true don't you think McCain would be talking about it? Or are you saying he's too stupid to bring up the "truth", but you want him to be president anyway?

[Ral]

^^ I would not be surprised if everything you said is true. (the name Orson Scott Card is also used by a science fiction writer. I seriously doubt they're the same.) However, his dissertation still rings true to me. He is probably wrong about much of what he writes but this article puts it very well.

edit: that was for the e30sd

[rwh11385]

Ragged, I explained fine in the other thread and you never cared to reply back.

Explain how the government is in no way responsible for initiating the credit crisis. GO!

[ragged325]

Heeter, I've got two kids, a wife, an 80-yr old house, a business and a cold and don't have time to reply to your 15K posts. Maybe if you made a real argument I'd try.

The article is trying to look at the surface of the problem and blame everything on the Democrats. This is simply not true. There are a lot of people/institutions to blame. Here's a quick cut and paste with some of the basics about the real cause of the problems:

Here's what happened: After 9/11, the Dow tanked and the Fed feared a recession so they cut the federal funds rate to darn near zero, that's the rate they charge banks to borrow from them. The problem was they held the rate at this point for a ridiculously long period of time. So banks were awash in cheap money, so they lowered the cost of borrowing to everyone else.

Hedge Funds and Private Equity went through the roof, every Tom, Dick and Suzy with decent credit was able to buy a house. So after a couple of years, housing values started shooting up because everyone could afford a house(this is known as a bubble). Also, shady mortgage brokers were selling loans to people knowing they couldn't afford them, and not all of these were sub prime loans. Most of them were loans to folks with good or decent credit who were trying to buy more house than they could afford, the sub prime market is only about 1/5 or less of the total market.

Now here's where wall st. comes in. The mortgage brokers didn't care if you could afford the loan in 2 or 4 years because they were going to sell the loan tomorrow to a Wall St. bank. Wall St. did some magic and turned crap into gold (in the eyes of S&P) called Mortgage Backed Securities (MBS). Now fast forward to 2007, interest rates start to rise and people with interest only loans start to default in large numbers.

At that point, someone starts doing the math and realizes that the high ratings S&P gave the bundled mortgages was just wrong (crap is crap). At that point, the MBS market dries up because no one really knows what the paper is worth. This leads to bear stearns going under first. This caused banks to revalue the MBS on their books downward, which caused them to record huge accounting losses.

The other kicker, it also forced the banks to have more cash on hand to meet regulatory standards. If a bank has to keep it's cash, then it can't lend it out. If a bank isn't making loans, there is a domino effect because the world runs on credit.

First people couldn't borrow to get houses or cars, then companies had to pay through the nose for their loans. Finally, banks just stopped lending altogether. Which is where we are today, banks all over the world are hording their cash because no one knows how much they actually need to have on hand to meet their regulatory requirements because they don't know the true value of the MBS they have on their books that they can't sell because crap is crap.

Larry Washington
Associate - Debt Finance
Anonymous Big Financial Firm

[ragged325]

I guess it'd be simpler if I just said it was the Democrats' fault and the press didn't want to mention it. Here's an article that discusses how credit default swaps work and how they affected the credit crisis:

Let's start simple: bonds. Everyone knows, more or less, what a bond is: it's a debt obligation held by one company. The easiest way to explain it is an IOU. As Wikipedia says:

A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest.

But a bond is simply a lot like an IOU: I borrowed $10,000 from you, and I'm going to pay you back at the end of x period of time, plus interest. Bonds are considered very enticing for individual investors that are looking for an investment that is more or less guaranteed: you're not likely to get a lot of money from investing in bonds (depending on the bond, of course: some are riskier than others), but you'll certainly not have to worry too much about losing money in them either. Safe, secure, no problem. For the most part.

Well, someone didn't agree. At some point, someone decided that the bond they held might not be worth what it was valued at. In other words, they were worried that the bond would default, which, as we all know, is when the expected payments on the loan stop coming. That's generally bad news for bond holders, because suddenly they've got this bond that's not worth what they bought it for, and there's a loss of money. So, the person who's worried about the bond defaulting suddenly goes from a position of security to a position of uncertainty. They want their safe and secure investment back.

Enter credit default swaps, or CDSs. In simple terms, a CDS is an insurance policy. You, as the holder of the bond, are worried about the value of that bond. So, you approach a third, unrelated party and ask for a credit default swap on your bond. This third party then agrees to give you a credit default swap, as long as you pay them, say, 2% of the bond's value every month/year/pay period. It's pretty much your standard insurance policy: someone pays someone else in case something happens. If the bond defaults, the insured party gets the value of the bond from the insurer. If the bond doesn't default, then the insurer keeps the premiums.

Are you with me so far? To sum up so far, we've got an insurance policy. The bond is the person being insured. The bond holder is the beneficiary of the insured, and the insurer is the person selling the CDS, or the insurance policy.

So far it's pretty easy, and everything is working normally. The problem arises when investors start using credit default swap to speculate. To understand how they can do what you'll see below, you have to remember that these instruments are unregulated. Much like the drug dealer on the street, he can sell to anyone, regardless of any laws in place to prevent him from doing just that.

Speculators saw CDS objects as a golden opportunity to go for awesome. Here's how it works: rather than getting an insurance policy on a bond they own, they just get the insurance policy. Yes, they can do that. This is the equivalent of insuring the neighbor you don't know very well. If he dies, you get cash, as long as you paid the premiums. The problem is, when you get a CDS on a bond you don't own, you're betting it will default. In some cases (though this is hard to verify for obvious reasons) there may even have been cases where people bought CDSs for bonds that did not exist.

So now we have life insurance policies from multiple purchasers on one person, and may even life insurance policies on people that don't exist. It gets worse.

As more and more companies got involved in CDSs, they began to notice their debt obligations piling up. They needed a source of cash to cover these obligations. What better source than the objects that resulted in those debt obligations? That's right, companies that sold credit default swaps then went out and bought credit default swaps in the wonderful financial practice known as hedging. That way, if the company's sold CDSs defaulted and they had to pay up, they could at least count on the CDSs that they held to pay them back.

The problem is that everyone was doing this, and no one was making sure that the companies that were responsible for paying the event of a bond default could actually pay up. After all, even though these are insurance policies, when you've got policies on people that are entirely unrelated, and possible people that don't exist, no one's going to care about something like capitalization in the even of default. And with everyone hedging their bets, it certainly seemed like a safe bet.

There was also a lot of leveraging going on. Leveraging is (thanks to Tonal Crow for the correction) using your assets as collateral to make a loan. And then using that loan to get more assets. In the case of CDSs, the CDSs were used as collateral to get more cash, with which to either issue or buy more CDSs. Now, we can look back and say "what were the banks thinking, loaning based on this collateral", but at the time, remember, CDSs seemed like very secure instruments, adequately hedged, and safe in a lot of respects.

Then, one of the companies failed.

The hows and whys the company failure is the topic of many debates, but it doesn't particularly matter here. What happened was the company realized it's debt obligation was greater than its actually debt payment ability, and it died. Unceremoniously. When it died, all the bonds that it had defaulted, and everyone who had a CDS on those bonds suddenly found themselves in the position of either paying up, or getting cash.

Panic. And rightly deserved panic. When you're hedging your bets, and one of your bets suddenly goes from possibly not paying enough to not paying at all, your careful hedging strategy is completely and totally undone. And worse, all the companies involved in this CDS market are irrevocably tied together, whether they know it or not, by their hedging moves. As one link in the chain fails, the whole chain begins to fall apart as the defaults move down the line. One company defaults, and then...well, everyone defaults eventually. That's the fear anyway.

Did you catch the important part of that previous paragraph, by the way?

Whether they know it or not.

The reason for the current credit freeze is at least strongly related to this Credit Default Swap mess. There's an unregulated market for these instruments. Every single company could hold one of these. They are considered debt at this point, and bad debt at that, since they're unlikely to ever pay off. As a result of this uncertainty, banks are hesitant to loan money. To anyone. Anyone could be holding one of these toxic instruments.

Even worse, consider the fact that no one ever really expected to have to pay these obligations, in the end. At least, not to the tune of what they've actually got. But as the meltdown continues, more and more of these CDS instruments are coming due, and there you have it.

CDS instruments are not the H-Bomb of the current financial crisis, but they are certainly exacerbating the problem. Banks don't like to lend money to people with a lot of debt for the obvious reason that they might not be able to pay it back. Well, imagine asking for a loan from a bank and, when they ask you how much debt you have, you answer, "I could have a lot, or a little. Guess."

You know how the bank will react.

This is not the H-Bomb of the current financial crisis. This is the straw that broke the camel's back. Unfortunately, it's a big straw.

There's some speculation that regulating the CDS market and getting all the information out into the open will help unstick the credit and resume money flow. This may be true, but if it happens, be prepared for one hell of a dive in the market as companies reveal all the debt they have. And it could be a lot; there was a lot of leveraging going on.

So there you have it. Credit Default Swaps in a nutshell.

[e30sd]

larry, excuse heeter. his self-proclaimed noble winning expertness only materialized within the last few months. for most of the happenings of this decade he was at middle school dances porking heffers and reading boyslife while masturbating to images of california girls.

[rwh11385]

For someone without a lot of time and a cold, you sure do type a lot.

But I guess all those words explain how the article doesn't point out any bias or failure to tell the story fairly from both sides.

[rwh11385]

And yes, I knew what bonds were and understand insurance, and feel that I bankers got somewhat they deserved and hope it takes them down a peg.

But I guess because Wall Street was involved, the government was in no way involved in the promotion of eased lending to LMI families with fair credit...

[ragged325]

If you read what I wrote I said it was a cut and paste. I'm not an expert in high-finance. I'm just saying there is a lot more to this than "the Democrats are to blame". From what I've read, it's a pretty complicated isssue. It sounds like your argument is that you don't want to know all of the real details, but you'd like to see more articles blaming the Democrats.

Here's another:

Overleverage is a condition that occurs during optimistic times in the economy. Due to the optimism, lenders are allowed to carry higher debt to equity ratios. Prior to 2004, lenders could go as far as a 12 to 1 ratio. In English this means you must have $1 dollar on hand for every $12 dollars you lend.

Then in 2004 the SEC under Bush appointee William Donaldson allowed five investment banks to operate beyond this regulation by 30-40 to 1 ratios. The five were Lehman Brothers, Bear Sterns, Merrill Lynch, Morgan Stanley, and Goldman Sachs. The first three no longer exist. While there were many agents of greed in the market, someone had to funnel the money to allow the housing bubble to grow. These new ratios allowed the funneling of bad loans through large investment banks, who could operate well above regulatory levels. This was not a change in law, hence did not involve congress. All of this was done at the SEC specifically, which operates under the executive branch.

Perhaps that was too much information in the intro, but it actually goes far deeper. For instance one of the men lobbying the SEC for the change was Hank Paulson, then representing Goldman Sachs as their CEO. Of course he went on to become the secretary of the treasury. Ultimately these large investment banks were frustrated by a slow economy following 9/11 and the internet bubble. Only one segment of the economy was showing real growth, and that was housing values.

When I say housing values, I don't mean to suggest that there was a notable surge in home ownership. Rather there was a large appreciation of the value of homes, which was benefiting home owners. As long as that value stayed locked in those homes with established mortgages, that money couldn't enter the market. There became a strategy of getting people to either buy new homes, or refinance their existing mortgages to a market based rate. All of this occurred with the assumption that houses would just continue to raise in value, so the threat of foreclosures was offset by the foreclosed property having gained value. These new loans could be bundled up and sold in the market for profit.

The problem was that no one had the capital to handle all these new loans. Hence the SEC change in regulation. Now these big investment banks acted as buyers and sellers of all of these collective mortgages, as they were able to far exceed the requirements of equity imposed on those actually making the loans. Before long everyone was hoping into the game. People were flipping houses left and right, builders were putting new houses up at record pace, and brokers were playing fast and loose with arranging loans for approval. Appraisers were being pushed to over value homes based on little actual housing data. Insurance companies like AIG began investing much of their capital in this money making machine.

Finally the worm began turning. First in the sub-prime loans, but representing a far bigger correction in housing values. As the sub-prime loans began to readjust based on lowering home values, foreclosures began happening when home owners couldn't afford the new rates, and couldn't refinance to a fixed rate. This increase in foreclosures began increasing the supply of homes, which in turn lowered the market price further. Before long everyone was getting stuck with loans that were greater than the value of the property, and the big investment bank valve closed. This left smaller banks with debt they had planned to sell in the market, but could no longer find a buyer for. Eventually the problem began taking down the larger banks and the market with it. This forced all banks to close off credit lines, as they no longer were sure what was bad and what was good on their own books, let alone any other bank's.

So here we are now looking at this in amazement. I don't mean to suggest that there weren't many other factors leading to this crisis, but without these large banks the other factors would have been contained. The problem was the overleveraging of five banks, and the blame squarely rests on the Bush administration for allowing the SEC change to regulation.

[ragged325]

BTW, I'm not the one starting these threads.

[rwh11385]

If you read what I wrote I said it was a cut and paste. I'm not an expert in high-finance. I'm just saying there is a lot more to this than "the Democrats are to blame". From what I've read, it's a pretty complicated isssue. It sounds like your argument is that you don't want to know all of the real details, but you'd like to see more articles blaming the Democrats.

I'd like the press to give all the details and the whole story, not just the one they want to publish.

I'd like fair reporting, not one twisting everything so that Wall Street is fucking Main Street. A lot of people who didn't make their mortgage payments are Main Street are responsible, as well as government involvement.

[Jon325i]

Ragged325 - great posts, all of them. You nailed it. My brother used to be employed with Wachovia in the mortgage division until recently (you can probably guess where he is now.....and no, he's not on Wells Fargo's payroll either). Through him, I've heard all about this mess most commonly referred to as the mortgage meltdown. He worked in this industry since around 2000/2001 so he had a front row seat to what was taking place. He also knew, through the grapevine, some of those shady brokers whose only concern was making the deal.....clients' ability to repay be damned, they wanted their commission. Some of these brokers he knew of are now doing time in Federal prison.

As for the article at the beginning of this thread: why does this kind of news reporting get suppressed until the shit hit the fan so hard it broke said fan? American Journalism is a sick fucking joke at best - and I don't care which side of the political aisle the reporter sides with, the current product being produced stinks.


Jon