Brian Fuller's blog on the media, marketing and content creation

The silver lining in the market meltdown

Posted on | March 18, 2008 | No Comments

At this writing, the Dow Jones Industrial Average is up nearly 290 points, but the financial markets and the U.S. economy are still in free fall. The Bear Stearns liquidation sale has become a windfall for J.P. Morgan and another assumption of risk on the U.S. taxpayer, as the Fed has guaranteed some $30 billion in Bear paper…risky paper at that. Some of the steps taken over the weekend have not been taken since the Great Depression.
Symbolically the legendary Goldman Sachs forecaster, Abby Joseph Cohen, was replaced as that institution’s main forecaster of short-term market moves.
The beginning of a long economic malaise in the U.S. economy is upon us as our debt chickens have come home to roost–and poop all over the front room. I don’t say that lightly, as I consider myself an optimist on most matters.
So given all that gloom and doom–and there’s plenty more in store–where’s the silver lining?
It lies in the fact that the creation of clever new investment vehicles in the past decade, such as collateralized debt obligations–investments that no one really seems to understand–has come amid the decline of mainstream media newsrooms. Coincidence?
Cuts, especially at big papers like The Wall Street Journal and The New York Times, have hurt those papers’ ability to carve off the best and brightest of their reporters to spend weeks or months researching complex stories, like the rise of CDOs, and write about them. And even if outfits like CNBC have grown in that time, don’t expect them to do the heavy lifting; they’re cheerleaders for the financial services industry. (Plus, their medium does not lend itself to explaining complex stories).
New media has exploded and there is doubtless some interesting work out there (see the YouTube video below), but most of it is the tree falling in the forest. Unless you’ve got a big audience (and that audience includes policy makers), you’re going to have a hard time making any noise.

The refrain today as the markets melt down is “we just don’t know how the story ends.” Maybe, just maybe, we’d have a better sense if we weren’t smothering the traditional press.

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No Responses to “The silver lining in the market meltdown”

  1. Loring Wirbel
    March 18th, 2008 @ 9:55 am

    It’s arguably as important for the average citizen to understand CDOs and Structured Investment Vehicles as it is to understand Obama’s race policy or Hillary’s exit strategy from Iraq. Yet I don’t see many citizens rushing to grasp the very things that matter most in their lives. The mainstream press has to be there for the push, but citizens also have to provide the pull of being willing to be active participants in public policy — and most want only to be entertained.

  2. Ryerson
    March 18th, 2008 @ 10:54 am

    I would like to believe that more media would have helped avert this crisis, but I don’t think history supports that conclusion.

    Let’s consider all the historical financial crises that occurred when there were that many reporters chasing stories. I can think of a lot not prevented. I can’t think of any that were (though I’m sure there were some.) Though I agree with Loring that reporters attention might have made for a more informed citizenry which would be all to the good.

    I think the underlying issue here is pretty common and pretty simple: greed versus prudence. To juice returns, people kept finding ways to make more and more aggressive loans. No money down puts the lender at huge risk if the housing market goes down. How you package those loans afterwards is a bit irrelevant if the loan was imprudent to begin with.

    But, of course, these loans are clearly imprudent only because they’ve failed. Looking forward it is hard to call a housing bubble. Is it merely a hot market, or has it become overheated? When do you take your money off the table because you think you’re at too much risk? That’s the equivalent of market timing and the track record of market timers isn’t great.

    I think many involved in the crisis failed to step back and do that clear-eyed risk assessment. If it goes bad, what will they lose versus what will they make if it continues? Having been involved in some of those kinds of discussions in a business setting, I think most people are optimists (or greedy if you prefer), and discount risks. It takes a lot of discipline in a business to respect and listen to someone who says “No, we can’t.” The natural inclination is continue to listen to and reward the hard chargers who keep saying “Yes we can” right off the cliff.

  3. wretch
    March 19th, 2008 @ 10:09 pm

    Bull cookies. Those loans were imprudent because they were imprudent. Derivatives based on those loans were garbage because the loans were garbage.

    Why did most of us realize this only in retrospect? Because most of us aren’t all that unlike me — the kind of person Loring justly bemoans — the type of person who doesn’t have the patience to try to decipher the obfuscatory prestiloquadation spewed out by the salesmen at banks who needed to sell loans, the salesmen at Wall Street brokerages who needed to sell financial instruments, and the free market faithful who believe that there is nothing a bank or brokerage can do that is immoral, illegal, or even ill-advised if the short-term result is a profit.

  4. Loring Wirbel
    March 20th, 2008 @ 8:06 am

    Actually, I think there’s more in common with Ryerson’s and Brian’s comments than either of them think. Ryerson gives us the operationalist view, similar to those who initially cheered the invasion of Iraq, who said “it only was wrong when it started messing up.” I get the feeling from Ryerson’s last paragraph that he does not agree with this, but says this is the way the public sees it. And that’s correct.

    Brian takes the position I do, that it is fundamentally wrong and unsound to bundle bad loans for re-sales and future speculations, just as it is fundamentally wrong and unsound to pre-emptively invade another nation without immediate and overwhelming justification (meaning troops at the border and missiles at the ready, not tenuous stories of WMD and al-Qaeda). The operational success of doing something bad does not count for doodly-squat, end of story.

    But as Ryerson says, the overwhelming American attitude of can-do says that you get nowhere for saying “This is not something that is prudent to do. We don’t want to go there.” Instead, you get brownie points for saying, “Aw hell, go for it. We’ll seek forgiveness later.” And we won’t stop being a Pottery Barn culture until we stop rewarding stupid activity because it’s brash and risk-taking. Risk is fine as long as it’s ethically justifiable. Beyond that, it’s stupid and criminal.

  5. Ryerson
    March 20th, 2008 @ 9:45 am


    I agree with you that until those who make such mistakes suffer the full punishment of the free market, they’ll keep doing it. The problem, of course, is that the perpetrators end up holding all of us hostage to a government bailout.

    And to clarify, I think the original loans were bad. Repackaging them was also bad, but only a continuation of the original sin of writing them in the first place. You need to address the source, not the downstream. Why did these companies take these risks?

  6. wretch
    March 20th, 2008 @ 11:57 am

    I’ve read commentary that states that Wall Street came up with the idea of the mortgate derivatives and exerted influence on banks to make the bad loans. The banks reportedly acquiesced because they could turn around and sell the loans, thus getting them off their books — no risk for them.

    Can’t say first-hand if all that’s true, but if it were true, it wouldn’t surprise me.

  7. wretch
    March 20th, 2008 @ 12:03 pm

    …so why take the risks? Because in theory all the risk would be borne by somebody else — investors who deserve what they get (even if they’re at other investment banks), and the government, which cannot justify letting the largest commercial institutions fail.

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