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Distinguished Women in International Affairs

"Notes from a Financial Foxhole: The Media, the Message, and the Mess"

A lecture by Diana B. Henriques
Senior writer, The New York Times

November 5, 2008

Thank you for that kind introduction, Elizabeth. Let me say how humbling it is to be asked to join the parade of outstanding people this lecture series has brought before you. We all owe Jack and Pam Cumming, who help underwrite this series, a large debt — one that we can repay only by making good use of the insights, knowledge or provocations we all gather from these events.

And we never, ever know what seeds we might plant in the minds of other people tonight. I suppose many of us have had the experience of hearing someone tell us that their lives were changed forever by some profound observation or astute advice we gave them long ago — in a conversation we cannot even remember. That would probably be how Professor Ralph Purcell would react if he were alive today to hear me say how powerfully he influenced my political education with a little two-word sentence he pounded into me at a seminar in 1969.

"Perception governs," he said.

As I recall, he was an old foreign service hand; at least, I know he could summon a steady stream of political attaches from Embassy Row to visit our seminar sessions. But while I can remember none of them, I have never forgotten the Purcell Imperative — in politics, he kept saying, perception governs. He did not mean that reality did not matter — or that history's actors could create their own reality, however different it was from the verifiable facts on the ground.

He did not believe in the Big Lie, and he believed the Truth had a nasty way of slamming into us mid-stride — as it did in the attacks of 9/11 and the inundation of New Orleans during Hurricane Katrina.

It's unfortunate that this age of constant spin and dishonest repetition has smudged the clarity his insight had back in 1969. Here's what he was trying to teach us: People do not react to what is really, truly happening — they react to what they think is happening. Even if a building is on fire, people will evacuate only if they personally believe the building is burning. Or, as history can attest, if a lot of people believe a squadron of Martians has landed in the New Jersey countryside, they will panic just as thoroughly as if the Martians were really there. It gets more insidious, too: If the public thinks that anyone with Asian roots poses a danger during a war with Japan — they'll act on that perception in tragic defiance of the reality. It is the perception of reality that governs people's actions — not reality itself. I've never forgotten that. And it's made me a better reporter because I have always understood the power of accurate reporting to nurture accurate public perceptions. Indeed, that is the only power that journalism has, or has ever had.

We can all wonder what it would be like to live in a world of pure rationalists who do not allow their perceptions to be distorted by emotions or lies or delusions, whose perceptions are always based purely on objective facts placed in a context of logic and reason. A world where the public's perception of what is going on actually matches the facts on the ground. I've devoted my career to trying to get us a little closer to that nirvana. But if you need any further evidence that Dr. Purcell was right, that we are governed not by reality but by perception, I give you: The Financial Crisis of 2008.

It is hard to focus on such distorted perceptions at such a remarkable time in our history, on the day after this historic election. But those who come after us will probably agree that it would be hard to find a period in our recent history when the gap between what was actually going on and what the public thought was going on was so vast. Even the perceptions of an observer as well-positioned and well-educated as former Federal Reserve Chairman Alan Greenspan were so much at odds with reality that he has been moved to offer one of the most remarkable public admissions of error that I have ever seen in my journalistic career.

How did the public get it so wrong? Why did the American people's perceptions move so very far away from the reality that was happening every day in the financial markets, in the bank offices, in the real estate agencies all across the country? And what lessons can we all take from this brutal collision with financial reality that we have experienced over the past three months?

First, how did the public get it so wrong? Well, there's been a lot of finger-pointing lately — it usually happens in a crisis as stubborn and scary as this one. And as usual, everyone's first candidate for scapegoat was the media. We have been accused of failing to raise the alarm about this gathering financial storm before it was too late. If we had only warned people in time, all this might have been averted, these critics say.

Of course, they bring up the savings and loan crisis of the 1980s — because we all must admit that, but for a few prescient stories in the mortgage industry press, the media largely deserve the blame we got for not noticing in time that the ill-named "thrift" industry was imploding. I suppose the S&L crisis was, for business journalists, what the "weapons of mass destruction" fallacy was for Washington reporters — our Waterloo. Our Vietnam. Yes, gallantry was shown by a small handful of reporters. But it didn't change the outcome or prevent the grievous losses.

And it wasn't the last time we didn't ring the fire bell in time. American business journalism was slow to shift from pretty competent economic news to more sophisticated financial news in the 1980s. In the 1990s, we were slow to see the dangers erupting in the international currency markets of South Asia and Russia, and we were too blinded by the starburst of truly dazzling technology to see the rising levels of helium in the dot.com bubble. We constantly found ourselves scrambling up that steep left-hand edge of the financial learning curve.

But we did climb that slope — we learned all those painful, humiliating lessons. And this time, as predatory lenders pumped subprime loans into the circulatory system of the global economy, almost all of us in the media called it right — and called it right very early.

I've got a little evidence to offer.

In March 2000, I worked on a joint print/TV investigative project with ABC News, revealing how predatory home equity loans were being diced up into mortgage-backed securities and sold to investors by … Lehman Brothers. You've heard of them? The publicity drove the abusive mortgage company into bankruptcy, but it didn't awaken federal regulators or Wall Street to the dangers of high-risk loans finding their way into investors' pockets, into pension fund accounts and onto bank balance sheets.

"Mortgage Markets Are Out of Control" wrote Gretchen Morgenson in our Sunday Business cover — back in August of 2003. She warned way back then about "the huge mortgage-backed securities market and the leveraged traders who call it home." Something big was changing, she said. The mortgage bond market, which was about half the size of the Treasury market in 1996, had grown to become 25 percent larger than the vast Treasury market. And it was becoming increasingly volatile, suggesting that big traders could not adequately hedge their risks.

She cited one expert who "fears that the size of the market and the fact that so many players are heavily leveraged make a disaster almost inevitable."

I remind you: That was in 2003, from a Pulitzer-winning financial journalist writing in one of the nation's largest, most visible newspapers.

In June 2004, Ed Andrews wrote in The Times about the dangers of low-cash loans made to low-income homebuyers. He said: "A kaleidoscopic array of mortgages for people with little cash or overstretched budgets has enabled families of modest income to take on debt that once would have been beyond their reach." But with the Federal Reserve expected to raise interest rates, experts worried that recent first-time buyers could be pushed into default, causing housing prices to weaken. Exactly what happened three years later, in fact. But no one listened then.

Ed also wrote an amazingly prescient piece called "Loose Reins on Galloping Loans." It ran in July 2005 and it warned: "For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans." They had warned banks not to let homebuyers borrow too much. They had fretted about no-money-down mortgages and "liars' loans" that required no proof of income. "The impact so far?" Ed asked. "Almost nil."

Why? Because federal banking regulators were reluctant to take corrective action, for fear they would stifle financial innovation, one bureaucrat told him.

Then in November, 2005, Gretchen opened a column asking: "Does a financial train wreck lie dead ahead for American consumers and investors?" The chief economist for a big Chicago trust company thought it did, warning that "even a mild recession next year could spiral into something ugly, given the combination of rising interest rates, off-the-charts consumer debt and a cooling housing market."

Oh, and here's a story in The Times reporting that "Wall Street's big bet on risky mortgages may be souring a lot faster than had been previously thought." Default rates were rising sharply, and Wall Street was beginning to pinch off new credit. Several mortgage lenders had collapsed, in what some feared was just the first wave.

That story ran in January of 2006 — almost three years ago!

Even our editorial page weighed in with timely and unambiguous warnings. It cautioned on Sept. 17, 2006 — two years ago — that "the housing boom would never have lasted as long as it did if mortgage lenders had to worry about being paid back in full," instead of being able to sell off loans as soon as they made them through the creation of mortgage-backed securities. That editorial warned, "In a market so vast and dynamic, everyone knows that if mortgage defaults should rise, the damage could reverberate throughout the financial system." And defaults were inching up; so were interest rates on adjustable rate mortgages. The editorial concluded: "We sure hope someone in charge has a fallback plan."

Clearly, no one did — and we reported that, too.

Throughout 2007, we ran a drumbeat of stories warning about these accelerating risks. We ran headlines like "Crisis Looms in Mortgages" and "Loan by Loan, the Making of a Credit Squeeze." And we kept clanging the fire-bell well into 2008.

And believe me, we were not alone. We were being sometimes followed, and sometimes beaten, on a host of top-notch stories that ran all across the much-derided "mainstream media." The Wall Street Journal, The Washington Post, the LA Times were raising a clamor. So were the big business magazines. And around the country, big local papers were tracking the rise of predatory lending and the spreading swamp of home foreclosures in their own neighborhoods. The best of the televised magazine shows were doing some excellent work, too. The warnings, in a word, were everywhere.

So I make absolutely no apologies for how the media tracked this financial hurricane. The government, the financial industry and the American consumer — if they had only paid attention — would have gotten ample warning about this crisis from us, years in advance, when there was still time to evacuate and seek shelter from this storm.

So why didn't anyone listen? Why were all these cogent, well-documented warnings simply ignored for so long? When the reality we were writing about was moving in such alarming and potentially devastating directions, why did the public not perceive the danger they were in long before now?

I'd like to offer a few possible explanations, suitable only for the first rough draft of the history unfolding around us. They are educated guesses — but they may hold some lessons for policymakers-in-training, so I offer them to you tonight.

First, I suspect we in the media are not entirely blameless, however loudly we sounded the alarm. I think our message about this dangerous shift in reality was muffled by a lesson we had taught the investing public far too successfully in the past — the lesson that the only market that matters is the Stock Market. We have become a nation of shareholders, picking stocks and mutual funds for our retirement plans, watching the bouncing Dow and feeling poor or rich depending on where it sits when the wheel stops spinning each day. And the media helped train us to do that.

But all these alarming stories I just described didn't mention the stock market. They were focused on the far more complicated bond market — the credit market where the government sells Treasury bonds to finance its deficit, where your home town sells municipal bonds to build a new school, where your corporate employer sells short-term notes to cover next week's payroll until cash arrives from its big customers, who in turn will sell short-term notes to pay those bills. And that marketplace — the credit market -- has been far less rigorously covered. Typically, Treasury rates move in teensy tiny basis points -- the charts don't look anything like as dramatic as the Dow on a good day. Bond prices go up when bond yields go down — how confusing is that? And Jim Cramer and his ilk never get very excited about new bond issues, do they? So the bond market never became a staple of the nightly business news, and most Americans learned to pay no attention to any so-called financial crisis until it started to damage the stock market -- no matter how important we told them that crisis was. And in the credit market crash of 2008, by the time the stock market started to take on water, it was way too late to get to shore.

Moreover, as markets have become more complicated, parts of the media's message has become less so. The paradox of the 24/7 televised news cycle is that we spend less time on each topic than ever before. You know that old joke about a specialist being someone who learns more and more about less and less until he knows everything about nothing? Well, we're going the other way — we're learning less and less about more and more. Compare today's sound bite to those of yesteryear, and you'll see how truly abbreviated our treatment of each story has become. And in this nonstop news cycle, you need constant novelty — to keep people from changing the channel, you have to keep changing the subject.

So we spend a little time on the credit markets and then a little time on Joe the Plumber and then a little time on Paris Hilton. Well, a little time is probably enough for Joe and Paris — but it's nowhere near enough for the credit markets.

So while many in the media were raising the alarm, and raising it early, many people were unable to separate what they thought they knew about financial news and what was actually happening. Their perception was: Hey, the stock market is doing okay, so how bad could things be? And they acted on that perception by shrugging off the warnings we were delivering month after month, year after year.

Second, I think this dangerous misperception persisted far too long because there was no one at the helm who could persuade the public that it should change its perception of our economy — no one who could, or did, convincingly and clearly describe the dangerous new reality that was taking shape all around us. Let me say this loud and clear to my beloved colleagues at The Elliott School: Talk all you want about the knowledge and training necessary for effective policymaking and successful public administration. If you can't persuade citizens to correct their misperceptions about something so critical to their own well-being as the economy, then you should just go start an organic garden or raise sheep somewhere and get out of the public arena.

I've spent my career observing how business and financial leaders communicate — and believe me: We would all be better off right now if some of them had spent part of their careers observing how I, and lots of other reasonably successful journalists, communicate. Instead, we find ourselves led by a sort of high-priest class of government leaders, fiercely intelligent people who know these financial complexities right down to the ground, people who know almost all there is to know about global markets and arcane derivatives — but who don't know the first thing about politics, and who have never been required to explain themselves clearly and convincingly to anyone but their intellectual peers.

Secretary Henry Paulson is a very smart man, a man who long dazzled his colleagues at Goldman Sachs with his grasp of complex business technicalities. He may even be one of the most financially astute men to sit in Alexander Hamilton's chair since Mr. Hamilton occupied it himself. And I am absolutely certain he does not want to go down in history as the Treasury secretary who presided over the collapse of the American banking system that Mr. Hamilton starting putting in place 230 years ago.

But when he took office, Mr. Paulson had no experience — zero, nada — in making an effective, persuasive policy argument to the guy on the street, or even to the folks in Congress. He'd never needed to do that before — few people at Goldman Sachs ever have. Just to give him the benefit of the doubt — his daughter, after all, is a fine young journalist at the Christian Science Monitor — I took the time last weekend to listen to an entire speech on corporate governance and accounting that he gave at The National Press Club in 2002, when he was still at Goldman Sachs. I can give you the website if any of you suffer from occasional bouts of insomnia. You'll find it very beneficial.

As my friend and New York Times colleague Floyd Norris has pointed out, it is impossible for an elected official to rise to the pinnacle of his or her career without ever speaking extemporaneously to a reporter or without ever enduring at least one raucous press conference on an inconvenient topic. But it is routine for a corporate CEO to do exactly that — indeed, it is absolutely expected. CEOs talk to their senior executive staff and some respectful lower-level employees. They talk to their supportive and admiring directors. Checkbook in hand, they may talk to a few grateful legislators or other office-holders. And they talk to their peers — intelligent, well-educated practitioners who understand the Wall Street shorthand and are fluent in the idiom of global finance.

If they ever, ever found themselves facing a raucous press corps with a bunch of unscripted questions, they would immediately fire the public relations team that let that happen. And it would never happen again.

I know whereof I speak — I've been pounding on the doors of those corner offices for more than 25 years, and I've posed my share of inconvenient questions. Many were the days that I have pined for my long-ago tenure as a political reporter in the New Jersey statehouse. The politicians I covered back then might think they could lie to you, or bully you, or dazzle you with phony numbers or even stonewall you. But they never, ever thought they could just avoid you in perpetuity — not if they expected to stay in office or seek a higher office.

A quick bit of unscientific research shows that for much of our nation's history, and certainly for most of its modern history, the Treasury department has usually been led by former elected officials — the Senate Banking Committee has produced a nice number of them, but there are a scattering of governors and representatives as well.

But the last Treasury secretary who had successfully sought public office served more than 15 years ago — he was former Texas Senator Lloyd Bentsen, who served in the first two years of the Clinton administration. Beginning with his successor, Goldman Sachs veteran Robert Rubin, we have had a string of Wall Street and corporate executives, with one Harvard economics professor thrown in for good measure. Whatever they know about the complexities of modern finance — and it is a vast amount, believe me — they know far too little about talking plainly and persuasively to the American consumer.

As for the Federal Reserve — well, that august institution is genetically incapable of speaking clearly to the public. And for good reason. Since every hiccup and sneeze at the Fed is watched on Wall Street for some hint of future interest rate moves, the Fed long ago perfected a sort of opaque gobbledygook that could be deciphered by only a handful of bond market analysts, and then only after they'd parsed it for several days. Don't take my word for it — just Google the term "Fedspeak" and see what you get. Indeed, one ambitious blogger offers an essay called "Fedspeak for Dummies." I would certainly fall in that category.

So here's my point: As America headed toward this crisis, it was being led by people — smart people, knowledgeable people — for whom the vocabulary and grammar necessary for talking to the American public about finance was, literally, a foreign language, one that they could not speak — indeed, one they had never needed to speak in their pre-Washington lives.

The result, I suspect, was that as government leaders grew more concerned about the events that were being described in the media — and our reconstructions of this unfolding crisis show they were definitely becoming more concerned — they simply were not able to convey their concern to the public in a way that was comprehensible and convincing. And that greatly limited their ability to generate public support in Congress for their emergency measures, as we all discovered when the House of Representatives voted down an urgently awaited rescue plan that apparently had been inadequately explained and insufficiently sold to a suspicious Congress and a resentful public. The public and legislative perception of this emergency measure was that this was a taxpayer bailout for greedy bankers — and that perception governed, not the dire reality that Secretary Paulson and Mr. Bernanke saw so clearly.

Finally, I think there is one other cultural chicken that came home to roost in this crisis, one that saddens and alarms me more than any of those I've mentioned so far. For more than a decade, the American public has been trained by various political antagonists to pay no attention to that silly old mainstream media. We — the mainstream press, the network news operations, the weekly news magazines — have been increasingly dismissed as just another special interest, trying to push its own agenda, its own perceptions. I thought I would collect a few examples of this litany of scorn for you, but the effort just got too depressing. Year after year, campaign after campaign, the media has been branded as biased and unreliable — all the media, not just the Op-Ed essayists and the increasingly partisan media of the Internet and the cable networks. All of us — business journalists apparently included.

The proof that this approach is interfering with an accurate public perception of reality can be found almost daily. Look at how fearlessly politicians on the stump continued to repeat the same factual errors over and over again — even after the mainstream media disclosed those mistakes and offered up the correct information. For example, I have seen frequent references to the percentage of America's oil and gas that comes from Alaska. There is a correct answer to that question. But it is not the one that the governor from that state consistently gave in her speeches on the stump. Perhaps she knew that her supporters probably were not looking to the mainstream media for validation of her facts — they had been carefully taught to ignore a fact, even if it is true, simply because it comes from a "mainstream media" it does not trust. And the fearless repetition of inaccuracies is just as brazen on the other side of the political fence — there are liberals who would not believe tomorrow's weather forecast if they heard it on Fox News.

Now, I'm not whining about this media-bashing. I've long since gotten used to it, and I've taken worse from some of the white-collar criminals I've helped identify and bring to justice over the years. I grieve over the way the line between information and opinion is being regularly smudged in the so-called "new media" that is so much a part of our daily life. But I'm not here tonight to talk about how this media-bashing hurts me — I'm here to talk about how it hurts the very political leaders who helped sponsor this strategy of scorn in the first place.

When this financial crisis hit, and then worsened at an astonishing pace, these leaders suddenly needed a credible way to get an important message out to the American public — hey, we're in a financial crisis, a really bad one, and Congress must act and act fast or we're all in the soup.

And not only did these leaders lack the skills needed to frame that message themselves — they never had to do it much back at Goldman Sachs and the Fed — but they were operating in a political environment that had deliberately discredited the one institution that still had those financial communication skills — the mainstream business media.

So, in finance as in politics, facts became partisan things, defined one way by Lou Dobbs and another way by Paul Krugman. If you disagreed with the source, you ignored the warning.

Well, let me point out a simple but obviously much overlooked truth: It does not matter one bit if the guy who warns you that your house is on fire is a Democrat or Republican, a conservative or a liberal. Your house is still on fire. Facts are stubborn things, and financial facts are the most stubborn of all. The financial markets are truly nonpartisan — they understand fear, they understand greed but they don't understand blue states and red states. Never have. Never will.

So it is emphatically not true that Americans were not warned that we were heading for a financial meltdown. What may be true is that they simply did not believe our repeated warnings — because they had been carefully taught to ignore and mistrust us, even when we were trying to warn them about a dreadful storm that has now, finally, hit home.

In effect, the media was cast in the role of the new Cassandra — that tragic figure condemned by the gods to accurately predict each new disaster, while forever being disbelieved by the people she was trying to warn. To refresh your Greek mythology: Cassandra was really unhappy about this frustrating situation. But the folks who really suffered were the ones who refused to believe her warnings.

So what can we learn from all this? First, I think we need to learn that we have to be willing to talk about — and listen to — the complex messages our marketplace puts out, even when "American Idol" is on the other channel. Second, to be effective, financial leaders need to be more than smart — they need to know how to talk to and educate the American people about these complexities that affect us all so much. And finally, government leaders need to re-examine their learned mistrust of all those folks in the so-called "mainstream media" — folks who, by and large, really are committed to the mainstream, the middle of the road. As the old proverb goes, if you kill the messenger because you don't like the message — it's really hard to send back a reply. All I can hope is that these lessons will not be lost on our financial and political leaders — or on our readers and viewers, or on those of us working in this world of financial journalism.

If they are, it will be far harder for all of us to navigate through this storm and the ones to come.

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