Long before subprime mortgages and credit default swaps became household terms (not to mention ruinous financial products), Janet Tavakoli was sounding the alarm about their danger to the financial system.
Tavakoli, the principal of Tavakoli Structured Finance, was by and large ignored until it was too late. The same could be said for Harry Markopolos, the accountant who spent the better part of a decade warning that Bernard Madoff’s operation was a Ponzi scheme.
There’s a lesson to be learned from the experiences of these two lone voices, according to New York Times business columnist Joe Nocera.
“I definitely think the lone voice is worth talking to and listening to,” he says. “They are not always right, but very often they have a point.”
That tip emerged during a conversation with him about All the Devils Are Here: The Hidden History of the Financial Crisis, the new book he co-authored with Bethany McLean about the recent financial crisis. I asked Nocera to identify some of the mistakes made by journalists in covering the crisis and suggest how they can avoid them in the future. I came away with three pieces of advice to go along with his tip about seeking out the “lone voice.”
1. Examine the fundamentals of the business, not the stock price.
Nocera cited a former mentor at Washington Monthly who told him “the best thing a Washington reporter could do is get out of Washington and see what’s happening on Main Street, and see how politics is affecting Main Street.”
Nocera said the business press missed the subprime story because it treated the big lenders such as Countrywide Financial as stock stories, rather than examining how their business was playing out on Main Street.
“On Main Street, you had subprime companies that were making a killing based upon lending millions of dollars of loans to people who could never hope to pay them back,” he said. “With rare exceptions, … reporters just didn’t roll up their sleeves and see what was going on, even as the phrase ‘subprime lending’ became louder, more pronounced and a bigger part of the culture.”
2. Don’t shy away from complexity.
Nocera said the complexity of the financial products involved in the recent crisis led many journalists to accept what they were being told, rather than dig deeper to understand how the products worked.
“The stuff that blew up on Wall Street was incredibly complex,” he said. “Listen, I don’t exempt myself in this. I didn’t know what collateralized debt was until the crisis …. You need to have known that it was important, and you need to have invested some time in understanding what was going on.”
3. Ask what’s next.
Moving from the recent past to the present, I asked Nocera what he thinks is the most important story in the financial world right now.
“I think journalists in general are underestimating the problems that remain inside the banking system,” he said, “but that requires a lot of forensic-accounting-type work to try and ferret it out.”
Once again, the complexity of the story could be a factor. Nocera also offered a simple question that anyone covering Wall Street should start asking.
“Wall Street is already on to the next thing,” he said. “A great question to be asking now is: ‘What is the next thing?’ I don’t know what it is myself, but that’s a question I plan on starting to ask very soon.”