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by Stephen P. Pizzo and Phillip L. Zweig

Originally published in the Columbia Journalism Review

It’s media awards season, and journalists who have submitted their best stories for the Pulitzer Prize and other prestigious competitions are eagerly awaiting the judges’ decisions. Inevitably, this year’s entries will include many fascinating post-mortems by financial journalists on the regulatory and managerial missteps that led to the demise of Bear Stearns, Washington Mutual, Lehman Brothers, and other financial behemoths. Fascinating and important as a first draft of history, to be sure—but not deserving of journalism’s highest honors.

In revealing the miscalculations and incompetence of the key players in this fiasco, these so-called “tick tocks” raise a troubling question: Where were these same news organizations while the biggest financial story of their lifetimes was playing out nationwide?

The answer: Generally out in left field. Their post-mortems with their condemnations of the failures of others—regulators, bankers, politicians corrupted by industry favors—to our ears ring hollow since they invariably fail to explore even the possibility that the business press itself failed in its main job: to adequately warn the public of the abuses and dangers mounting on its main beats.

In our opinion, credit standards over the last decade deteriorated to disastrous levels at least in part because of the decline in journalistic standards over the same period. While smart, tough regulation and supervision could have headed off this crisis, perverse regulatory and financial services industry incentives precluded that. That left only tough, savvy, and timely reporting to protect us, or at least mitigate the damage from the catastrophe we now face.

Although there were numerous pre-2007 (B. C. or Before Crash) stories in the major national media asserting that housing prices had reached bubble proportions, journalists failed to link the surge in originations of toxic mortgages by lenders to the contemporaneous boom in the global distribution of mortgage-related securities by Wall Street firms until it was too late. And while national publications produced episodic good work on predatory lending over the years, it is notable that some of the best was done by regional papers, including a 2005 series in the Atlanta Journal-Constitution and a lengthy 2003 expose on Citigroup in Southern Exposure. Clearly, more was needed.

We believe journalists missed numerous opportunities, beginning as early as the late 1990’s, to expose the flaws and abuses behind the housing bubble. If, for example, some enterprising reporter had taken the time to examine and reveal how now-defunct lenders like Washington Mutual, Golden West Financial, and IndyMac were generating spectacular but illusory “profits” by making loans to people who could never repay them, such revelations might have forced regulators to shut them down before they inflicted fatal damage on the financial system and economy. Hand-wringing, he-said, they-said articles on whether or not there was a “housing bubble” were simply not enough to provoke outrage and action.

There are precedents for exposes on irresponsible financial institutions that influence events instead of merely report on them after the fact. The American Banker’s early 1982 coverage of the imprudent energy lending practices of Oklahoma’s Penn Square Bank led to its closing on July 5, 1982, and National Mortgage News’s mid-1980’s exposes on troubled savings and loan institutions were the first to point to malfeasance on a massive scale. We know because we were there. Zweig worked on the first expose, Pizzo the second.

So what went wrong? Several things:

Diminished media resources: We’re now paying the price for a crippled media industry and the deterioration of investigative journalism, a trend that was underway even before ad revenue began its inexorable migration from newspapers to the Web. As a result of financial pressures, serious journalists are now forced to spend time cranking out dross, and have less time to dig for new material.

Risk aversion: Financial pressure also creates a climate of fear. Few journalists are daring enough, particularly when newsroom budgets are tight, to try to get ahead of a complex story that might not pan out. One reason: when editors cut staff, one of the first things they consider is the byline count. In such a climate, editors favor the obvious over the maybe.

Lack of editorial vision: Media outlets are organized around beats and bureaus, and reporters guard their territories jealously. News managers suffer from the same affliction and are not universally known for their management prowess. No one was working the “systemic risk” beat, because there was none. The left hand of government didn’t know what the right hand was doing, and newsrooms were no different.

Lack of technical expertise and historical perspective: Only a handful of financial journalists truly understand the workings of financial institutions, markets, and the complex derivative instruments that caused the financial system to unravel. Even those few failed to make the connections between credit default swaps (CDS), collateralized debt obligations (CDO), and subprime mortgage-backed securities (MBS) until this deadly alphabet soup had already poisoned the system. Fewer still have been around long enough to recognize the parallels between this crisis and earlier ones. Just as the housing boom was driven by the notion that home prices could only go up, the energy mania of the early 1980’s was based on the assumption that oil prices would rise forever.

Impaired Objectivity. Many journalists forgot that they’re supposed to speak truth to power. The tradeoff between the competing needs for access and arms-length scrutiny got way out of whack. Financial journalists might well ponder the mostly flattering coverage of Alan Greenspan. Only recently are we informed that the “Maestro” thwarted virtually every attempt to regulate risky derivative instruments and subprime lending.

The media’s ineffectual pre-crash coverage should now inspire some serious soul-searching for a new sense of journalistic mission. In selecting prize-winners this year, judges could take a good first step in that direction by rewarding foresight and courageous investigations, not 20-20 hindsight.

Stephen P. Pizzo and a team from the National Mortgage News won the George Polk and Gerald Loeb awards for their coverage of the savings and loan episode. He is a co-author of “Inside Job: The Looting of America’s Savings and Loans.” Phillip L. Zweig won the same awards for his 1982 American Banker series on the imprudent lending practices of Oklahoma’s Penn Square Bank and is the author of “Belly Up: The Collapse of the Penn Square Bank.”

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