Almost none of Australia's business journalists sounded notes of caution in early 2007. How did they get it so spectacularly wrong?
This is the second installment in a five-part series on Australian business journalism. Read part one here.
Though the financial crisis was not of our making, Australia in the boom years was buoyed by all-time high commodity prices and a tide of easy money surging out of the United States.
Banks and non-banks alike tapped heavily into overseas credit markets, financial engineers had a field day, US private equiteers launched highly leveraged bids for iconic Australian companies like Coles, Myer, Qantas, Nine and Seven, and at the tail end of the boom ill-advised local institutional investors were even buying up the same AAA-rated but incomprehensible derivatives that were about to turn toxic.
Certainly Australian financial journalists could not have busted open the American sub-prime debt markets -- a task that even journalists in the US did not take on, with a few exceptions like Gillian Tett, then-capital markets editor of the Financial Times
, who turned an anthropologist’s eye
to credit markets and warned they had turned insular as early as 2006. She was branded a doomsayer.
Is it a failure of the financial press that Tett was such a lone voice? Veteran Australian business journalist Trevor Sykes argues it is “a bit much to expect the journalists to declare the sky is falling if no one at the top of the banks or the regulation system has detected the fact”. He cites the chairman of the Federal Reserve from 1987 to 2006, Alan Greenspan, who admitted after he stepped down it had been beyond him to understand the risks and complexities of some of the most toxic mortgage-backed securities, called "collateralised debt obligations" (CDOs), emerging from Wall Street:
“I didn’t understand what they were doing or how they actually got the types of returns … that they did. And I figured if I didn’t understand it and I had access to a couple hundred PhDs, how the rest of the world is going to understand it sort of bewildered me”.
Sykes defends finance journalists, saying that “of all the people you could throw rocks at -- the banks who lend the money, directors who run the company, the regulators -- the business media are the only ones who don’t have any official role whatsoever. We don’t have any responsibility, except a general moral one to try and tell the truth”. At the same time, in a telling indictment, he believes Australia’s business media was more credulous in the lead-up to the latest financial crisis than ahead of the 1980s stockmarket crash:
“In 1987, in Australia, the collapse here involved people like Alan Bond, Christopher Skase and various others who had been criticised in the press … there were plenty of warning bells there. I think there was more scepticism at that stage in the rest of the press as well. This time around though it whacked us on the bottom a bit. We didn’t see how far all the counterparty risk was going to go.”
Until the tide goes out, it can be difficult for the journalist -- no matter how skilled -- to see where the rocks are. But Fairfax Media business writer Michael West, who wrote the Margin Call column at The Australian
from 1999 until 2007, says that’s the job: “I think you can work out where the rocks are. I wrote about the first CDOs -- it was Deutsche Bank's NEXUS notes, I think -- because I had a fund manager ring me up and say, 'I don't know exactly what it is, but this is going to be trouble, you can just tell'. They looked like a great de-risking product, but of course in the end they became ever-more complex and leveraged and could never be unwound. Look at the most complex things, that's where the rocks are.”
West’s anecdote also underlines the importance of contacts and the value of a timely tip off -- without which a journalist might never twig to what’s going on inside a company. That doesn’t mean waiting for a whistleblower to call, as investigative journalist Ben Hills told Crikey
: “There were people on Wall Street who knew what was going on. It's the journalist's job to find them. Don’t go along with the crowd saying how wonderful it is … put in a few extra phone calls, there's always going to be a sceptic. Every bull run that's ever existed, there's always a lone voice crying ‘hang on a second!’ It's not rocket science.”
Yet would even the best journalism have prevented the financial crisis? Hills doubts it: “There is no doubt the GFC and all the scams and frauds that underpinned it would never have gone as far as they did if there'd been proper scrutiny and that's the job of the business journalist. But do I think a Woodward and Bernstein going in and exposing Goldman Sachs in 2006, would that have stopped the whole scam? No, I don't think it would have done. I just don't think journalism on its own would have done it.”
In Australia, some finance journalists were more sceptical than others. ABC business editor Ian Verrender was running the finance desk at The Sydney Morning Herald
in the lead-up to the crisis and says his team of journalists went in hard. Kate Askew took on the private equity
“locusts", and relentlessly exposed the rorts and conflicts in the failed bid for Qantas. Stuart Washington’s robust coverage
of Babcock & Brown’s Alinta takeover drew the ire of chief Phil Green, at the time one of the big swinging dick merchant bankers around Sydney. Ditto Lisa Murray, now in China for The Australian Financial Review
. Verrender recalls one Murray story
reporting that Allco had been forced to correct a mistake in its accounts but had somehow arrived at the same bottom line result regardless. First thing in the morning, Verrender recalls, then-Allco chief the late David Coe rang him up furious at SMH
’s coverage: “He says ‘your girl doesn't understand’. I say: ‘I'm not an accountant, I don't really understand accounting, I'm an economist. But the one rule I do know about accounting is, you don't start with your bottom figure and work your way up to the top. You start from the top and work your way to the bottom’. At that he hung up on me!”
"Here and in the US, the lessons of previous busts are never learned."
Adele Ferguson, who joined The Australian
as a columnist at the peak of the boom in early 2007 after more than a decade at Business Review Weekly
, wrote rigorous examinations for example of financial and property group MFS in early 2007 -- particularly, its exposure to 'management letting rights' scams in Queensland -- which generated a lot of push back from the company. On the front lines before and during the crisis, Ferguson is reluctant to "fail" Australian business journalism:
“No one really knew the GFC was ready to descend. There was a lot of hype at the time. I know myself, writing about private equity, there was some scepticism. For example, KKR putting in a proposal to try and buy Coles would have been the biggest tax dodge out. Just like over in the US, and journalism here, some of what I wrote was exuberant. The critical stuff tends to get drowned out. Just like the dotcom boom, your perceptions change. Greenspan talked about 'irrational exuberance' at the time. Right now, how often have we read that we've got a property boom and the bubble will burst? But it's kept going for years. There's been lots of really critical pieces over the years about property prices, but it is all about timing. What about those people who listened and acted on those critical articles, they would have missed out on the gains?”
Ferguson’s observation is backed up by the research of Sophie Knowles, Gail Phillips and Johan Lidberg in their article for the Australian Journalism Review
, “The framing of the Global Financial Crisis 2005-08: a cross-country comparison of the US, UK and Australia”. They found that there was a tendency here and in England to see the financial crisis, at least initially, as an American import.
Sykes himself admits as much, saying at first he thought the subprime crunch was “a Yank problem”. Given their housing mortgage market was so different, with predominantly non-recourse loans, “should an Australian be worried about that? At first glance, no. What we didn't know about was the derivatives anchored to the housing market.”
Australia’s benchmark ASX200 index, barometer of the sharemarket, peaked in November 2007, before it fell sharply -- and kept falling -- as the crisis intensified through 2008 until March, 2009, by which time the combined value of our top 200 companies had more than halved.
Almost nobody saw it coming. Michael West now observes:
“There were very few journalists who questioned market valuations and too many believing the bull market was going to run forever. This reflects the tendency of business journalists, rather than using logic and history as their guide, to reproduce the views of those they report on in business. I don't want to brag as the guy who nailed the top of the market, but I wrote a piece in October 2007 saying it was way over-valued. But I'd been calling the top of the market for two years. I was a huge critic since 2005. I was also a huge critic of the dot-coms a year before that blew up.”
In his 2003 Quarterly Essay Bad Company: the Cult of the CEO
, Gideon Haigh picked over the tech wreck -- and its Australian reverberations, with the collapse of One.Tel and insurer HIH -- and asked how we had fallen under the American spell, dressing up corporate greed as leadership. He cited Yale economic historian Robert Shiller, who wrote that a credulous media is a pre-condition of all bull markets: "The history of the speculative bubble begins roughly with the advent of newspapers".
Here and in the US, the lessons of previous busts are never learned. One of the great virtues of Sykes' book Six Months of Panic
is to show the crisis was in no way unprecedented: Wall Street’s risk-addled "plague dogs" have, time and again, inflicted huge losses on the rest of America -- from the savings and loans fiasco in the '80s to the failure of hedge fund Long Term Capital Management in the late '90s -- and are only emboldened when they are insulated from the fallout with bailouts from regulators fearful of financial meltdown, in a classic moral hazard.
For Australian business journalists, says Sykes, the cautionary tale may be against parochialism, given recent busts -- from the ‘87 crash to the tech wreck to the financial crisis -- have all happened in the backwash from overseas. “Maybe we should spend a lot more time looking at what's happening globally than we do here. But the punters out there aren't really interested in the grand sweep -- what they want to know is how to make a quid next week.”
Read part three of
Watchdog or Lapdog? tomorrow.