With the Quasimodos of Wall Street hauled down from their corporate bell towers this week to Washington by a vengeful Congress and leering media, it may seem as though justice is finally being done. But for all the zeal in the press for the corporate perp walks, it's regrettable that members of the media aren't being put in the dock themselves and questioned about their role in this financial disaster.
Whenever an aircraft crashes into American soil, federal officials send a rapid response team to examine the debris and determine the cause. When a consumer is sickened by tomatoes or a leaf of spinach, the feds trace the contaminated food to its source with the fervor of a SWAT team.
But what happens when calamity befalls an investment bank, and the precious cargo is shareholder equity, which plummets to earth at alarming speed? Should the federal government investigate the cause of such a catastrophe, distinguishing deliberate negligence from simple human error?
The accusation itself—akin to "When did you stop beating your wife?"—hung in the air like the smell of gasoline.
On March 16, Bear Stearns lost nearly all of its book value and had to be sold at rock-bottom prices to JPMorgan Chase. The Securities and Exchange Commission is now examining the days leading up to this event to determine whether Bear's collapse was in some way precipitated by investors betting on the bank's failure.
SEC enforcement officers are investigating whether any of 50 hedge funds made false statements with the intent to undermine public confidence in Bear. That, of course, is a felony, classified generally as securities fraud.
But the larger, much thornier, issue involves the reporters who disseminated those statements. If they knew the information was wrong, their actions could also be construed as crime (aiding and abetting), and so too would a refusal to discuss their sources with federal authorities (obstruction of justice).
In Bryan Burrough's seminal account of the Bear crash in the August issue of Vanity Fair, he described it as an unprecedented bank run, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Burrough identified one financial reporter in particular, CNBC's Charlie Gasparino, as the bane of Bear Stearns.
As a media consultant to a number of large-cap companies, including financial services firms, I've frequently challenged CNBC reporters and producers on the use of anonymous sources and tangled personally with Gasparino.
During that fateful week of March 10, CNBC segments on Bear Stearns were peppered with phrases such as "executives I've talked to," "people whom I trust," "traders are saying," or the catch-all "my sources." Rarely, if ever, did reporters name the individuals to whom they ascribed doubts about the firm's liquidity. In fact, Bear Stearns said it had confirmed its good standing with creditors, even though the stock had been declining for some months.
On Tuesday, March 11, Gasparino reported on CNBC: "This is having a business impact. There are people that are thinking, that are calling up their traders, their brokers at Bear, and are talking about maybe pulling funds from Bear, and that's the problem here. Rumors sometimes create runs on the bank and it builds on itself."
The next day, CNBC's David Faber asked Bear CEO Alan Schwartz: "So when I'm told by a hedge fund that I know well that last night they tried to close out a mortgage credit protection position with Goldman Sachs that they had bought a year ago—Bear was the low bid-and I'm told that Goldman would not accept the counterparty risk of Bear Stearns, you're saying you're not aware that that would be the case?"
Schwartz quickly denied it, but the accusation itself—akin to "When did you stop beating your wife?"—hung in the air like the smell of gasoline.
As Faber himself explained the following day: "Bear Stearns was having a liquidity crisis over the last 24 hours and ... it's simply a matter of confidence, and regardless of the fundamentals of the underlying credit, boy, we've seen that across the board, if people lose confidence they pull their lines."
Now the SEC wants to know who gave out negative information about Bear and how it was disseminated. The agency is keenly aware that short sellers sometimes try to use the press as a conduit; that was the subject of its 2006 investigation of Overstock.com, which had been a target of negative press.
Those earlier subpoenas to financial reporters met with fierce resistance and were eventually dropped. However, as a result, SEC Chairman Christopher Cox set down official guidelines stating that questions to reporters should be limited to the verification of published information and to surrounding circumstances relating to the accuracy of published information.
That sounds reasonable. But at the time, Gasparino, for one, sensed that Cox might be prepared to go further and faster in his investigation of journalists: "To be honest, I am not all that comforted by Cox's go-slow approach...under certain circumstances, Cox might not have a problem hauling a bunch of journalists down to SEC headquarters and having them answer questions and possibly hand over their sources."
The SEC's director of enforcement, Linda Chatman Thomsen—who signed off on the subpoenas to journalists in the Overstock case—issued a statement on September 17 about the current crisis in the financial sector, declaring: "The Enforcement Division has been investigating and will continue to investigate any suggestion of manipulative trading. We are committed to using every weapon in our arsenal to combat market manipulation that threatens investors and capital markets."
It must be noted that the SEC has taken sharp criticism for not monitoring banks like Bear closely enough in the months leading up to the crisis. Few would doubt that those banks were in precarious health. But if the patient was sick, the real question is whether the media yanked the IV and put a pillow over his head.
Media ethics experts generally agree, of course, that once a source has demonstrably lied to a reporter, that reporter has no obligation to protect the source.
CNBC's posture has been unapologetic. "We stand behind our reporters and our reporting," a CNBC spokesperson told the industry trade blog TVNewser.
"CNBC didn't report rumors," Gasparino told the same outlet. "What we were talking about was market activity."
Both Faber and Gasparino declined to comment for this article, even to explain the network's standards for using unattributed sources.
I heard from a CNBC spokesman this morning who reiterated that CNBC stands by its reporters and its reporting. It’s also been pointed out to me by colleagues that I, too, have acted as an anonymous source in the past, though on different stories than Bear Stearns and on behalf of different clients.
"If viewers don't know that there are some internal controls about anonymous sources, that's a real problem," says Jeff Poor, a media ethics specialist at the conservative-leaning Media Research Center. "I talk to reporters all the time about standards and bias, but NBC just refuses to discuss it."
In the current climate, when confidence in the financial markets is so crucial, the standards for accurate and verifiable reporting ought to be at their highest. And for an American public already deeply skeptical about the news media, it isn't enough for reporters simply to say, Trust us but don't investigate. That posture amounts to watchdog hypocrisy: accountability for thee but not for me.
Update: I heard from a CNBC spokesman this morning who reiterated that CNBC stands by its reporters and its reporting. It’s also been pointed out to me by colleagues that I, too, have acted as an anonymous source in the past, though on different stories than Bear Stearns and on behalf of different clients.