Rupert's New Rag

Media pundits are apoplectic at the notion of Rupert Murdoch’s News Corp. buying The Wall Street Journal.Journal reporters themselves staged a morning-long walkout last Thursday. No one believes an agreement in the proposed sale on “editorial independence” will stand the test of time; Murdoch will reportedly have the power to hire and fire editors.

While I share these concerns — there’s no question Murdoch has a history of using some of his media outlets to push his neoconservative world view and others to advance his own business interests — I looked at the front page of Wednesday’s paper and thought to myself a Murdoch-driven Journal couldn’t be much worse than the current iteration.

Two stories stood out, both on topics familiar to Whiskey & Gunpowder readers: the housing bubble and tightening world energy supplies. Let’s look at the housing one first, for that got the most prominent play — 2,800 words, above the fold, headlined “LENDING A HAND — How Wall Street Stoked the Mortgage Meltdown: Lehman and Others Transformed the Market for Riskiest Borrowers.”

We actually have two stories in one here, one of them pretty good, the other just awful. The good one is an examination of how Lehman Brothers was first to the post among Wall Street’s high rollers when it came to taking junky subprime mortgages and packaging them in investment-grade bonds — the sort of bonds that blew up in the face of Bear Stearns last week. There were tales of employees at Lehman’s in-house lending unit being pressured to push through dodgy loans to bolster volume — leading to unorthodox practices such as altering documents with scissors, tape, and Wite-Out. (Lehman’s response was a classic, amounting to, “We’ve done nothing wrong, and we’ll never do it again.”)

Oops, Better Put the Story in Context for the Masses

It could have been good story about one company’s role within a major economic trend, but no, Journal editors couldn’t leave well enough alone. It looks to me as though they pushed the reporter to make it a “bigger” story, to live up to the first part of the headline — “How Wall Street Stoked the Mortgage Meltdown.”

Thus, a sidebar summarizing the story was largely a rehash of the self-evident:


And the little-picture Lehman story was larded down with big-picture background such as this:

“A generation ago, housing finance was different. Bankers took in deposits, lent that money to homebuyers, and collected interest and principal until the mortgages were paid. Wall Street wasn’t much involved.

“Now it plays a central role. Wall Street firms provide working capital that allows thousands of mortgage firms to make loans. After lenders sign up consumers for home loans, investment banks pool the income streams from these loans into bonds known as mortgage-backed securities. The banks sell them to yield-hungry investors around the world.

“Before the mid-1990s, mortgage-backed securities consisted mostly of loans to borrowers with good credit and cash to make ample downpayments. Then investment banks found they could do the same with riskier loans to borrowers with modest incomes and flawed credits. Pooling the loans created a cushion against defaults by diversifying the risk. The high interest rates on the loans made for bonds with high yields that investors savored.”

None of this is news to you, because Mish Shedlock has done a bang-up job of informing Whiskey readers about an impending housing crisis for the better part of two years now. Other alternative media outlets have also enlightened their readers, including our sister publication The Daily Reckoning.

But for the ordinary financial news consumer, these things have to be spelled out in painstaking, mind-numbing detail — because the mainstream financial media did such a poor job alerting their readers and viewers about the dangers you and I saw coming. The thought process of Journal editors likely ran along these lines: We’ve got all this good investigative stuff on Lehman, it’s passed muster with our lawyers, and it’s ready for publication, but we need to put it in context now that Bear Stearns caught everyone by surprise. Hence, the effort in remedial education.

If the Journal were serious about illuminating the root causes of the subprime meltdown, it might have examined the role of the Federal Reserve recklessly expanding the money supply in recent years — fueling the housing bubble at all levels from subprime to super-luxury. But that’s asking too much of an organization that barely batted an eye when the Fed stopped reporting M3 last year.

Peak Oil? What Peak Oil?

Our next sorry exhibit is headlined: “Exxon, Conoco Exit Venezuela Under Pressure: Host Nations Escalate Demands on Oil Firms; ‘Some Tough Decisions.'”

Here, too, we witness an attempt to take a micro story — Exxon Mobil and ConocoPhillips giving up their projects in Venezuela, rather than put up with any more guff from President Hugo Chavez — and turn it into a macro story about the troubles international oil companies are having as more and more governments around the world nationalize their oil and gas reserves. In this instance, the likely motivation is that for whatever reason, the Journal was a day late to this story. Reuters had sources who confirmed the two companies’ decision to take their marbles and go home late last Monday — in time for publication in many papers on Tuesday.

Whenever a media outlet gets spanked on a big story like this, one way it tries to recover is to attempt to place the immediate developments in a larger context. So the story had all sorts of background on not only Venezuela, but also Russia. And that’s fine — I don’t fault the financial media for being asleep on resource nationalization nearly as much as I do for being asleep on the housing bubble; it’s a more complex phenomenon.

Still, this story gets into trouble early on — the third paragraph, to be precise:

“The companies feel they won’t get adequate value from the Venezuelan government, so they may pursue arbitration rulings that, even if favorable, mean a long wait for compensation. But the need to replace significant holdings could intensify exploration and result in new finds elsewhere, as happened after the last widespread purge of Western majors from developing nations.”

This rather oblique passage is explained further down in the article:

“One response is to move aggressively to find opportunities in politically stable nations. The wave of nationalization that swept the Middle East in the 1970s led to the development of the giant fields in Alaska and Europe’s North Sea. Conoco pursued a similar path by creating a joint venture to tap Canada’s heavy-oil deposits, which hold enormous reserves of oil, but are expensive to produce.”

The subtext here is subtle, but unmistakable: “Don’t worry about the stability of the world oil supply. And don’t worry about Peak Oil. Even if Chavez and Russia’s Vladimir Putin make it hard on the Western oil majors, they’ll rescue us with new finds in “politically stable nations.”

Readers given to paranoia might think this is part of some diabolical conspiracy to suppress awareness of Peak Oil. But that’s giving the financial media too much credit for ingenuity. After all, Peak Oil is already out of the bag — as I explained last month. It’s being debated openly on CNBC. BusinessWeek is giving space to guest columnists who take Peak Oil seriously. But among those in the media who’ve been familiar with Peak Oil for a while, the comfortable mind-set still prevails that further exploration, or new technology, or some other panacea will assure the continued steady supply of oil for the foreseeable future — because that’s how it’s always worked in the past. Trust me on this — there’s no grand scheme to squelch the truth; there is a collective consciousness that’s unreceptive to new ideas, developed by mere force of habit. But the dereliction of duty is nonetheless a serious one.

Could Murdoch Do Worse?

So there you have it. A head-in-the-sand approach to Peak Oil, and a day-late, dollar-short attempt to educate readers about the genesis of the subprime mess. Ignore crises while they’re forming, and do hand-wringing coverage once the crises break. Turn on the Fox News Channel’s business coverage, guided both on-camera and behind the scenes by the heavy hand of Neil Cavuto, and you’ll see a dumbed-down version of the same. (The market’s up? Celebrate with an “expert” panel. The market’s down? Let’s talk about a recently jailed hotel heiress!) Could a Murdoch-owned Wall Street Journal do its readers a worse disservice than under the paper’s existing sclerotic leadership?

Dave Gonigam

[Full disclosure: This author was employed by one of News Corp.’s TV stations for eight years. While I objected mightily to Fox News Channel’s editorial bent, I observed no conscious design during my tenure to impose that template on the local Fox broadcast outlets, and I left in early 2007 on friendly terms. Just thought I should get that on the table.]

July 2, 2007

The Daily Reckoning