What the New York Times and Wall Street Journal got right—and wrong—about this week's financial crisis

Derivatives are financial weapons of mass destruction. The dangers are now latent—but they could be lethal.
—Warren Buffett, 2003

This has been the worst financial crisis since the Great Depression. There is no question about it.
—Mark Gertler, New York University economist, quoted in today's Wall Street Journal

If my fears are right, a more fundamental reckoning may lie ahead and Washington will have to take far more decisive action. At some point, the new president might have to do what FDR did in the wreckage of early 1933—declare a "bank holiday" and announce emergency rules to govern banking and finance until the crisis is broken.
—William Greider in the Nation, September 17, 2008

As all the fruits of the Republican love affair with deregulation came flying off the trees of Wall Street like rotten apples transported in a hurricane, today's Time magazine offered the single best explainer of what was actually going on. Fortune magazine managing editor Andy Serwer and senior editor at large Allan Sloan were recruited for temporary duty at their sister publication by Time Inc. editor in chief John Huey to write Time's cover story, and they managed to break the crisis down into colorful, digestible bites:

• "Wall Streeters didn't have to worry about regulation, which was in disrepute, and they didn't worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products [including] derivatives like credit-default swaps."

• "One weekend, the Federal Government swallows two gigantic mortgage companies and dumps more than $5 trillion ... of the firms' debt onto taxpayers, nearly doubling the amount Uncle Sam owes to his lenders. While we're trying to get our heads around what amounts to the biggest debt transfer since money was created, Lehman Brothers goes broke, and Merrill Lynch feels compelled to shack up with Bank of America to avoid a similar fate."

• "A lack of fear became a hothouse of greed and ignorance on Wall Street—and on Main Street as well. When greed exceeds fear, trouble follows."

• "This latest go-round featured hedge-fund operators, leveraged-buyout boys (who took to calling themselves "private-equity firms") and whiz-kid quants who devised and plugged in those new financial instruments, creating a financial Frankenstein the likes of which we had never seen."

• "Folks in the world of finance created, bought, sold and traded securities that were too complex for them to fully understand. (Try analyzing a CDO-squared sometime. Good luck.)"

• "Lehman's debts were about 35 times its capital, far higher than its peer group's ratio ... When things go well, as they did until last year, Lehman is immensely profitable. If you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money. If, however, things move against you—as they did with Lehman—a 1% or 2% drop in the value of your assets puts your future in doubt."

• "Moody's and Standard & Poor's had blithely assigned top-drawer AAA and AA ratings to all sorts of hinky mortgage securities and other financial esoterica without understanding the risks involved. Would you know how to rate a collateralized loan obligation? Or commercial-mortgage-backed securities? Sophisticated investors took Moody's and S&P's word for it, and it turned out that the agencies didn't know what they were doing."

And finally—surprise!—even in the middle of this catastrophe, the big guys are still laughing all the way to the bank, at least as long as there still is a bank: "Wall Street's classic business model ... works like a dream for Wall Street employees (during good times) but can be a nightmare for the customers. Here's how it goes. You bet big with someone else's money. If you win, you get a huge bonus, based on the profits. If you lose, you lose someone else's money rather than your own, and you move on to the next job. If you're especially smart—like Lehman chief executive Dick Fuld—you take a lot of money off the table. During his tenure as CEO, Fuld made $490 million (before taxes) cashing in stock options and stock he received as compensation. ... Fuld is unlikely to show up applying for food stamps."

But perhaps some energetic federal prosecutor will figure out another way to modify Fuld's daily diet.

Meanwhile, the New York Times managed its own share of scoops, including the remarkable news in this morning's page one story by Ben White and Eric Dash, which reported that Morgan Stanley's chief executive, John J. Mack, has already decided his firm is doomed unless it can find a merger partner. [Well, maybe not so remarkable: See "Update" below.]

The Times said Mack "made an unsuccessful effort on Tuesday evening to persuade Citigroup's chief executive, Vikram S. Pandit, to enter into a combination ... 'We need a merger partner or we're not going to make it,' Mr. Mack told Mr. Pandit.'" But Pandit—a former senior investment banker at Morgan Stanley—rebuffed the overture.

While the stories in the Times were solid, the paper's page one editors were guilty of the most egregious underplay in the newspaper's history. Instead of giving the worst financial crisis since the Depression the six-column banner headlines it merited every day this week, they used two-deck, four-column heads, which gave the reader no hint of the unprecedented danger facing the economy.

But before you call your broker, take a look at the other side of the story in today's Wall Street Journal. Columnist Brett Arends wrote, "If you are panicking and getting ready to sell everything and hide under a rock, here are ten reasons why you shouldn't."

Among them: the slump in the price of oil, and the fact that even a still "deeply gloomy" bear like Jeremy Grantham believes that "shares have fallen so far that if you buy a basket of 'high-quality' U.S. stocks today and hold them for about seven years, you'll probably end up making about a 50% profit—after inflation." His top "high-quality" picks are Microsoft, Johnson & Johnson, Pfizer, Walmart, Exxon Mobil, Coca-Cola, PepsiCo, Chevron, UnitedHealth Group, Procter & Gamble, Qualcomm, Oracle, Merck, Home Depot, and Cisco Systems.

Says Arends: "If you are really nervous, maybe you should just sell your other shares and buy these."

[Update: Later Thursday the Times posted an editor's note on its website pulling back from its "scoop" about Morgan Stanley's imminent demise: "Morgan Stanley vigorously denied that Mr. Mack had made the comment, as did Citigroup, which had declined to comment on Wednesday," the note said. "The Times's two sources have since clarified their comments, saying that because they were not present during the discussions, they could not confirm that Mr. Mack had in fact made the statement. The Times should have asked Morgan Stanley for comment and should not have used the quotation without doing more to verify the sources' version of events."]

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Charles Kaiser is the author of The Gay Metropolis and 1968 in America. He has been media editor for Newsweek, a member of the metro staff of the New York Times, and a reporter for the Wall Street Journal, where he covered the press and book publishing. To learn more, visit charleskaiser.com.

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