21 October 2009

When the Financial Journalists Were Indeed 'Pimping' for Wall Street

Here is a interesting moment in US financial journalism on CNBC. It does not describe the basis of the lawsuit very well, and does become a bit surreal at times. There is a nearly priceless moment at the end when the frustrated Attorney General of California Jerry Brown asks Dennis Kneale and Michelle Caruso-Cabrera, "Are you pimping for (State Street Bank) the defendant?"

You can watch the video and assess things for yourselves.

This question of the role of financial journalism brings to mind a little remembered vignette from the 1930's. After the Crash and the slide into Depression, there were a number of government investigations conducted into the varieties of financial fraud, of which there were many, and became the basis for a number of laws, most of which were overturned just prior to our current series of crises starting in 2000.

There was a particularly colorful character named A. Newton Plummer. He was a culprit, a bagman I think they were called, but also had become a whistle blower, a witness, after having been apprehended.

And a right effective witness he proved to be, since he had kept a suitcaseful of cancelled checks that showed that a great many, if not most, of the financial journalists in the major eastern media were regularly 'on the take' from Wall Street, in promoting certain ideas, certain stocks, legislation, whatever was required. Apparently in those days of stock operators and pools, prior to the SEC, it was a common practice to deceive the small investor through the manipulation of price action and news. Can you imagine that. And in less-regulated, naturally efficient markets.

We do not hear much about A. Newton Plummer. But he did write a book about what he had done as the bagman, after his testimony was buried, deeply. Probably to help restore public confidence in the troubled financial markets of the Great Depression.

The Great American Swindle Incorporated
Plummer, A. Newton
A. Newton Plummer, 1932. 2,000 copies.

I have a copy of his privately published book. It is an interesting read. Everything he said was documented. It was a time when the news media was undoubtedly 'pimping for Wall Street.' And they helped to create a credit bubble, the bubble that broke the world, and blamed it on a spontaneous mass delusion, and financial innovations like consumer credit.

While CNBC has its journalistic standards, this does not seem to be their finest moment. Both Dennis and Michelle are seasoned journalists. But Jerry Brown is a consummate politician, and is to be baited carefully, and at your peril.

CNBC Interview with the California Attorney General

Things are much more sophisticated these days, and the times of 'yellow journalism' with moguls like W. Randoph Hearst starting wars and promoting causes using the power of their media conglomerates are a thing of the past.

But journalists who specialize in a specific sector all the time, whether it be finance or politicians, must be on their guard not to closely identify with the industry which they are supposed to be objectively covering. An emotional attachment can develop, a mindset can be imprinted, when you spend all day speaking with people who have a particular viewpoint of the world based on their own needs and objectives and biases.

And it still bothered me that I came away from this interview without understanding the nature of the lawsuit, and obtaining no real facts about it. Dennis Kneale seems to imply that the Pension funds were promised a specific price and it was delivered, and California was merely griping about the deal unjustifiably. And then Michelle engaged in what might be charitably called an ad hominem attack.

So here are the facts as reported by The New York Times:

Still, the lawsuit raises troubling questions about the bank’s practices and controls. It grew out of an inquiry by California state investigators who were looking into claims made against State Street by unidentified whistle-blowers that accused the bank of adding a secret and substantial markup to the price of their currency trades. The whistleblowers alleged that the scheme cost State Street clients about $400 million annually and dated back to 1998.

According to the California Attorney General, State Street executed about $35.2 billion in currency trades for Calpers, the California Public Employees’ Retirement System, and Calstrs, the California State Teachers’ Retirement System, from 2001 to this fall.

State Street tellingly referred to the state pension funds as “dumb” clients since they allowed the bank to handle foreign exchange transactions for them, according to a complaint filed by the whistleblowers. Smart clients, it said, traded directly with the bank and obtained better rates.

The lawsuit contends that State Street concealed fraudulent pricing practices by entering false exchange rates into electronic trading databases and reporting false prices in the account statements that it provided Calpers and Calstrs. The lawsuit also accuses State Street of deliberately failing to include time stamp data in its reports so that the pension funds could not verify the actual cost of the trade.
It sounds to me that State is being accused of conducting trades for a fee, but then padding the associated trades to skim a bit extra. This is not an unheard of practice, especially when a trading firm is dealing with what they consider to be a 'dumb client.' There is a mindset among some trading groups that says if you are dumb enough to do business with me, I am justified in ripping your face off, even if it is a little bit at a time. We will have to see how the court case proceeds to find out if the accusations are true.

Now, would it have been so hard for CNBC to find these facts out and ask about them rather than take such a stumbling and ill-prepared stance into the interview, and then insult the interviewee and disparage his motives?

They are capable of doing much better professional work than this.