Why Your Banking App Might Spell Trouble for Your Bank
‘Bank walks,’ not just runs, may undermine financial stability.
Why Your Banking App Might Spell Trouble for Your BankJosh Stunkel
(soft piano music)
Hal Weitzman: When the comedian Jon Stewart tackled CNBC’s Jim Cramer in 2009 about why the news network failed to warn of the financial crisis, Cramer said, “It was a one in a million occurrence.” But the financial crisis was at least a decade in the making, and financial media in general failed to warn the public what was going on.
So what’s wrong with the financial media? Are they obsessed with breaking news and scoops rather than holding companies and industries to account?
Welcome to The Big Question, the monthly video series from Capital Ideas at Chicago Booth. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.
Dean Starkman is a fellow-in-residence at the Center for Media, Data, and Society at the Central European University in Budapest. A former reporter for the Wall Street Journal and the LA Times and an editor at the Columbia Journalism Review, he was part of the investigative team at the Providence Journal that won a Pulitzer Prize in 1994. He’s the author of The Watchdog that Didn’t Bark:The Financial Crisis and the Disappearance of Investigative Journalism.
And Guy Rolnik is a clinical associate professor of strategic management for Chicago Booth. He founded and served as editor in-chief of the Marker, Israeli financial news company, and at Booth he teaches a class on Reputation, Regulation, and Communications: How Media Influences Business.
Panel, welcome to The Big Question.
Dean Starkman, let me start with you. Basic question, why should the media be a watchdog?
Dean Starkman: It’s an interesting question to hear because essentially for me the better question is why be a journalist at all if you’re not gonna be a watchdog? It’s an essential function. Actually, the core function of what journalists do.
When you sort of think about it, the idea of being a journalist or being a watchdog is inherent in the journalist role. Why? Because here we are. We are representing ourselves as people who are reporting the news and telling people what’s happening.
Well, you don’t suddenly switch on your watchdog cap and decide, “Oh, I’m gonna actually dig a little bit deeper between, you know, behind the scenes and see what’s going on.” You’re there as a . . . You’re presenting yourself to the public as somebody, “I’m here. I am covering this institution,” say it’s City Hall or Goldman Sachs, and you’re basically there to tell people what’s actually going on. You’re not a . . . you used the word media, it’s sort of interesting. The Latin root for media is middle and that’s not how I see what journalism does. Journalism is from the French word jour. So it tells you what’s happening that day. So our . . . The question is interesting ’cause it presupposes that we’re sort of this passive transmitter of information from institutions.
Hal Weitzman: But isn’t that what most journalism is? I mean, ultimately aren’t people reporting what is happening. I mean, if you’re covering, you know, sports. Most of the time you’re reporting on what is happening in sporting events. If you’re covering business, presumably most of the time you’re reporting on what is happening in the business world and kinda what is happening day-to-day.
Dean Starkman: Yes.
Hal Weitzman: So where does the watchdog part come in?
Dean Starkman: Well, I mean, it is all too true that often media or journalism or news organizations are content to be transmitters of what’s happening on the soccer field or what’s happening within the four corners of the diamond at Wrigley Field, but in fact, that is one function and it actually, there’s nothing, absolutely nothing wrong with the idea of letting people know what major institutions and people and powerful actors are thinking and saying and what they intend to do.
I mean, that’s . . . You know, when the mayor comes out with his budget, that’s what, you report it. It’s not a problem, but the idea that somehow that is the sum and substance of your job is actually, you know, first, it’s never been true. Secondly, it’s not practical because in fact, facts lead you in all sorts of directions, and in an ideal world, media or journalists are required to follow the facts where they go. Thirdly, we think about it. It’s actually very, a dangerous practice to try and confine your reporting to what’s simply presented to you because your own credibility is at stake. So often you’ll see, just as with the financial crisis, but you can take almost any other event, say you’re talking about sports. Say the steroid era, there was a platoon of sports writers writing about Barry Bonds as he ballooned into this grotesque figure and Sammy Sosa and the rest, and it was like an obvious piece for everyone.
Hal Weitzman: You’re talking about baseball players who were taking . . .
Dean Starkman: Steroids, yeah.
Hal Weitzman: Steroids.
Dean Starkman: It was a bit of an American metaphor, but the point being that, you know, sports reporting was enormously discredited by the fact that, you know, after the veil was pulled away and investigative reporters from the San Francisco Chronicle were the first to break the story, that, oh, by the way, this entire era of baseball is essentially a farce, has to be thrown out. So it’s really damaging for media, for news organizations to try and confine their role to this sort of passive role.
Hal Weitzman: OK, Guy Rolnik.
Guy Rolnik: Yes. So we see in democracy and in the market system that the voters are informed and that the players in the market are informed. But we also know that voters and citizens and consumers sometimes don’t have the economic incentives to do, to acquire information about what the politicians are doing, what the regulators are doing, what the players in the market are doing. And the most important role of the media, of journalists, of course, is to overcome this collective-action problem, to research and to aggregate and to be a watchdog because many times in many markets nobody has an incentive to do it.
Hal Weitzman: OK. Dean Starkman, in your book you criticize, as do many other people, the media for not really having spotted the financial crisis looming and building up over many years.
Has the media ever really spotted a financial crisis and could they have done anything to prevent it happening? Did they even kind of help cause it in a way by not reporting it?
Dean Starkman: Absolutely. Journalism actually could have headed off, or yeah, really helped contain the mortgage crisis, which metastasized into the financial crisis. And it is a fair question whether or not media has ever called a big financial crisis. And uh—
Hal Weitzman: Is there an example, ’cause your book is somewhat nostalgic. You sort of said, “There was a period when this was happening.” So?
Dean Starkman: In my book, one of the things I try to do is give a historical view and try to make the case that, wait a minute, anyone actually dismisses institutional media, mainstream media is probably doing so out of ignorance because in fact, if you look over this period, particularly postwar, particularly since the ’60s, when investigative journalism became this mainstream practice, actually, rather impressive sometimes even glorious record in bringing . . . holding power to account and generating really important reform.
So just one example was the people I want to think about is the tobacco industry. You forget, the tobacco industry in the ’90s was enormously powerful. They were the Wall Street of their time, and essentially there is no question from anybody that the reason that the tobacco industry is essentially transformed by the end of the ’90s was because of the reporting of Wall Street Journal, ABC News, and 60 Minutes and other outlets.
So the idea that journalism can’t . . . Is ineffectual is flat false, period, full stop. (coughing) Having said that, it’s fair, I mean, one thing that you have to . . . We have to, we defenders of the media, people who like media and want it to be strong and robust and all that and we have to work with is the fact that it, you know, it’s better . . . It seems to be better at the small to medium-sized things, although Tobacco is a pretty big deal. And sometimes misses the big one. The savings and loans, which collapsed in the late ’80s leaving, you know, a bill for tax payers in the $300 billion range, bit of a warm-up for a subsequent financial crisis was . . . as I say, sort of served up on a platter to some news organizations and it’s in my book, but it’s just a bit of a scandal that that was missed because again, it wasn’t like it was hiding anywhere.
However, having said all that, the idea that institutional media has always been this, sort of, lapdog, is quite false, and it’s actually rather dangerous because you know, frankly the public relies on media for, really it’s the oxygen of democracy and it’s the only truly independent force out there that’s providing scrutiny to powerful institutions, including the government, and so to dismiss it is a huge mistake.
Guy Rolnik: Many times the media is the problem. I think it was the economist [Yale’s] Robert Shiller that in 2000 wrote is famous book, Original Exuberance, where he forecasted basically the popping of the dot-com bubble and he did a survey of the financial bubbles in the history going back to the Netherlands, the Tulips in a bubble and basically he said, “You know, in order to have a financial bubble, you need a large group of people to have the same idea.” And guess who spreads idea? Who is the most efficient vehicle in spreading the same idea for many people? Of course, it’s the media.
So basically, if we look at the financial bubbles and media, we’ll see that their history is intertwined. We started seeing financial bubbles with the ascent of mass media, and I think this is probably the case of the dot-com, which is probably the case . . .
Hal Weitzman: Does that mean mass media are always to blame for financial crises just in being the conduit for information?
Guy Rolnik: I’m not sure that it’s always to blame, but sometimes it has a part in it. And of course, when we . . . When researchers study what happened to the interplay between media and the markets, they see that the more you have a bull market, the ability and the willingness of media to go after the big players and to be more critical diminishes. Basically, when you need the media, they are, many times, in cahoots with the players with the financial players, and so on.
Basically, when we have financial scandals or when we have market failures, when we have government failures, there is this narrative, some people will say, “Well, this is all captured by special interests. The capture, it’s by lobbying, by revolving doors, by financial incentives.”
And to some extent this is all very true, but as we know for these inequalities, for these market failures, for these government failures to persist over time, you need legitimacy by the people. You cannot have it just by the power of money or by the power of government. So at the end of the day, if you want to have those aberrations for a long time, you need media to cooperate with this narrative.
Dean Starkman: Absolutely.
Guy Rolnik: So the real . . . Many, many times the capture is intellectual capture, and this is basically where the media comes in and plays a significant role. So media cannot say, “We are just reporting. It’s the corrupted players in politician. It’s the corrupted CEO.” It doesn’t work this way. At the end of the day in a capitalistic democracy, you need legitimacy.
Dean Starkman: Right, and I was just gonna say, and it’s precisely at that moment, media, I would say journalism has to step in to sort of counter the narrative. That would . . . that sort of presupposes a more active, you know, sort of agency kind of role for journalism, which I feel is the, sort of, the missing link in a lot of these times. So for instance, Guy’s right that . . . So in the 1990s, when the tech bubble was forming, that was the time for journalism to sort of counter that, the narrative of the new economy would transform and valuations were not, and there was some of that, but not enough.
And also in, but even more so during the mortgage era when Wall Street was growing to become these colossus, colossi that bestrode the globe. It was time for the media to step in and say, “Wait a minute. This is not necessarily healthy for the financial system, for the economy,” and to provide a counternarrative.
Hal Weitzman: And what actually happened? Because I referred in the introduction to this great interview between Jon Stewart and Jim Cramer. Stewart’s argument is essentially that Jim Cramer and everyone else at CNBC knew what was going on. They knew there was nefarious practices on Wall Street, but they didn’t report it. In other words, it was almost like a deliberate cover-up.
Your thesis is slightly different. It’s almost that the practices in newsrooms meant that they didn’t even really know what was going on.
Dean Starkman: Right, I mean it’s interesting. I wouldn’t necessarily . . . We’re deconstructing Jon Stewart, but I wouldn’t necessarily . . . I didn’t just read the Jon Stewart critique, and it was so important because my take on that was like, “Hey, you guys are there every day. You purport to cover this beat 24/7. And yet, you’re saying there’s no way we could have known. How is that possible? What happened?” And that’s sort of how . . . That’s how, and my analysis of that was like, OK, well, let’s just say Jim Cramer, who I’ve met and nice guy or whatever, but his methods and his sources are all about Wall Street elites and checking to see what, you know, Bear Stearn’s profitability, and that kind of thing. Well, that . . . If those are the only people that you’re looking at. If you have no idea, right? You know that they have enormous amounts of mortgage products on their balance sheet, right? You have no idea what those products represent and how they were made, right? See, even Jimmy Cain, who ran Bear Stearns, had no idea how those mortgage products came to be. You had to be, you know, you had to actually have been at the ground level to understand what was going on.
Guy Rolnik: You know, in the financial world they have sell-side analysts and buy-side analysts. So the sell-side analysts are the ones that you read their research everywhere and basically they are selling securities and getting accommodations from tradings or from M&As and so on. And then you have the buy-side analysts. Those are analysts that never publicize what they are doing because they are doing it for their proprietary trading or for the clients.
Now, the financial television, is it a sell side or buy side? It’s more of a sell side. It’s more of entertainment. So when you look at the business model of those companies that do those financial television shows, at the end of the day, their ratings and their audience and their axis is based on being positive. If they continue to be negative, if they went out in a campaign that the financial market now is super dangerous because of subprime, and they’ll do it one year and two years and the bubble will pop, they would go out of business.
So you know, when we look at the media, to expect the people specifically in financial TV to be the watchdog, I think that you’re probably looking at the wrong direction.
Hal Weitzman: OK, so where would the watchdog be then? You mean in the traditional printed media?
Guy Rolnik: Well, I would expect the watchdog today as we look at it to be with the financial media, with the accountability newspapers that still have a business model that is based on quality.
As we know, it has become tougher and tougher and more complicated in the last 30 years because of the disintegration of the business model of print newspapers, namely the disappearance of the classified, which was the engine of money for many newspapers. So I would still expect to see that in the print big newspapers and I wouldn’t expect to see it on TV.
Hal Weitzman: OK, Dean Starkman, part of your thesis is that the demand for scoops in journalism, for, you know, this, “We must get the news five seconds before our competitor,” which has got faster and faster and faster over the past decade or so. That that has sort of destroyed the old-fashioned, you know, shoe leather, investigative journalism that really holds institutions to account.
So are media organizations that aren’t obsessed with scoops, let’s say the Economist magazine. Are they better at accountability?
Dean Starkman: That’s interesting to think about. Well, I mean, what I was trying to just talk about with (coughing) that is that, I was trying to sort of explain, or to figure out for myself why the news looks the way it does. Why is it that so often the news looks like it’s subservient to these institutions, essentially transmitting what they say or maybe doing it five seconds before, five minutes before, five hours before everybody else.
But occasionally, say it, but occasionally they are actually subversive and are actually confrontational in bringing this kind of public-interest information into the public sphere. And, you know, what I was trying to talk about was that, you know, all, both . . . that news organizations are made up of these two poles. I mean, I in no sense denounce or have any problem with scoops. I’ve gotten a few myself over the years, and they are immensely satisfying. It does serve investors, and you know there’s not a thing wrong with it, except it’s entirely a transactional form of reporting and it has very little to do with the big picture, certainly, and systemic problems and holding anyone to account. In fact, it’s a win-win-win thing for everybody and that’s all good.
Hal Weitzman: Right, somebody wants to get the information out. They find a—
Guy Rolnik: Is it clearly a win-win-win? There is somebody that is losing out there, right?
Dean Starkman: Well, my competitors lost. I love that.
Guy Rolnik: No, and how about the dispersed public or your readers? They lose because in order to get that scoop, basically, the guy who gave you that scoop wants something back from you and sometimes their next story, you’re gonna spin it—
(talking over eachother)
Dean Starkman: No—
Guy Rolnik: —in a positive way, otherwise he wouldn’t give you that story.
Dean Starkman: —no question, no question. My only argument in that book was like, OK, it’s like first, trying to stop axis reporting is just like trying to hold back the tide or prevent the sun from coming up in the morning.
Hal Weitzman: When you say axis reporting you mean that . . .
Dean Starkman: Scoop-driven types.
Hal Weitman: Interviews with CEOs and . . .
Guy Rolnik: So actually, I tend to little bit disagree here and I’ll tell you why. Because axis, first of all axis, which biases the reporter and biases the editor and biases the newspaper, is one of the few biases that we have—we have the ownership bias. We have the advertisers’ bias. We have all. We sometimes have the audience bias that you have to cater to the bias of your audience.
But the scoop bias, which is the axis bias, is one that actually we can gradually get rid of. And the reason, of course, is the internet. Twenty years ago or 30 years ago, you could have said that there is economic value in bringing in the story a day or five hours or five minutes before your competitor.
Now, this economic value has disappeared basically because if I scoop you, you just do a follow-up on it after 10 minutes, and I would not be able to get any economic advantages. I won’t be able to sell to my readers, “I bring these stories first,” because you’re gonna bring the story five minutes, or five seconds after me.
Now that the economic incentive is gone, in a way it diminishes, many times, the business model of some media outlets, but it also lets us people in the media to start understand that we have to change the culture of our newsroom and start thinking about how to get rid of this axis thing because getting the story about M&A one hour before your competitor doesn’t really add real value to society. So let’s just quit doing it if the price that we have to pay is basically the next day to put a positive spin on a merger that is gonna be horrible and destroy value to consumers, to the investors, or worse than that create concentration in the market that will drive our prices.
Dean Starkman: (laughing) Interesting, right.
OK, I mean, no, I will stand up and defend scoops. You know, I was the one who wrote a book basically warning against them, but the reason I’ll do that is this. It’s just that, first, my main complaint about axis reporting and scoop-driven reporting is . . . Unlike Guy, isn’t in and of itself as a problem, but what it is is it expands and tends to crowd out the thing and you talk about . . . To the point where basically you, someone like, you know, an informed layperson would think, “Well, that’s what media is.” And that’s really, it’s all about a struggle over the definition of what news is, what journalism is.
My problem is, the trouble is that axis reporting tends to . . . is so popular within newrooms and within companies and it’s relatively quick, easy, and cheap, you know, essentially that becomes, that’s news.
There are whole websites based . . . CNBC has an entire network devoted to that. Politico essentially is an entire website with 500 people essentially doing that alone and that’s . . . it’s OK, but you know, the trouble is that cannot be the beginning, middle, and end of our news ecosystem, otherwise you’re gonna get horrific financial crises and things like that that you absolutely must . . . That’s why this very, sort of, vulnerable and embattled sphere within journalism of accountability reporting needs to be, first, recognized and understood as an actual force and that needs to be nourished and supported and expanded to a much larger degree than it is.
I mean . . .
Guy Rolnik: But Dean, can you explain to us what is the value to this society that you have one newspaper bringing an M&A story an hour before the other newspaper?
Dean Starkman: All right.
Guy Rolnik: What does it add value to the market, to the efficiency of the market, to us, to a location, I don’t see it.
Dean Starkman: I make that point myself in the book. I agree with you, all right? I cry uncle, I give in.
Guy Rolnik: You know, information is gonna be out there sooner or later very fast because basically all those scoops, basically these are driven by the PR, by the companies. It’s not like it’s not gonna be revealed. We’re not talking about an investigative piece. We’re talking about stuff that is going to be announced in an hour or the next day and you are giving it to your friend journalist because you have those relationship with him and it is a quid pro quo with him.
So think about all the energy and all the resource allocation in a newsroom on out scooping that they could have devoted this time and energy to go through the financial statements of some of those companies and to see what’s going on.
Dean Starkman: Yeah, it’s a small thing. We’re not disagreeing that much. In other words, you could argue that . . . and there actually have been a few cases where somebody reporting so-and-so are in talks and it turns out that that’s a disaster for many reasons and the merger is sort of blown because the guy got the scoop, but that’s one in 1,000.
Hal Weitzman: Do you feel that the media is at all placed to cope with the next financial crisis, to warn us?
Dean Starkman: What it really needs is structural support and cultural support. Right now . . .
Hal Weitzman: And the media industry does not have a lot of resources at the moment to spend on it.
Dean Starkman: Right now, I’m gonna argue that, sort of, the fact gathering resources of the news industry is at, you know, it’s at a catastrophically low ebb.
Guy Rolnik: When you look at the size of the economy, the complexity of the economy, the complexity of regulation and what’s happening in the market in the last decade or so, and the growth there, and then you see what’s happening to the number of the journalists that are covering the thing. It’s basically the number of journalists probably halved in 30 years, so you have less.
Hal Weitzman: But is it the number or is it the practice because you’ve suggested that it’s not necessarily the number; it’s what they’re doing.
Guy Rolnik: First of all it’s the practice, as we discussed, and of course there’s some descent news outlets and there are some descent reporters and editors and investigative reporters, but the number is diminishing all the time, and the corporations and the special-interest groups and the industry that they have to cover are only getting bigger and more complicated in handling media and sometimes they even don’t. The way they handle media, they bypass media. We know, we have a few tech titans today that actually don’t need to work with media because they own their own platforms.
So this is also something that has changed. And now their own platforms and sometimes their market cap and their economic power is 10 times, 20 times, 100 times bigger than the media company.
So we have an imbalance of power that is also playing out here. So if we look at the last 30 years, although we had the internet revolution and we thought that it diminishes entry barrier and so on, at the end of the day, the economics of media today are much more complicated than they were 20 or 30 years ago.
I think it’s a mistake to look at media has a role to prevent financial crises because basically there are crises that are happening every day in many industries here in the United States and all over the world. You don’t need a financial collapse to say that something is sometimes wrong with an industry.
So I don’t foresee any bubble popping in the health-care industry, but as we know, the United States health-care system is one of the worst in the world in terms of its costs and the way it works. So we don’t need to say that there is a problem only after there is a financial bubble.
Hal Weitzman: OK. Alright. Well, on that note, our time is up. This has been a fascinating discussion. We’ll come back to it.
My thanks to our panel, Dean Starkman and Guy Rolnik.
For more research, analysis and commentary visit us online at chicagobooth.edu/capideas and join us again next time for another The Big Question.
Goodbye.
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