Audit Interview: Mark Pittman

"This is a defining moment for business journalism and for Wall Street."

(UPDATE, November 29, 2009: Mark died a couple of days ago. It’s a huge loss and we’ll have more on him next week, but until then you can read some of what we’ve written about his exploits here. We wrote about when he and Bloomberg sued the Fed and when he won. Here’s Pittman with his friend and colleague Bob Ivry (who wrote Pittman’s excellent obituary), with a great profile of Elizabeth Warren last week. Here’s our look at how a Pittman story last September helped break the huge story of Goldman’s (and others’) backdoor bailout through AIG.

Here he is going after an incredibly complex story: How much are those toxic assets actually worth? And Pittman kept a close eye on the disastrously bad deals Uncle Sam cut for itself to benefit Wall Street. Watch him leverage the hot story, the AIG bonuses, to show how much bigger another story was, the bailouts of AIG’s counterparties.)

(UPDATE December 2, 2009: See Dean Starkman’s remembrance of The Pittman Way. I write here about Moral Force and why Pittman matters.)

Mark Pittman has been all over this financial crisis.

He was part of a team at Bloomberg News that won the Loeb Award last year for a five-part series on the origins of the crisis called “Wall Street’s Faustian Bargain,” including Pittman’s lead story on how the Street goosed the subprime mortgage market late with financial engineering.

The new standardized contracts they created would allow firms to protect themselves from the risks of subprime mortgages, enable speculators to bet against the U.S. housing market, and help meet demand from institutional investors for the high yields of loans to homeowners with poor credit.

The tools also magnified losses so much that a small number of defaulting subprime borrowers could devastate securities held by banks and pension funds globally, freeze corporate lending, and bring the world’s credit markets to a standstill.

In addition to the Loeb-winning work, Pittman has broken major stories on Goldman Sachs’s interest in the AIG bailout, Hank Paulson’s role in creating the subprime mess, and the ratings agencies inexplicable delays in downgrading mortgage securities, and he’s delved into how Wall Street spread its detritus across the world.

Pittman is a native of Kansas City, graduated from the University of Kansas, and got his first job covering cops at the Coffeyville Journal in southern Kansas, where he was paid so little he had to get a part-time job as a ranch hand across the Oklahoma border in Lenapah. Proving yet again that it really is a small world and journalism is even smaller (and getting smaller every day, as Pittman points out) we discovered to our amazement that my late grandfather Arva Chittum was a good source of Pittman’s back in the early 1980’s in Coffeyville.

He spent twelve years at the Times Herald-Record in Middletown, New York, before joining Bloomberg News in 1997.

We spoke recently about cops, CDO’s, and the crisis.

The Audit: How did you get started at Bloomberg News?

Mark Pittman: That was back when Bloomberg News only had like fifty people in New York. I covered oil in the beginning and then they moved me to covering securities firms. I was covering the Street in 1999 to 2000. There were only two of us covering the whole Street. We didn’t do a very good job as you can imagine. We could barely get the earnings out.

I went on to private equity and corporate finance. I got a wide education. I learned a lot about trading. If you cover the oil markets, those guys know how to trade. They know how to pull the trigger on stuff and back out. That gets in your bones. When you realize how you make money doing that kind of stuff, a lot of other things make sense. I’m not sure that a lot of business journalists get that kind of knowledge.

That’s stuff you just don’t get covering companies or doing profiles. You learn different stuff.

TA: How’d you get onto the crisis story?

MP: I had a conversation with a couple of people in late 2006/early 2007, and people were talking about what’s wrong with asset-backed securities and where all this is headed. I’d also covered derivatives contracts. When they first started doing credit-default swaps on companies, I covered that. That was like ‘99-2000. You could tell it was going to be a really hot thing.

When they started talking about doing derivatives on mortgage-backed securities [a bet against the housing market; this is explained a few lines below], I was like “oh, man, that means the banks are scared!” That was 2006, and we wrote a whole series about this.

You always want to be around the hot story. If you’re not around the hot story, you’re screwed.

TA: So did you go into that pretty much full-time? How’d you convince your editors to let you do that?

MP: You know it really wasn’t hard. They’ve really let me take a lot of chances here, and they’re extremely generous with my time. They recognize it as an important part of the reporting process. They give me a lot of rope. They let me figure stuff out. That’s something that’s in real short supply with a lot of news organizations now. You’ve got to let reporters run and figure out what’s going on.

TA: Not many others have the resources to do much of that nowadays.

MP: Instead of doing the sixth sidebar on a bailout program that probably won’t work anyway, let the person figure out what’s actually happening. And you’ve got to let your people do that.

We did a five-part series [the one that won the Loeb] on the whole idea of why the subprime crisis occurred, and it starts with this story about how a bunch of traders at Deutsche Bank, Goldman Sachs, JP Morgan got together and said “We need a standard contract to be able to short the mortgage market.” As soon as I realized they were going to try and short the mortgage market I said, “Ohhh. That means they think the market is going down.”

TA: And these are the guys who’ve come out pretty okay in this.

MP: You’ll notice UBS and Merrill aren’t in the group. The thing about this entire series of events is this is so complicated and so intertwined that we don’t have —journalists are not qualified to cover the story. We don’t have the background. These guys are doing stuff that you had no idea was happening. The off-balance-sheet accounting stuff is crazy.

TA: Well, if the ex-chairman of the Fed Alan Greenspan, formerly regarded as a near god, didn’t understand what this stuff was, who did? He had access to all the people and all the information he could want.

MP: He had no idea what was going on. How is it possible for them to sell themselves, to an off-balance-sheet entity, risk that is now exploding all over everybody? Why would that be allowed and why would you be able to book a profit on this? Who was in charge of this?

We haven’t got to the bottom of this whole thing yet. Somebody’s going to do this big forensic—and it might be me!—somebody’s going to do the deep dive into how everything happened and they’re going to find out that this system was just on autopilot and was spinning money out to a whole bunch of people. And it included you and me.

TA: In the form of cheap credit?

MP: Yes. The spreads should never have gotten to that level.

This goes back to why AIG is all screwed up. The banks sold AIG all their risk in 2007, when it was really blowing up. AIG had sworn that they weren’t going to do any more of this and then (the banks) restuffed the CDO’s with new stuff. So (AIG) had newer collateral that they weren’t really aware of.

TA: So the banks were stuffing the CDO’s with new stuff but AIG didn’t know they were replacing the stuff?

MP: Right.

TA: An MBS, you can’t move things in or out, but a CDO you can. Are the banks liable for this? AIG got blown up, but these guys knew what they were doing.

MP: You know what, the lawsuits will have to sort that out. And it’s going to be going on for years. It’s going to be just a debacle. Congress is going to have go through and force people to say “Okay, so what did you do with this, and where did it go from here?” They need to have very talented investigators go in and find out what the deal is.

TA: Tell me how your cops background plays into what you’re doing now.

MP: You end up with a big BS detector as a cops reporter because the cops lie to you, the victims lie to you, the people helping the victims lie to you. And you’ve got to sort through and there will be a story that seems a certain way and it just won’t be—and you know it. That’s what this is about.

The reporters who didn’t question the tight, tight spreads [the narrow difference in interest rates offered by Treasury bills and other, less secure instruments] that were going on in corporate [bonds], it was wrong. Where is this demand coming from? How can you guys sell this issue in thirty minutes? Who the hell’s buying this stuff like that? We’re going to come to the answer that it was going off balance sheet, at least temporarily, and then it might be sold to other customers.

TA: So they were buying it themselves and…

MP: They were buying it themselves. Yeah. And not every deal. But you know what—it happened enough. We don’t have enough journalists in America who understand what a spread does, which is the essence of banking. I just finished Dean’s piece in Mother Jones recently. We’ve got 9,000 business journalists and maybe twenty of them know what a spread is. This is not business journalism’s finest hour. But it is our biggest opportunity ever.

TA: How does the Bloomberg terminal inform your reporting or help you find leads?

MP: Well, I’ll give you an example. The first best story that I did about this—I’m gonna brag about this—was in June of ‘07. It said that subprime bonds are failing and they’re failing at an alarming rate, and they’re going up a lot, and they all need to be downgraded. The ratings companies aren’t following their own criteria for what makes a bond a certain rating. I did that through data that’s available on the Bloomberg. We’ve got a function called DQRP, which gives you delinquency reports on every RMBS, dividing it up by category. So you can pick the worst bonds with the worst stuff and you can divide it up by rating—all kinds of sorting. Nobody has that but us.

TA: I didn’t even know that capability was out there.

MP: Hell yes, man. And it works. Then you can pull up each individual bond and you’ve got a complete description of its geographic reach—how much is in California, all kinds of great stuff. What a weapon! And if you know how to use it, it works pretty well.

TA: So what’s your prescription for business journalists? What do they need to know and do? Not everybody’s going to have a $20,000 a year Bloomberg terminal to play with.

MP: Hardly anyone has a Bloomberg machine and the ones that do don’t know how to use it.

But you know what? The government needs to make this kind of data much more publicly available than it is now. We purchase a lot of this. But, for instance, a lot of the bond deals were (not subject to disclosure). And all the CDO’s were private placements. We know why—because they placed them with themselves. The number of secret deals going bad is astounding, it’s probably 90 percent of them were secret deals.

TA: Bloomberg’s got a ton of people on bonds, but I’ve said before that a part of why the business press failed here was that it has so many times more people covering equities than debt. And debt markets are many, many times the size of the equity markets. That’s kind of a major problem right there, right?

MP: It is huge. Most reporters, it’s shocking how few of them actually understand the difference between price and yield. Hardly any business journalist actually covers the financing. If you cover a company and all of a sudden their borrowing costs go from 100 (basis points) over to 250 or 300 over [meaning investors believe the risk has increased substantially], and no one asks a question. There’s a problem there when that happens and nobody asks a question. I think we have training issues in a huge way in our profession. We brought a knife to a gunfight.

TA: Does there need to be regulation just to simplify things to where it makes sense to more people?

MP: If it was all transparent the complexity wouldn’t matter. If the CDO market had had publicly available prospectuses with the contents of the CDO disclosed, we wouldn’t have this issue, because Bloomberg probably would have made fun of anybody who bought anything like this. But there was this enormous shadow banking system going on. We did a series about that, too. A lot of times people don’t see what we do.

TA: That’s one of the problems I’ve noticed. We’ve consciously tried at The Audit to make sure people are reading your stuff. I don’t think it’s become a habit for a lot of people even in the biz to go over to Bloomberg.

MP: It kinda bums you out, because you want to do things that have big (impact) because that’s why you’re in the business. And public policy would work a lot better if they actually understood what the hell was going on.

TA: Like adding up the total number of trillions that the government is on the hook for in this bailout. Nobody else is doing that but you. Why not?

MP: Because it’s a big pain. You start off with whatever you can remember off the top of your head—oh, they’re doing this, they’re doing that—you start writing it down on a piece of paper and you go “Wow, this is real money.” It starts adding up.

The thing that people don’t realize is that the Fed is now the “bad bank.” That’s just something that people don’t understand. They’ve taken collateral, and they refuse to tell us how they valued it…

We have numerous banks— dozens, maybe hundreds that are insolvent. And they become more insolvent every day because more people quit paying their mortgage loans, and more guys move out of the shopping center, and more people quit paying their credit cards. But nobody wants to have the adult conversation…We need to be honest about what the problem is here, how big it is, and how we’re going forward to clean it up, and who’s going to pay for it.

TA: Basically the charade that’s going on here is that they haven’t marked these assets down yet because that would show they’re insolvent.

MP: But a lot of [the assets] have gone to the Fed, though, as collateral for loans. They’re still on their balance sheet, but you borrowed against them. We don’t know if those are cracked CDO’s or prime RMBS…

TA: That’s what you guys are suing (the Federal Reserve) for—to find out what the collateral is.

MP: Yeah, and that’s the secret part of the story that nobody wants to let you know.

TA: Because it’s worth pennies on the dollar or dimes on the dollar.

MP: Yeah, and then everybody’s going to go “Oh my God, we’re lending ninety cents on something that’s worth twenty or thirty?”

TA: They say they don’t want to disclose it because it would interfere with the markets, is that right?

MP: Their basic argument is this would cause chaos, and they’re probably right. But that doesn’t mean that the American taxpayer ought to be on the hook for this.

TA: Why would it cause chaos?

MP: Because people would realize that we’re lending eighty cents on the dollar for something that’s worth twenty cents.

TA: So political chaos?

MP: And maybe market chaos, too. Well, you know the market’s probably pretty savvy about this thing, and everybody knows what’s going on but we just haven’t communicated with the public. When you say “political chaos” you might well be right. That may be what it was. Congress is going to go “We’re lending this much money on this Triple-C security? What are we thinking here?”

TA: One thing I really like about you guys is in your reporting and writing, you have a sense of outrage that’s not in the Journal, say. This thing is so huge, and you guys are conveying the magnitude of it better than some, and there’s a sense of urgency that’s lacking elsewhere. Is this a conscious thing in the newsroom?

MP: We have been primary movers for transparency in markets since our existence. Bloomberg’s reason for being was to give the buy side enough tools so they wouldn’t get screwed by the investment banks. That’s what we’re about. So we’re a weapon for the buy side and a de facto weapon for every one who has a mutual fund. We just need to level the playing field and let everybody know what’s going on. This is from Matt Winkler on down. This is what we do.

It’s also that we realize this is a defining moment for business journalism and for Wall Street. I think that this organization, this news department, was built for this crisis. We’ve got more tools than anybody, we’ve got the will, we have the assets to go after this in a huge way. Everybody believes that in this room.

Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed (laughs). We need to know how to prevent it from happening again, and we need to know who did it. There’s renewed energy on this front because we’ve staffed up the people who cover banks, the securities firms. We have a lot more people going at real estate and a bunch of different areas that this involves. That was a conscious move from meetings we started having in 2007. We hired people and we moved people from one area to another area.

Our issue is we have readers who are very interested in very small things. That’s why they have the terminal. It’s because they’re interested in natural gas or things that aren’t connected with the biggest story in twenty years, maybe longer. This is a big deal and it’s going to be going on—I swear to God I’m going to retire on this story, because it’s just going to keep happening.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at [email protected]. Follow him on Twitter at @ryanchittum.