Were We Forewarned??

Nassim Taleb studies randomness and the role of uncertainty in science and society, with particular emphasis on the philosophy of history and the role of fortunate or unfortunate high-impact random events, which he calls "black swans", in determining the course of history.



He wrote a highly popular book, called the Black Swan. As he writes, A Black Swan is a surprise event - like the discovery of the black bird in Australia, which was unpredictable because swans in the Old World were all white. But unlike the bird, my Black Swan carries large consequences.


He summarizes that a Black Swan event is:

• Highly improbable and unpredictable
• It will have massive consequences
• Afterwards, experts will invent reasons why it was predictable, and not random

Recently, staff of The Audit, the business-press section of the Columbia Journalism Review, prepared the List. The List is a comprehensive catalog of relevant stories about the lending industry during the run-up to the mortgage crisis.

They scoured over 1/2 million news articles from 2000-2007, and uncovered just 727 significant stories.

The Audit looked for the best pre-crisis stories during this critical period, after which it was too late for warnings. They found work that falls into three categories, ranging from investigative to non-investigative but otherwise useful service pieces to, for context, non-warnings.

These news articles came from such leading papers as the the Wall Street Journal, New York Times, Washington Post, Financial Times, Bloomberg, Forbes, Fortune and Business Week.

They explored the question of whether the business press provided the public with adequate warnings of the looming calamity—and The Audit concluded that NO, we were not adequately forewarned.

To the extent there were warnings, here are a few notable examples from The Audit's research files:

New York Times, 3/15/2000: A landmark probe of the Lehman Brothers subprime connection. A predatory lending firm closed shortly afterwards. Nothing like this appeared again for seven years.

New York Times, 10/22/2000: Along With a Lender, Is Citigroup Buying Trouble? An investigation of a notorious subprime outfit.

Wall Street Journal, 12/7/2001: How Big Lenders Sell A Pricier Refinancing To Poor Homeowners--People Give Up Low Rates To Pay Off Other Debts.

Forbes, 9/2/2002: Household International succeeds at lending to bad credit risks by managing smarter. People suckered into mortgages by lies and deceit.

Wall Street Journal, 11/10/2002: Friendly Watchdog: Federal Regulator Often Helps Banks Fighting Consumers--Dependent on Lenders' Fees, OCC Takes Their Side Against Local, State Laws.

Bloomberg, 6/26/2003: Credit Swaps, Some Toxic May Soar to $4.8 Trillion.

Washington Post, 11/22/04: Dozens of current and former rating officials, financial advisers and Wall Street traders and investors interviewed by The Washington Post say the rating system has proved vulnerable to subjective judgment, manipulation and pressure from borrowers. They say the big three are so dominant they can keep their rating processes secret, force clients to pay higher fees and fend off complaints about their mistakes.

Los Angeles Times, 3/28/2005: The three plaintiffs contend in court papers that Ameriquest had an art department in a Tampa office where loan documents were altered. In interviews with The Times, they've shown stacks of what they say are internal Ameriquest files proving their allegation. After the crash, such practices are found at Countrywide, WaMu, New Century and lenders across the board.

Los Angeles Times, 10/24/2005: Freddie Mac, the government-sponsored mortgage finance giant, estimates that more than 20% of people who get these so-called sub- prime loans could have qualified for more-conventional prime loans.

Bloomberg, 5/11/2007: Bear Stearns Funds Own 67 Percent Stake in Everquest. Important because the Bear funds were trying to offload their risk on to the stock market. When that failed, the funds went kablooey.

Bloomberg, 5/31/2007: CDO Boom Masks Subprime Losses, Abetted by S&P, Moody's, Fitch.

Bloomberg, 6/1/2007: Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund. This is a good look at Wall St. dumping on clients.

Wall Street Journal, 6/27/2007: Debt Bomb--Lending a Hand: How Wall Street Stoked The Mortgage Meltdown --- Lehman and Others Transformed the Market For Riskiest Borrowers. This is an exemplary examination of the subprime/Wall Street connection. Interestingly, it cites documents from the same case that underpinned the NYT's fine story on 3/15/00.