All of us remember 2008 as if it were yesterday. We are still suffering from the consequences of the bust of the financial bubble. We remember vividly the massive hubris that led to the near death of Bear Stearns and the collapse of Lehman Brothers. That hubris was fed and supported by the media that created a cult around figures like Richard Fuld and other Wall Street CEOs.
Many groups and organizations have been blamed for the financial crisis. But one has escaped the blame it richly deserves. That is Financial Television. In our opinion, Financial Television networks made the financial bubble much more widespread than it would have otherwise been.
There were many smart, sensible voices that warned about the impending disaster. These were scoffed at, ridiculed and then passionately attacked for crying wolf, for blaming “legendary” Wall Street executives, for engaging in witch hunts. When these voices were silenced mainly by Financial Television, no one was left with a large enough megaphone to warn the American people.
This reality was brought home to us this week, specifically this Thursday. We were first appalled and then frightened for the future of independent opinion. So we decided to write about what we witnessed on Thursday, November 3, 2011.
One Ratings Agency, One Wall Street Firm, One Financial TV Network
Remember the outcry about Rating Agencies. Remember the anger about their unwillingness to warn about risks in Wall Street Firms. Surely, the rating agencies could have and should warned us. But this Thursday, we saw what could have happened to rating agencies had they tried to warn investors in 2007-2008.
Egan-Jones is an independent ratings company. They are independent from Companies & Issuers of Debt they rate. This means Egan-Jones does not accept fees from companies they rate. Instead, Egan-Jones receives fees from investors. This means Egan-Jones does not have the conflict of interest that Moody’s and S&P do.
Egan-Jones is well known and respected on Wall Street and by Financial Media. Sean Egan, a Founding Principal of Egan-Jones, was a frequent guest on CNBC this summer when CNBC wanted honest opinion about European Banks. Sean Egan was very critical of the financial condition of European Banks and CNBC loved him for his honesty and candid critique.
This Thursday, Egan-Jones downgraded the ratings of Jefferies from BBB to BBB-minus. The lower rating is still Investment grade. The reaction of CNBC to this modest one notch downgrade is the topic of this article. We are not credit analysts. We do not intend to discuss the merits of the downgrade.
Our sole interest is to discuss the reaction of CNBC to this action by Egan-Jones. As a national network, the actions of CNBC & its anchors are of vital importance to Individual Investors that watch CNBC and to American Society as a whole.
Interview of Sean Egan by CNBC’s David Faber, Melissa Lee, Simon Hobbs and Carl Quintannia
The ideal way for CNBC to cover a dispute between Jefferies & Egan-Jones would have been to get the CEO or CFO of Jefferies and Sean Egan together in an interview and moderate the discussion. Did CNBC even try to arrange such a discussion? We do not think so.
CNBC anchors spoke to Jefferies Management and then, armed with what Jefferies told them, proceeded to interrogate and chastise Sean Egan. How do we know this? From CNBC’s own transcript of their conversation with Sean Egan on Thursday, November 3 at 10:50 am. We encourage readers to watch this entire interview at Jefferies Downgraded on Europe Exposure on CNBC.com. The clip also has an automated transcript.
The first questions were from CNBC’s Melissa Lee & Carl Quintannia:
- Lee – So, you’re saying at this point they (Jefferies) would need to raise capital and that effectively would be dilutive.
- Egan – They have a 13-1 leverage which is a lot less than MF Global’s 40:1. None the less, the environment has changed post Lehman Brothes, post MF Global, where by the people who do business with Broker Dealers get stuck and therefore, risk managers are less tolerant than they were a couple of years ago.
- Quintannia – Obviously, the fact the net exposure is thin, Sean, is not enough. Is there something about the offsets that you find unsatisfactory? Is it a matter of buying your protection from a bank in Europe that might be in trouble?
- Egan – Absolutely. You have to make sure that there is a balance. There is no perfect hedge in the market and you worry about whether or not this structure is set up for the hedges and in the case of the company, Jefferies, we would like them to raise more capital… 13-1 is just too high in this environment. It’s riskier- banks are supposed to have 9-1 leverage and the company is higher than that.
At this point, CNBC’s David Faber got involved. David Faber is CNBC’s expert reporter on Private Equity, Mergers & Acquisitions and the Issuance of Debt by Wall Street Firms. His reporting depends on maintaining excellent contacts at senior level of Wall Street firm. He has invited Senior Managers from Jefferies on CNBC to discuss the Credit Markets in the past.
- Faber – Sean, this is David Faber. I’d like to understand what happened here. I spoke to the CFO & the CEO, you took a shot at a very vulnerable company here. Stock down as much 20% at one point today. They say they explained to you they had offsetting short positions in these securities, cash positions, CDS, and that you said ultimately if you become public with that, I might revise my rating. I heard you say you are not going to. Why (almost in a shouting tone) would you come with this report specifically citing the sovereign exposure when they (listen to the emotion in Faber’s voice) told you they had (again emotion) all the shorts in place that offset it?
We were both amazed and perplexed by Faber’s words. Faber evidently accepted at face value what Jefferies told him. Then, having accepted that, Faber shouted at Sean Egan for not accepting the Jefferies point of view. Didn’t Faber realize that it is the JOB of a ratings company to NOT ACCEPT at face value what a Company tells them, that it is the explicit job of a ratings company to question in detail the assertions of Company Management? Otherwise, what would be the difference between a ratings company and a publicity firm?
Come to think of it, isn’t it the JOB of a journalist, even a TV journalist, to question what a CEO or CFO tells him or her? Obviously, David Faber doesn’t think so.
What perplexed us is why David Faber called Jefferies “a very vulnerable company”? If Jefferies is so solid according to Mr. Faber, where does the vulnerability come from? Did Faber’s emotion spring from his own sense of vulnerability of Jefferies?
Sean Egan answered the question calmly:
- Egan – Let’s put things in perspective, David. We cut our rating from BBB to BBB minus and we put it on negative watch. It’s in recognition of the change in operating environment. Hopefully, the shorts do completely off set the longs.You never have complete comfort on that. In fact, if you look at the tapes from Lehman Brother, Bear Stearns, they said they’re completely hedged and not to worry about it. They have very sophisticated internal risk assessment systems and they acted too quickly. … I think that the bottom line here is that 13-1 leverage is too high when you’re unlike a bank – you don’t have the deposits backstopped that are backstopped by the U.S. government effectively and therefore, more vulnerable. Hopefully, they’ll raise capital to reflect the change in the working environment.
The questioning of Sean Egan went on for a few more minutes. At the end, CNBC’s Carl Quintannia asked a sensible question:
– So, if you had to put an end period on it, is this call more about
what you know or more about the opacity of disclosure, things you do not
- Egan – it’s more a warning that the company has to
respond. The lessons learned from Lehman Brothers, Bear Stearns, MF
Global is that there have been massive hubris whereby the companies have
assumed that everything is fine, they haven’t taken the investors into
account, they haven’t adjusted their business and as a result, they’ve
been caught up in it and there’s been massive loss to the country.
Hopefully, there will be some response. Jefferies is an incredible
franchise and we hope they live for another 150 years as is Lehman
Brothers and hopefully, they’ll make adjustments and realize the
operating environment has changed and they have to respond to it. It
would be foolish not to.
We leave it to Jefferies, Egan-Jones and the financial markets to debate & decide whether 13:1 leverage is acceptable for a broker dealer in the middle of a crisis in Europe and a weak economy at home.
But we do feel that CNBC Anchors, David Faber in particular, acted as a media advocates of Jefferies and not as Journalists.
From David Faber’s Emotion to Brian Sullivan’s Passion
At 2 pm on Thursday, Brian Sullivan, anchor of CNBC Street Signs, jumped to passionate defense of Jefferies. He said he had been on the phone with Jefferies management multiple times. He did not say whether he had called Sean Egan. Then he reported he had a brief telephone interview with the celebrated analyst Meredith Whitney. Sullivan then showed on air the comments of Meredith Whitney:
- Rich Handler is one of the best CEOs no one’s ever heard of,…he has managed the
company so conservatively and has raised capital and done the largest
debt deal ever just to play it safe and have cap buffers.
For some reason, CNBC did not post the videoclip of Sullivan’s comments on CNBC.com. Instead, Jeff Cox, a CNBC writer, wrote an article titled Jefferies Not Risk-Takers, CEO ‘One of the Best’:Whitney on CNBC.com.
If you read this article, you will notice that Meredith Whitney did not make a single factual comment about the issues raised by Egan-Jones, the ratings agency that downgraded Jefferies by one notch. Ms. Whitney did not address the 13:1 leverage mentioned by Egan-Jones. Ms. Whitney did not even touch on whether hedges can properly reduce exposure in volatile markets and the European crisis. See how Jeff Cox, the CNBC writer, described Ms. Whitney’s attitude:
- Whitney, though, said she would be more inclined to believe that Jefferies did not take irresponsible risks.
“inclined to believe” – These are not the words Meredith Whitney would use when she is staking her reputation as an analyst. These are gentle, generic words of a well-wisher.
But Brian Sullivan was not deterred. He paraded the words of Meredith Whitney as evidence that Jefferies was correct in its posture. He then brought a fan of Jefferies, a money manager named Anton Schutz, to defend Jefferies:
- Sullivan – Anton, were you able to hear the comments I got from Meredith Whitney.
- Anton Schutz– I did and I agree wholeheartedly.
- Sullivan – Everybody is piling on Jefferies today. We’re not trying to say everything’s fine, but there’s a lot of negative commentary out there. Give us the real story of Jefferies right now.
Does Sullivan forget the role of a journalist? The better question might be, did he ever know? He has a great career ahead as a PR guy. First the victimization plea – “everybody is piling on Jefferies”. Then asking a fan to give “the real story’.
What was the “real story” according to Mr. Anton Schutz? That Egan Jones was yelling fire in a crowded theater. No, we kid you not. Mr. Anton Schutz actually said this to Brian Sullivan and Sullivan accepted it as a fact.
Not to be outdone, Sullivan’s co-anchor Amanda Drury jumped in with “you obviously see the witch hunt going on with Jefferies“. From what we see of her on-air, Ms. Drury is not blessed with knowledge of markets. Her role on CNBC Street Signs is to bring “sunshine” views. We recall Ms. Drury proudly proclaiming that her degree was in “mall shopping” during a discussion of college degrees on Street Signs. Yet, Ms. Drury fearlessly opined that a debt credit rating was a “witch hunt” of Jefferies.
David Faber may be emotional about Jefferies. He may act as a media advocate for Jefferies. But he knows credit markets. Brian Sullivan shows no evidence that he does. In our opinion, David Faber has forgotten more about credit markets than Brian Sullivan ever knew. May be that is why Brian Sullivan resorted to passion and “piling on” comments and let his co-anchor talk about a witch hunt.
We urge all readers to watch this interview between Brian Sullivan and Anton Schutz. Those who do will realize we are actually being understated in our comments. The interview is titled Defending Jefferies. In case, you wonder there is no interview, no videoclip titled “Defending Egan-Jones” on CNBC.com. Such is the standard of Journalism at CNBC.
Only one man stood up to defend Egan-Jones on CNBC Street Signs. That man is CNBC’s Herb Greenberg. Kudos to Mr. Greenberg. Herb Greenberg has always done that. Witness his comments in the CNBC videoclip titled Lehman vs. Short Sellers on April 1, 2008, yes in 2008 when so many at CNBC were defending Lehman and accepting at face value what Dick Fuld, Lehman’s CEO, told them.
Is This Why no one downgraded Lehman in 2007-2008?
This Thursday’s vitriolic attack on Sean Egan by CNBC Anchors teaches us why no ratings agency downgraded Lehman Brothers or Bear Stearns in 2008. Today, we know what problems at Wall Street Firms can do to our economy. We did not know that in 2007-2008.
The financial bubble was going strong then. Wall Street CEOs were hailed by CNBC as great leaders. CNBC anchors, including David Faber, were celebrating global growth, global liquidity, LBOs and “covenant-lite” deals. Can you imagine what CNBC would have done to a ratings company that dared to downgrade Lehman in late 2007 or early 2008?
You don’t have to imagine. Just look at what CNBC did to Sean Jones on Thursday, November 3, 2011 and magnify it hundred-fold.
You Eat My Bread, You Sing My Song!
This past summer, S&P downgraded America. CNBC Anchors discussed that downgrade but they did not seem or act outraged. But when Jefferies was downgraded this Thursday, they rose in up emotional and passionate outrage. This may look strange and sound surprising. But it should not.
CNBC Anchors eat the bread of Wall Street. They depend on Wall Street executives as sources, they rely on Wall Street strategists for content, as expert guests on CNBC shows. Imagine a CNBC cut off by Wall Street Firms. Could it survive? We doubt it.
So it does not surprise us that CNBC Anchors sing the song of Wall Street. They even adopt Wall Street mannerisms and lingo. Wall Street has always held Individual Investors in contempt. The Street never says Individual Investors. Instead Wall Street uses the derogatory term “retail” investors, dumb investors that can be made to pay high fees for left over products and allocations.
Ever their master’s voices, CNBC Anchors call their viewers “retail” investors. Sometimes anchors like Melissa Lee & Carl Quintannia, two anchors who “interviewed” Sean Egan on Thursday, use the term “masses” for their viewers.
This contempt towards Individual Investors is probably why CNBC Anchors have damaged their viewers at the top of virtually every market cycle. They shouted “Qualcomm, Qualcomm” in the first quarter of 2000, they spoke glowingly of global growth, global liquidity in late 2007.
We have witnessed bad CNBC Anchor behavior over many years. But we had never seen CNBC Anchors come as unhinged as we saw on Thursday, November 3, 2011. They used their media might to savagely attack an independent ratings company that did its job, that published what it thought was a correct rating of risk of a Wall Street firm. We hope CNBC Management is ashamed of what happened on their network and apologizes to Sean Egan.
Journalism is based on Free Speech. You don’t have to like an opinion or agree with it to defend the right of another to express that opinion. Wall Street does not believe this or practice it. Neither does CNBC, as this past Thursday demonstrated.
do not mean to paint all of CNBC with the same brush. Many CNBC
reporters do a superb job. Diana Olick, Phil Lebeau, Steve Liesman are
experts in their areas and help Individual Investors with their
knowledge and insight. Rick Santelli is nationally recognized for his
courage, candor and his unfailing attention to needs of CNBC viewers. Herb Greenberg often acts as the conscience of CNBC as he did on Thursday afternoon.
The above are our opinions. They are based on what we observed on CNBC. We do not wish to be unfair to anyone. So we ask David Faber, Brian Sullivan, Amanda Drury, any CNBC anchor or anyone else at CNBC to let us know if and how they disagree with our opinions. We shall print their response verbatim.
Send your feedback to firstname.lastname@example.org OR @MacroViewpoints on Twitter