Hear no evil, see no evil, speak no evil.

"How could 9,000 business reporters blow it?" asks Dean Starkman, a former Wall Street Journal reporter and current writer for the Columbia Journalism Review, in a recent essay that examines how the media missed the warning signs in the run up to the credit crisis.  According to Starkman there are several factors to consider:

- Shrinking newsrooms and increasing financial pressure on media as factors that have reduced investigative reporting.  

- The rise of M&A reporting, in effect, made media Wall Street "insiders" dependent on Wall Street for information and potentially coopting independence

- An editorial focus on outsized CEOs was a distraction from the real business stories underfoot

Starkman makes good points but sensibly does not entirely indict media for missing the boat.  Indeed, many in the media were asking the right questions and reporting about smoke in the real estate market.  As early as 2005, Ruth Simon and Bob Hagerty of the Wall Street Journal were asking my clients hard questions about subprime lending practices and default rates.  It is clear to me that they knew something dangerous was happening, but they never could get their suspicions confirmed by the right people.  The complexity of mortgage securitizations and CDS and CDO markets made it almost impossible for journalists to identify what was going on, much less "expose" anything with confidence.  (See a more complete defense of financial media at The Deal.)

The big question is how can the media (or regulator or other whistle blower) focus on bad news when the market is going up and up?  Not easy.  Ask Harry Markopolos.  Indeed, there were examples of stories that identified exactly what the risks were.  In September 2005, the Wall Street Journal wrote an in depth piece on the limitations of the Gaussian coupola, the formula at the heart of the models evaluating mortgage securities and derivatives.  The piece explains how the formula was being applied to gauge risk of CDOs and synthetic CDOs.  Read today, the article is truly scary.  Back then no few paid attention.  The Gaussian coupola is the subject of the cover story in Wired this month.

Of course, there were many who figured out at least some of what was happening.  Steve Eisman of Front Point Partners (see the December cover story of Portfolio) and John Paulson made fortunes shorting financial firms.  It's just that their voices were not heard over the din inflating the bubble.  Why be a sourpuss when everyone is getting rich?

Someone, though, always seems to know the truth.  Even in the Bernie Madoff scandal, certain private banks refused to allow their clients to invest in the Madoff funds.

It appears that, especially during bubbles, it takes more than one voice to show that the emperor has no clothes.  It can't be media alone, or short selllers alone, or a noble minded whistle blower, like Markopolos, alone.  

In the wake of the banking crisis, hedge funds should choose to be more vocal, utlizing the media and other means to expose unsound unsound business practices, accounting sleight of hand and fraud.  Speaking up and getting people to listen, even when they don't want to hear the truth, is good for hedge fund business, the economy and our society.