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Podcast Pulitzer Special: Jake Bernstein and Jesse Eisinger on Wall Street Coverage

ProPublica had the immense honor of winning the Pulitzer Prize for National Reporting for its series, “The Wall Street Money Machine.” The lead reporters, Jake Bernstein and Jesse Eisinger, take a moment to explain the series, how it all started and their reaction after reeling in ProPublica’s second Pulitzer, which was also the first ever awarded to a body of work that didn’t appear in print.

Read their series: The Wall Street Money Machine and the letter addressing the award from our editor-in-chief. You can also subscribe to all of ProPublica’s podcasts on iTunes.


Mike Webb: Hi, I'm Mike Webb, and welcome to the ProPublica Podcast. Each year, the Pulitzer Prize is awarded for outstanding achievement in the fields of literature, musical composition, and journalism. On Monday, April 18th, the Pulitzers announced this year's winners, and ProPublica was once again honored to be among them. Jesse Eisinger and Jake Bernstein won the award in the category of National Reporting for their outstanding Wall Street Money Machine series, which examined how some Wall Street bankers and hedge funds sought to enrich themselves at the expense of their clients and sometimes even their own firms through sketchy transactions that delayed and ultimately worsened the financial crisis.

On today's podcast, we brought the two reporters in to discuss their stories, its impact, and what it's like to win a Pulitzer Prize.

Congratulations and welcome, guys.

Jake Bernstein: Thanks.

Jesse Eisinger: Thanks for having us.

Mike: All right, so listen, why don't we recap the original three stories that you did. Jesse, why don't you tell us how the Magnetar Trade story came together?

Jesse: Sure. So we were approached by the guys from Planet Money, Adam Davidson and Alex Blumberg, in the summer of 2009. And they said. "We've done this great piece of radio journalism for This American Life called 'The Giant Pool of Money,' but we want a follow‑on piece. We want to know what happened afterwards." And there had been an enormous amount of journalistic attention shed on the events of September 2008, when the global financial system collapsed, or was on the verge of collapsing. But there had been very little attention paid to the run‑up in late 2006 and early 2007. And we thought that was a great place to start looking for stories. And so we set out.

Jake: Alex and Adam had sort of done this soup‑to‑nuts version of the financial crisis, where they had looked at everything from housing to structured finance, and they had sort of seen the craziness of the boom. But they had felt, while they were doing their reporting, that there was another side of the story that they weren't getting, which was that people knew that there was problems, knew that there were serious asymmetries that there were issues going on, bankers, people on Wall Street, and that they took advantage of that. And that in taking advantage of it, they may have made the crisis worse.

But they didn't know exactly where that had happened and who was responsible, and so they sort of tasked us with trying to find that out.

Jesse: Yeah. This sort of basic, essential sort of journalistic question, "What did they know and when did they know it?"

Mike: And what was it that you found?

Jesse: We started looking at this world of CDOs, these bundles of mortgage securities called "collateralized debt obligations." That was the nexus of the financial crisis. That seemed like a very natural place to look. And what we found was initially a lot of people in the CDO world telling us about a hedge fund out of Chicago that very few people had heard of called Magnetar.

Mike: Why Magnetar? Were they really that big of a player? They were the ones?

Jake: They were pretty big. But it was, we would talk to people, CDO managers and bankers and all kinds of people, and we'd just keep on hearing the same thing. "You really need to look at these guys." These guys were responsible for a lot of deals, and they sort of epitomized this sense in '06 and '07 of folks who were really just sort of inflating the bubble bigger and bigger and bigger, even though they knew it probably wasn't sustainable.

And what we found out after doing our reporting was that Magnetar was responsible for more than $40 billion worth of CDOs, which is a pretty big figure any way you slice it.

Jesse: Yeah, it was a huge figure. And they were by far the dominant player in going to Wall Street and asking Wall Street to make deals for them. And they would invest in the deal to make it happen, but really what they were doing was betting against the deal in a much greater proportion than they were actually investing in it. And so they had much more to gain from the collapse of the deals than their investment in the deals.

Mike: OK, and then the second story about how the banks allowed this to happen, or how the banks played a role in this.

Jake: Well, for our second story what we really wanted was to quantify this in some way. And so we managed to do some work with this wonderful data firm called Thetica, and they really crunched the numbers for us and allowed us to see sort of what was going in the CDO business. Because we increasingly were hearing that there weren't that many investors in '06 and '07, that people were actually ‑ investors, real investors, real money investors ‑ were leaving the market. Because they kind of saw what was happening. And for other reasons as well.

But the volume of deals kept on growing, and really skyrocketing. So we wanted to know: who's buying this stuff? So through our analysis of the data we began to see that, in fact, the biggest buyer for one key part of the CDO was just other CDOs.

And it was this huge sort of self‑dealing daisy chain, if you will. So that's really what the second story was about.

Jesse: Right. And what was happening with those purchases was they were essentially being orchestrated by the banks themselves. The banks actually controlled, dictated, the purchase of parts of CDOs by other CDOs. And the banks were using that to veil, mask their own purchases of the CDOs. So essentially what they were doing was buying their own garbage, which had a wonderful effect of increasing the bonus pools for the bankers themselves that were creating these deals, but eventually led to the destruction of Merrill‑Lynch, the near‑failure of Merrill‑Lynch, the collapse of CitiGroup, UBS.

Eventually the Wall Street collapse, mainly because of CDOs, especially because they were regurgitating this kind of stuff and eating themselves.

Jake: And of course at the end of the day it was taxpayers who were on the hook for this.

Mike: Right. Now what was the broad scope of the third story.

Jake: The third story is we sort of dove deep into Merrill‑Lynch, which was the biggest producer of CDOs during this period, and really tried to figure out something that was kind of a question mark that we had. Merrill‑Lynch kind of did itself in by taking so much of their own product. They were eating their own cooking. And yet why would a bank, which is really concerned about profit and traders who are concerned about making profit because they want bonuses off of that profit, why would they take stuff that was losing money, that no one else wanted?

And so we dug deep into that and we found something that internally in Merrill was called the "subsidy." And the way the subsidy worked was that the CDO group was not allowed within the bank to keep the stuff they couldn't sell; they had to get rid of it.

And so what they were doing was they were essentially selling it to another division within the bank, another group of traders who were marking it at close to book value, at close to par. And then the CDO group was sharing its bonuses with that group as an incentive for them to take it.

Which was called the "subsidy," and which explained how a bank like this could do this kind of thing.

Mike: OK, and last week the Senate issued a report that sort of talked about ‑ that I know mentioned some of your work ‑ and talked about some of the necessary reforms.

Jesse: Yeah. The Levin committee ‑‑ what is it called? It's the...

Jake: The Permanent Sub‑Committee on Investigations.

Jesse: Yeah, the Permanent Sub‑Committee on Investigations, a well‑known bi‑partisan committee, came out with an enormous report on the CDO business. Largely on the CDO business, on the sort of financial collapse. And they cited ProPublica's work numerous times.

Mike: Your work.

Jesse: Our work, which was very flattering. And I think that the central premise of our work, that CDOs were buying CDOs and propagating this machine, keeping this machine going to the benefit of individual bankers. That was a running theme in the report. And then the other running theme was that bankers knew the business was slowing down and took advantage of it. Goldman‑Sachs was the main focus of their report, Goldman and Deutsche Bank. So they've got an enormous amount of detail on that. We had focused on other banks: Merrill, Citi, primarily, and the Magnetar trade. But they were thematically very similar.

Jake: The Levin committee found this thread of a lack of transparency and just incredible greed and self‑interest on the part of Wall Street. And that was the same thing that we had found, so they sort of cited our work, particularly about Magnetar, to sort of demonstrate what was going on and what they were seeing with a bunch of other banks and players.

Jesse: And the essence was that there was a conflict of interest, where the banks were serving their interests or the interests of one customer, and not disclosing the genesis of these deals to other customers. So they weren't saying, "We're betting against this." Or, "The hedge fund that helped create this is betting against it, it's not betting for it."

Mike: Right. And that was a key point in your story.

Jesse: In the Magnetar story, yeah.

Mike: Right. What other reforms came about because of your work? Or what other impact have you seen it have?

Jake: The jury's still out, because they're kind of writing the rules. But the Magnetar story was cited on the Senate floor by Senator Chris Dodd during the debate over what eventually became the Dodd‑Frank financial reform. So that's sort of still in the process. The SEC has been doing some work around the stuff that we've written about. They've issued Wells Notices to some of the people who are involved in the Magnetar deals. A Wells Notice is a notice that you're under investigation and that they might be bringing charges against you.

One of the deals that we focused on was a JP Morgan deal called Squared, and that's the deal that they've looked at. They've also looked at some other deals that are under investigation that we wrote about first. That's one sort of movement.

But there really hasn't been as many prosecutions and as many consequences for what was the largest financial collapse since the Great Depression. And it surprised a lot of people.

Mike: And you wrote about that in a recent column.

Jesse: Yeah. I think that everybody from the outside is utterly shocked that there haven't been more people charged, going to jail. From the mortgage originators like Countrywide or New Century to Washington Mutual to the investment banks, Bear Sterns, Lehman. I think that you could make very good cases that some of these banks mislead their shareholders at the least; that were misleading in testimony to the Senate. And that they lied about their books.

Mike: So your work will play a role in some of the lawsuits that end up being filed.

Jesse: I think that, yeah, we've already been cited in civil lawsuits. So I think that that's one place where this is going to play out. And as Jake said, the other place this is going to play out is the SEC. But I think that to a large extent the perpetrators of the worst financial crisis since the Great Depression are going scott‑free.

Mike: I want to find out how you guys responded to winning the actual award. How did you hear about it first and what was your reaction?

Jesse: We won something?

Jake: It was quite special. We all gathered around the computer here in the office, the entire staff, waiting for the three o’clock hour to strike and the committee to put up who were the winners. And then we saw our names and knew that in fact it was real. And it's obviously one of the great honors and pleasures that a journalist can have in their career, so it's pretty terrific.

Jesse: And I think that we can say with straight faces that we we’re not in it for prizes, but when you win one, it's quite wonderful.

Mike: People have pointed out that business journalism doesn't generally do well with the Pulitzers.

Jake: We were very surprised that we would get an award like this, simply because our story's very difficult. It's a very complicated story. It really requires some work on the part of the reader, because they have to go with us and really try to understand these things. And it was a hard story to put together. So it's just very gratifying. And the other thing is, it appears that our series is the first series that was published online before it was in newspapers that's won a Pulitzer. I think we'll see a lot more of those in the years to come, but to be the first one is pretty cool.

Jesse: And we were cited especially for bringing this to a level for the lay reader. And I think we took a lot of pride in that. Our editors really worked with us. They worked and worked and worked with us, Steve Engelberg and Eric Umansky, to make our points comprehensible, jargon‑free, accessible to the average reader. And the This American Life guys helped us structure the narrative in a way that was accessible to people and drew them in and drew them along in the story. And so we're grateful for that. And I think that was one of the great accomplishments of this story, this kind of collaboration and partnership that allowed the storytelling to really come through.

Jake: Yeah, certainly. That was our biggest challenge, is we really wanted this to be something that a general audience could appreciate. And we put a tremendous amount of work in it and we're very pleased.

Mike: All right, guys. Congratulations. We're really thrilled for both of you.

Jesse: Thank you.

Jake: Thank you.

Mike: That was Jake Bernstein and Jesse Eisinger. You can see all of the elements in their series at And now for our Officials Say the Darndest Things Tumblr Quote of the Week. "I always thought I was gonna have like really cool phones and stuff. We can't get our phones to work. C'mon guys, I'm the President of the United States! Where's the fancy buttons and stuff and the big screen that comes up? It doesn't happen."

Who said it? Well, I'm going to go out on a limb and guess that 100 percent of our listeners identified the remark as coming from President Barack Obama, as he was overheard speaking to campaign donors about White House technology and other issues.

OK, that does it for this week's show. Thanks to Minhee Cho for producing this podcast and to our former producer Brent Gardner-Smith, for his valuable input this week as well. For ProPublica, I'm Mike Webb. We'll see you next time.

Transcription by CastingWords

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