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The subprime advertising crisis is here

Steve Carell is seen on the set of 'The Big Short' on May 20, 2015 in New York City.
Ignat | Bauer-Griffin | Getty Images
Steve Carell is seen on the set of 'The Big Short' on May 20, 2015 in New York City.

This commentary was originally published on Medium.

In the film adaptation of Michael Lewis's book "The Big Short," Mark Baum (played by Steve Carell) explains the short-sighted thinking that led to the subprime mortgage meltdown:

"We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short-sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did."

The advertising and media world have likewise wrongly been focused on short-term outcomes, and via disjointed incentives have either perpetrated outright fraud on their customers and/or the public, or have stood by while other companies they've trusted have done so.

1. Lying to, and trading against, your customers. Investment banks lied to, and have traded ahead of ("front-run"), their customers over the years. In this regard, Goldman Sachs in 2016 agreed to pay a $5 billion settlement, for issues stemming from the 2008 mortgage crisis. The subprime advertising equivalent: The Association of National Advertisers released a report claiming that advertising agencies defrauded their own customers by failing to disclose rebates they received from vendors, and also routinely act as principals in buying ad impressions and then reselling them to clients at 30 percent to 90 percent markups.

2. Low quality + high quality = high quality(?). Mortgages were bundled together into tranches by quality, but the poor quality tranches didn't actually diminish the credit rating of the overall product even as they were failing at higher-than-expected rates. The failure of these poor quality mortgages in many cases caused the entire mortgage-backed security to default. Online, (as highlighted in this 'Clickbait & traffic laundering' report by Kalkis Research) aggregators like Taboola, Outbrain and RevContent help publishers launder suspect or Not Safe For Work (NSFW) traffic, and in so doing. let them buy extra impressions they need to fulfill their highest CPM ad campaigns. This is something called "sourced traffic" and the majority of advertisers have no idea this is happening.

3. Big sales commissions could mean lower standards. You didn't need a college education to make $250,000 a year as a mortgage broker back in 2004–2006, the go-go days of "poor credit? accepted!" adjustable-rate mortgages. Subprime mortgages paid the banks more and they, in turn, gave sales bigger "rips": Salespeople focused on getting those generous commissions worked extra hard to make sure almost anyone could qualify for a mortgage, and, fueled by online refinance leads, they bought from companies like NexTag, LowerMyBills and LendingTree, and did just that. In online advertising, ad networks and their salespeople have continually lowered their standards to allow almost anyone to run an ad campaign with just an email address and a valid credit card. White Ops has shown at a security conference how a hacker could theoretically distribute malware to user's machines thanks to lax online ad policies. And don't kid yourselves — malware ad campaigns show up

.

4. You and your data are being resold. Mortgages are packaged up and resold, with the entity that you initially did business with often having no stake in your financial product in future. Similarly, your personal information is being resold by the sites you visit, via third-party data brokers, ending up who-knows-where. This creates incentives for data collection for entities with no concern for the consumer, since the collector doesn't have to deal with any of the downstream consequences.

5. Regulatory entities paid by the firms they regulate. The major ratings agencies like S&P and Moody's failed to sound the alarm about potentially toxic CDOs and mortgage-backed securities from 2006–2008, and, at the same time, were paid by the banks whose products they are regulating. A comparison could be made to the Interactive Advertising Bureau, which takes a great deal of money from ad-technology companies and ad networks, even as it supposedly tries to set standards and lobbies to retain self-regulation for the online ad industry. The loser ends up being the consumer.

6. Trying too hard to make something a commodity. The fundamental premise behind creating these toxic mortgage and debt securities was that you could take dissimilar things (a $120,000 loan to an insurance salesman in Naples, Florida, and a $400,000 loan made to a BART driver and his wife in Alameda, Calif., for example) and find enough similarities to turn them into a tradable commodity for Wall Street. Over time, these representations become more and more disconnected from reality as the fundamental characteristics of the underlying data/items change, and the nuances are ignored. Ad exchanges and "programmatic ad buying" have also perpetrated this fiction by letting ad buyers "trade" online ad impressions, and buy user-data segments like "auto intenders-last 14 days." The more this is done, the easier it is for bad actors to game the system, such as introducing bot-impressions into this commodity mix, bundling lower-quality impressions (e.g. the 7th ad on a single page), stretch the definition of these categories (reading a motorsport article is kind of like intending to buy a minivan, right?) and worse.

7. Nobody knows who is actually paying the bills. Wall Street built proprietary trading operations where (in many cases) a group of 100 or fewer professionals could be making more profit than the other 10,000 employees of the company. I don't believe that journalists understand how their salaries are paid, and do not have a notion of which ads are making the most money for their employers (and troublingly, the extent to which these ads and offers are outright fraudulent). I've yet to see any journalist from a major publication address this in an article.

8. Buying stuff you can't afford. There is recent evidence that celebrities hired by big food companies appear in food ads aimed at children that are helping to make our kids fat. Too many financial institutions relaxed their standards and pushed unsuitable mortgage products (no-interest periods, and/or negative-amortization loans) on consumers, putting them into homes and loans they couldn't afford. Ads with false claims (with a bit of help from our overconfident human nature) help us convince ourselves we need things we really don't need.

9. Taking advantage of the weakest among us. As Professor Scott Galloway of NYU says, "Advertising is increasingly a tax that poor people or the technologically unsophisticated pay," — if you've ever signed a mortgage agreement, you've agreed to lots of fine print spread across hundreds of pages. Hidden in these pages may be hidden time bombs like adjustable "teaser" rates (which were heavily advertised by those aforementioned companies in online ads) that are going to disappear quickly, and could leave the consumer with monthly payments that double or triple. I've spoken to consumers who clicked on online ads on major websites, signed up for a free trial of weight loss pills and who ended up being charged hundreds of dollars and/or wasting their time in disputes with credit-card companies. While you and I *might* pride ourselves on never clicking on these ads and not being fooled, those that do are the people paying for the news content that we consume.

10. Gone before the music stops. Sadly, shady ad networks, agency- and ad tech execs alike have more in common with investment bankers and mortgage brokers than they'd like to admit. Everyone wants to collect their bonuses and cash out before the music stops. Look at that ad sales guy's laptop while they're camped out at Starbucks (hoping to "run into" the agency media buyer who sometimes stops in there); I bet you $5 they're running an ad blocker. They know the risks.

As Lewis' book explains, the subprime debt crisis was created by the crazy, opaque leverage that banks and mortgage investors had, which magnified the impact of losses in loan portfolios to a catastrophic extent that threatened the entire economic system. If the marketing and media business implode, it may not cause a collapse of the same magnitude, but these firms are trusting too many third parties who are now magnifying their problems. I currently trust the quality of content from the New York Times and also implicitly the quality of the ads they show, but as they outsource their ads to others, these two things become more and more disconnected — and the leverage multiplier can be a simple tool called an ad blocker, that, if I decide to install, immediately destroys not only the New York Times' ability to show me ads, but the ability of every other website, too. Leverage!

Joe Marchese wrote a great post back in 2014 called "The Coming Subprime Advertising Crisis." He summed it up well: "I don't think we have the sense of urgency we need. And we need that because, unlike the financial-services industry, advertising is not too big to fail … because online display ads are so terrible and so oversaturated, most ordinary people don't particularly like advertising and wouldn't care if it went away."

The wolf is at the door. All is not yet lost, but it is time to get serious about fixing it.

Commentary by Rob Leathern, CEO of Optimal.com, which lets consumers donate small amounts of money to their favorite websites in exchange for blocking ads. Rob was an early employee at LinkedIn and sold his first software start-up in 2013. Follow him on Twitter @robleathern.

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