Tuesday, August 05, 2008

NYT Hit Job on Freddie Mac

by Tanta on 8/05/2008 08:23:00 AM

This has to be read to be believed.

More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis.

Many of those interviewed were given anonymity for fear of damaging their careers by speaking publicly.
Actually, all but two of the "more than two dozen" were given anonymity to damage Richard Syron's career while protecting their own, by my reading of this. One former Freddie Mac executive and one industry consultant are named. Nobody else is. And we are given no idea how many of the "more than two dozen" are shareholders. (Who need to protect their careers?) Or how many of them were found on Yahoo! message boards. (Hey! We don't know that they weren't!)

The Times reporter, Charles Duhigg, can't even bring himself to include Syron's full bio:
Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange. An economist with a Ph.D. and the first in his family to graduate from high school, Mr. Syron was welcomed as an unpretentious but politically astute leader.
I have to wonder why the Times leaves off the part about how Syron is a former deputy assistant Treasury Secretary, asssistant to Federal Reserve chairman Paul Volker, and president of the Federal Reserve Bank of Boston in the late 80s and 90s, which included being a member of the Open Market Committee. None of that makes him perfect or infallible or anything else, of course. But why does the Times leave it out? If Syron is as clueless as the Times wants us to believe, isn't it relevant that Syron had a very influential role in restructuring failed banks and the FSLIC during the last major banking crisis? I remember all that being quite relevant when Freddie hired him in 2003 after the accounting scandal.

No, but a former employee wrote a memo in 2004 that apparently didn't impress Syron all that much. A lot of us wrote memos in 2004 that didn't impress a lot of people all that much. I can relate to the urge to say "I tolja so." I'm not sure I can relate to the claim that if this one memo had been taken seriously, all this "crisis" could have been averted.

But the Times story just isn't interested in plausibility:
By the time both men [Syron and Fannie Mae's Mudd] took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans.

By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more.

Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.
"By the time both men took over." As far as I know the market has believed in the implicit guarantee of the GSEs since the day the GSEs were chartered. To say they "made money by capitalizing" on that fact is to say they operated as GSEs--government/private hybrids--since they were chartered as GSEs.

Also, what's with this exposure to the "unlikely, but potentially catastrophic possibility" of home price declines? What are we saying here? The article seems to want us to believe that all the probabilities had in fact been laid out for Syron (by his trusty memo-writer) and he ignored them. But it was also "unlikely"?

I suggest that the Times reporter and his anonymous sources (whose self-interest, of course, we cannot measure) are in a bind here: as they all, including the Times, spent so many years denying the reality of the housing bubble, they have to stick to the hoocoodanode line. But the currently popular narrative is about the GSEs being front and center of goofball lending--as hard to swallow as most of that is--so we have to shade this into "the GSEs coodanode, but not the rest of us."

There will be analysts, shareholders, industry experts, and professionals in financial services and housing--not to mention a couple of economists--who will, anonymously, comment on this blog that this reporter is a clueless hit-man. Starting with me. I wonder if that will make it true for the NYT.