Setting the Template

There's plenty of blame to go around in the current financial meltdown; feckless politicians from both parties; greedy executive on Wall Street who thought they could re-write the rules of economics; deadbeat homeowners who bought homes they couldn't afford--all share culpability for the mortgage crisis that eventually spread to the credit market and now threatens our entire economy.

But it's also clear that the entire mess began with Fannie Mae and Freddie Mac, those infamous, semi-public entities established by Congress to "encourage" home ownership by guaranteeing mortgage loans to all types of consumers. Fannie and Freddie (along with their pals in the financial industry) were also responsible for buying up and reselling risky loans to investors, who believed that the housing bubble would expand indefinitely.

That's why an article that appeared in Sunday's edition of The New York Times is so instructive. Written by reporter Charles Duhigg, the piece represents of the paper's first attempts to examine the role of Fannie and Freddie in precipitating the current crisis.

Unfortunately, the article is anything but a hard-hitting expose. Instead, it is something of a mea culpa for Daniel Mudd, the son of the former CBS newscaster, and Fannie Mae's well-c9compensated CEO until earlier this year. It begins with Mudd's assertion that he was blindsided (for lack of a better term) by the crisis.

“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae.

The piece goes on to describe the former CEO in glowing terms; a "decorated former Marine," who "wanted to work for an altruistic business," so "he could be a hero to his four children," just as his father had been to him.

But, as Duhigg describes it, Mr. Mudd inherited a company under siege, because private lenders were snatching lucrative parts of Fannie Mae's business. Lenders were also threatening to by-pass the company and sell directly to Wall Street, unless Fannie Mae bought more of their high-risk loans. Making matters worse, Congress was pressuring Mudd and his organization to expand their efforts and guarantee even more loans to "low-income borrowers."

In other words, Mr. Mudd was literally backed into a corner, and acted accordingly:

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.

Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.

[snip]

Mr. Mudd said in an interview that he responded as best he could given the company’s challenges, and worked to balance risks prudently.

“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”

Obviously, financial reporting isn't our forte, and we can't claim the decades of collective experience of the Times' business section. But we do seem to recall a certain accounting scandal that engulfed Fannie Mae and Freddie Mac in the middle part of this decade, ending the tenure of Mudd's predecessor, Franklin Raines, and the company's Chief Financial Officer, Timothy Howard.

To his credit, Duhigg does get around to mentioning that little snafu, but it's quickly summarized in a single paragraph on page 2. There is no description of the fraud perpetuated by Raines, Howard and their associates. Federal investigators described it as "extensive" and that's being charitable. It was nothing more than a scheme to cook Fannie Mae's books, so executives could pocket tens of millions of dollars in pay and bonuses, linked to the company's financial performance.

Raines and Howard don't surface again until the end of the article, which notes that both men kept most of their bonus money, and are enjoying the good life as multi-millionaires. Mr. Mudd, by comparison, is depicted as a man who tried to salvage a sinking ship, before finally being sacked by Treasury Secretary Henry Paulson.

Also receiving scant attention is the role played by Congressional Democrats, who resisted efforts to reform Fannie and Freddie. Only two are mentioned by name; Rhode Island Senator Jack Reed, who lectured Mudd during a Congressional hearing in 2006, and Massachusetts Congressman Barney Frank, There is no mention of two of Fannie Mae's most enthusiastic backers in the Senate--Chris Dodd and Barack Obama.

Predictably, Mr. Duhigg also ignores GOP to rein in the federally-backed mortgage guarantors. Over the past eight years, the Bush Administration proposed additional oversight for Fannie and Freddie on at least fourteen occasions. In 2005, Senator John McCain offered a bill that would have increased regulation of both agencies, but Senate Democrats blocked its passage.

In the end, Mudd comes off as yet another victim of the financial crisis. As far as we can tell, the Times never presses the former CEO on what me he could have done--should have done--to stem the crisis that (ultimately) caused the collapse of Fannie Mae and Freddie Mac. Indeed, Mudd seems almost oblivious to the gathering storm in the housing and mortgage industries.

Why was he so preoccupied? To hear the NYT tell it, he was trying to placate partners in the lending industry and on Wall Street. No mention was made of Mudd's appearance before the Congressional Black Caucus in 2005, shortly after he took over Fannie Mae. Mudd gave a particularly fawning speech, referring to caucus members as "family," and pledging to do more for their constituencies.

Mr. Mudd's address makes one thing very clear: he knew who was buttering Fannie Mae's bread, and was determined to serve his political masters, whatever the cost.

It also seems apparent that the Times' plans to go easy on people like Mr. Mudd and his former associates at Fannie Mae and Freddie Mac. As government regulators reported three years ago, executives at the organizations were up to their necks in fraudulent activities, yet there's no discussion on what Mr. Mudd knew--and why he did nothing as Raines (and others) approved fraudulent financial statements that gave them millions in pay and bonuses.

If the MSM follows the NYT template, we won't be hearing much about what happened in the boardrooms at Fannie Mae and Freddie Mac. Conversely, the Wall Street crooks involved in this mess will get the "Enron" treatment, right down to their perp walk.

We're not saying the Wall Street crowd doesn't deserve a media lynching. But ignoring the underlying corruption at Fannie Mae and Freddie Mac--and the politicians who enabled it--is yet another example of the slow, steady death of American journalism.

Michelle Malkin has observed the same, sorry media scramble to cover for Democrats involved in the fleecing and collapse of Fannie and Freddie.

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ADDENDUM: And, right on cue, California Congressman Henry Waxman has opened hearings into the financial meltdown. His first witness? The former CEO of Lehman Brothers. To date, we've heard of no plans to subpoena Frank Raines, Jim Johnson, Tim Howard or Daniel Mudd.

We also wonder how long it would take a President Obama to pardon Raines and other, former members of his management team.