Reckless Reporting

“It Teetered, It Tottered, It Was Bound to Fall Down” (5/21/11)

“Wall Street Whitewash” (NYT, 12/16/10)

“Fannie Backwards” (American Prospect, 7/14/11)

“Why Fannie and Freddie Are Not to Blame for the Crisis” (NYRB, 7/13/11)

I was surprised when the Times ran an excerpt from Reckless Endangerment, the book about the financial crisis co-written by Gretchen Morgenson, a business reporter for the paper. The Times regularly provides a forum for its employees’ extra-curricular efforts; for example, Janny Scott’s book about President Obama’s mother was adapted into a lengthy article for the Sunday Magazine. But the central argument of Reckless Endangerment, which Morgenson wrote with financial analyst Joshua Rosner, seemed to run counter to everything the Times had published, in its news pages as well as in its opinion section, about the 2008 Wall Street meltdown. The mainstream narrative of the crisis, put forth by the Financial Crisis Inquiry Commission, is that the housing bubble created by shady lending practices and profit-hungry banks and hedge funds caused the economy to crater. However, as Republicans are not known for respecting the “reality-based” community, the conservative members of the bipartisan commission issued their own report outlining their disagreements with the Democratic majority. Times columnist Paul Krugman wrote in December 2010 of a Huffington Post article that reported that “all four Republicans on the commission voted to exclude the following terms from the report: ‘deregulation,’ ‘shadow banking,’ ‘interconnection,’ and, yes, ‘Wall Street.'” In the Republican version of history, the lack of regulatory teeth in the SEC and other government agencies had nothing to do with the crisis. Instead, Krugman went on to say,

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It was astonishing, then, to see the Times devote so many column-inches to the similar alternate history proposed by Morgenson and Rosner. The authors vilify Fannie Mae and its 1990s chief executive, Jim Johnson, while conveniently ignoring the fact that Johnson’s sins, however venial their nature, occurred long before the inception of the dubious lending practices — which, Paul Krugman and others have noted, spread from private firms to Fannie and not the other way around — that eventually punched a hole in the economy. Morgenson, in her daily reporting for the Times, does not come off as a Republican shill, so the rightward slant of her book was even more surprising.

Now it’s apparent that I wasn’t the only one who responded with a silent “huh?” to Morgenson’s strange choice of Fannie Mae as the ultimate evildoer. Robert Kuttner of The American Prospect and co-writers Jeff Madrick and Frank Partnoy at The New York Review of Books have produced two articles challenging the conclusions of Reckless Endangerment. Kuttner’s indictment is particularly harsh; he calls the book “disingenuous” and “disgraceful” and observes that Morgenson’s narrative has events “backward.” He writes: “The public record is unequivocal: The private lenders led the deterioration of mortgage standards; Wall Street financed them; and Fannie resisted and then belatedly followed.”

The authors’ allegations against Fannie Mae and other quasi-governmental agencies amount to a “red herring” that shifts the blame from Wall Street and follows, item by item, the GOP playbook. Kuttner acknowledges that Fannie Mae was “guilty of plenty of wrongdoing — without inventing its role in the broader collapse.” He is befuddled and angered by the sloppy reporting produced by someone as fine a journalist as Morgenson, whom he seems to genuinely respect. The article ends with this biting criticism:

It is bewildering that [Morgenson and Rosner] would echo the right-wing narrative and stretch their story to attribute the financial collapse to Fannie Mae’s work to broaden home-ownership, much less to the government’s effort to remedy discrimination in mortgage lending. At the very least, they owe their admirers factual corrections and an explanation.

Madrick and Partnoy’s NYRB piece (a blog post, which will be expanded in an upcoming issue of the NYRB), accuses Morgenson of losing any shred of objectivity that she may have gained from her work at the Times. After quoting from the book, Madrick and Partnoy note drily that “a phrase like ‘blow up the American economy’ is not the kind of cautious, specific analysis we expect from Morgenson or Rosner. And here is yet another example: ‘…the home ownership drive helped to plunge the nation into the worst economic crisis since the Great Depression.'” Additionally, Morgenson and her co-author stand accused of furthering conservatives’ wishful thinking about the origins of the financial crisis:

Such assertions have been red meat to columnists David Brooks of The New York Times and George Will of The Washington Post, who were apparently yearning to blame government action, not regulatory inaction, for the crisis.

The NYRB echoes Robert Kuttner’s criticism of the way Morgenson manipulates events to turn Fannie Mae, not the big Wall Street banks, into the instigator of bad mortgages. Madrick and Partnoy are cutting in their description, stating that the claims are “so far-fetched that they require time travel.” They include statistics that bolster the contention that the majority of risky mortgages belonged to private firms, not Government Sponsored Enterprises (GSEs): “In 2006 and 2007, default rates reached 13.2 and 14.9 percent in the GSEs and 45.1 and 42.3 percent in the private market.”

It’s important to note that the NYRB is not the liberal standard-bearer that The American Prospect aims to be. Madrick and Partnoy’s analysis throws fewer bombs than Kuttner’s, but all three authors arrive at the same conclusion, neatly summed up at the end of the NYRB piece:

“What is disturbing about the currency being given the Morgenson-Rosner argument is that it is supplying ammunition to those who believe government involvement of almost any kind in the markets is bad, and that without a mismanaged Fannie and Freddie all would have been fine. “