The New York Times Attack on Freddie Mac's Richard Syron

When does a good story get in the way of informing readers? Editors of all major publications face this decision each day. A recurring topic in my writing is how many bloggers play fast and loose with facts. The Internet gatekeepers push along the stories placing the burden on readers. No matter how intelligent the reader, no one is going to check facts, sources, and analytical techniques for various stories.

With print media in competition with blogs, the distinction is starting to fade. Cyberspace is full of unedited and often unchallenged text. It lasts forever.

Background: The New York Times Attack

Charles Duhigg studied history at Yale and got an MBA from Harvard on the way to becoming a reporter for The Los Angeles Times and then The New York Times. His feature article on Freddie Mac (FRE) and Richard Syron attracted plenty of attention and comment yesterday.

The main contention is that Syron got a memo in 2004 from his Chief Risk Officer, David A. Andrukonis, warning that the firm was financing questionable loans. The next year Mr. Andrukonis left "to become a teacher." Duhigg has plenty of anonymous sources who confirm that Syron had this information.

Since we accept the factual authority of The New York Times, we do not challenge that there was such a memo. We also do not doubt that sources were confirmed. This leaves room for plenty of other complaints.

Challenges from our Blogging Colleagues

The best job of analysis on this article came early in the day yesterday from Tanta at Calculated Risk, one of our featured sites. She was clearly on a mission. Among other points she noted the following:

• The Times short-changed Syron's resume;
• Too many anonymous sources;
• No recognition that this was one memo of many; and
• Faulty grasp of the role of the GSE's.

Nice work.

Matt Stichnoth, writing for Bankstocks.com, has some other good points. He draws our attention to the following:

• There was a big change from 2004 to 2005. These problems were not so obvious in 2004, and might not even have applied to loans at that time.
• Recognition of Congressional pressure for Fannie Mae (FNM) and Freddie to pursue social missions; and
• Recognition that the worst crisis in history might not have been totally foreseen.

Both of these articles deserve to be read in their entirety, as well as the original article.

Our Take

There is a common statistical problem involved here. In any large organization there are many people warning about many things. Sometimes the warnings are completely unnoticed. Sometimes they are evaluated but found to be unpersuasive.

If one starts with all of the situations where there is "a warning" the executive might have done very well. Who knows how many problems Syron correctly anticipated and solved or how many bogus concerns that he ignored.

If one begins with the conclusion, it is usually easy to spot something. Finding the warnings that should have alerted someone to the big mistakes is a classic revisiting of history. Some examples include the following:

• FDR did or should have known about the attack on Pearl Harbor.
• NASA should have known about the defective O-Rings before the Challenger disaster.
• President Bush should have known about 9/11 before the attacks.

We are surprised that these incidents were apparently not covered sufficiently in the Yale history program, nor the statistical problem in the Harvard MBA program.

There is also the policy perspective. The reason that GSEs had implicit government support is that they were following national policy, using prescribed rules (including degree of leverage), and overseen by appropriate authorities. It was a balancing act.

Whether these organizations, neither fish nor fowl, are appropriate mechanisms of policy is a question for another day. Second-guessing the executives confronted with difficult decisions is another matter altogether.

The Consequence of Journalistic Choices

We doubt that most readers, on their own, thought about the many points raised here or by Tanta and Matt. Since The New York Times has a much larger circulation than the bloggers, only a few will be alerted.

Our guess is that most will accept this as just another case of corporate greed. For every issue there is some simple heuristic, a lowest common denominator if you will, that resonates with those who have conclusions in mind when they read news. We are disappointed, therefore at the conclusion reached by another of our favorite sources. After noting that Syron has received $38 million in compensation since 2003 while the stock prices has declined, here is the conclusion offered:

This was simply greed on the part of an executive, a transference of wealth from Shareholders to himself . . .
 

Full Disclosure: While we have no position in Freddie Mac (FRE), we have a recent and very successful position in Fannie Mae (FNM) -- long stock and short the pumped August calls.

Comments

[NickGulliford:]

Good article! The Boston Globe defended Syron:

www.boston.com/busines...

"Syron encouraged the Boston Fed's research department to wade into important, but contentious public policy issues. Perhaps best known was its study of lending discrimination, which found race, not lending risks, driving loan decisions.......... the study helped change lending practices and expand credit to minority and poor neighborhoods. In taking on the issue ......... Syron was virtually alone in the financial industry."

That was clearly commendable. People should not be discriminated against on the grounds of race or neighbourhood. However, lenders need to assess the integrity of borrowers as well as their earnings or other income.

I have raised another issue in an article "Are the Sub-Prime, Northern Rock, Fannie Mae and Freddie Mac fiascos connected with the increase in cohabitation?"

I think we need to know whether the foreclosures are disproportionately against cohabiting couples - as compared with - married ones?

The parties who have the information that would enable an answer to be give to this question seem to be very reluctant to provide it.

Members of the public on both sides of the Atlantic will all agree with Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), “The signal that we send to our banks is that we want to continue lending. But we want healthy lending. We want good risk management. We want well underwritten loans to credit-worthy borrowers.”

In "Soaring cohabitation risky?" Mike McManus writes:

washingtontimes.com/ne.../

"Some 6.4 million couples were cohabiting at any moment in 2007, but only 2.2 million married, 700,000 of whom were not cohabiting. Cohabitors had a 23 percent chance of marriage. Grim odds .......... Many couples who cohabit say they are in a "trial marriage." That is a myth. More than 8 in 10 will break up either before or after the wedding,"

The survival rate of first time marriages for couples who did not cohabit first is more than twice as good as for couples who cohabit.

I don't know whether mortgage underwriters take these facts into account, but I think for the same reason that race and neighbourhood should not be used to discriminate against people applying for mortgages, the risk associated with a lack of marital commitment should be assessed in the light of proper research, if that is not being done at present.

This is "a contentious public policy issue", but I don't think the banks, the media and the politicians can continue to ignore it.

2008 Aug 06 05:32 AM

[Joyful Alte...:]

Ivy undergraduate degree in history, Ivy MBA---just like George W. Bush, who apparently learned little history or statistics.

2008 Aug 06 08:22 AM

[notsosmart:]

wow-all these big educated brains & what a mess.

2008 Aug 06 10:35 AM