The Conspiracy Theory – 1: Judging a “Narrative”

Last Tuesday, the Wall Street Journal published a letter by Franklin Raines, the ex CEO of Fannie Mae. (I don’t provide a link because the WSJ charges for access to its articles). Raines had written to protest and correct the errors and misrepresentations of a hack job, of the kind that the Journal frequently publishes about Fannie Mae and Freddie Mac. Referring to the two companies, he wrote:

The losses which crippled the companies were caused by the purchase of loans with lower credit standards between 2005 and 2007. The companies explicitly changed their credit standards to regain market share after Wall Street began to define market credit standards in 2004 ... So the cause of the financial problems for Fannie and Freddie was bad decisions, not their government sponsored status.

The Journal’s rabid ideologues used the letter to go on the editorial rampage againt Raines. In a half-page article titled Rewriting History at Fannie Mae they began: “If you want proof that the Washington establishment had learned nothing from the 2008 financial panic, look no further than the nearby letter from former Fannie Mae CEO”. The Journal complaining about “rewriting history” is a thief shouting “thief!” when his hand is caught in someone else’s pocket.

Raines is not a stupid man. His wondering about “whose narrative” on Fannie/Freddie demise was going to prevail showed his awareness of the role of propaganda and its influence in the way events are reported and recorded. But the same wondering also betrayed a sense of resignation and defeat, as evidenced by the fact that his letter was weak and unconvincing. Raines blamed management decision for the agencies’ problems, akin to blaming gravity for an airplane crash. But why did the people who had successfully run the two companies for many years suddenly become bad decision makers?

Fannie’s ex CEO touched upon this point. He noted that “the companies explicitly changed their credit standards to regain market share after Wall Street began to define market credit standards in 2004”. So something happened in 2004. But he did not elaborate. Perhaps it was the space limitation or the letter was heavily edited. My guess, though, is that Raines finally was defeated. He came to accept his adversaries’ narrative of the events. In that, he is a man of our time, made to talk, think, vote and act against his own interests and beliefs.

Two years ago I documented the deliberate destruction of Fannie Mae and Freddie Mac in a 3-part series. I urge you to read them here, here and here. The destruction was given a go ahead in a conspiratorial meeting in 2001 that was reported in no other than the Wall Street Journal:

A coalition of chief executives from more than a dozen large financial institutions has decided to press for reform of Fannie Mae and Freddie Mac … The decision to seek a review of the way the government-sponsored mortgage giants conduct their business was made two weeks ago at a meeting in Amelia Island, Fla., of the Financial Services Forum … The group, an intentionally low-profile organization of chief executives from the country’s biggest financial companies, backed the successful effort to repeal laws separating the banking and securities industries … Tensions have risen in recent years between the mortgage companies and other financial-service concerns amid fears that rapidly growing Fannie and Freddie would diversify and take business away from other companies.

A few days after this meeting, the WSJ began attacking Fannie Mae and Freddie Mac — and never stopped. The paper has published well over 100 news stories, commentaries and editorial pieces on the subject, not to mention a barrage of negative and accusatory quotes from officials of every stripe, especially Alan Greenspan, about the systemic dangers of Fannie and Freddie and the need to “reign” them.

The incessant attacks softened up Fannie/Freddie and forced them to loosen their lending standards; their strict lending standards had stood in the way of the indiscriminate mortgage lending that was necessary for feeding Wall Street’s CDO machine.

This critical point is now all but forgotten. So is the fact that even the severely weakened and demoralized Fannie and Freddie proved pivotal in stabilizing the falling mortgage market in 2009.

The readers of this blog know these facts. Yet, for every reader of this blog, the WSJ has thousands, if not tens of thousands of readers. In the age of Google, when the number and frequency of the references to a source is taken for its authenticity, Raines’ question about the way a particular narrative comes to be accepted as a fact deserves serious consideration. Consider, if you will, this cross examination in some imaginary court:

OK, Mr. Saber. So there was a meeting of financial executives in 2001. Let us also grant you the point that they actively set out to destroy Fannie Mae and Freddie Mac. But how do you go from there to claiming that what actually happened was the result of this so-called conspiracy? Remember that many of those same executive were burned in the crisis.

As for Alan Greenspan, everyone knows the obscene manner of his speech, although he no doubt considered it sophisticated and politician-like. The point is that everybody can dig a few quotes from him for and against any topic under the sun. So he spoke against Fannie and Freddie. So what?

The proof of conspiracy must be made of sterner stuff.

Is it, then, possible to prove an ongoing conspiracy in the Fannie/Freddie affair – and beyond, in the realm of finance?

The answer is, yes, it is. We only need to define prove, not to manipulate and weaken its meaning but, on the contrary, strengthen it by giving a precise description. Proof is the presentation of Truth. In light of it, all inconsistencies and ironies surrounding a narrative vanish at once, as every chess player knows.