Insider's Game

John Dickerson took the bait. As did Josh Gerstein the New York Sun. Both overlooked the disclaimers embedded in the text, and presented somebody else’s speculation as demonstrable fact. And suddenly, there is buzz in the Washington press corps that gives Republicans a pretext to argue that Democrats are just as corrupt the GOP.

Here was Dickerson’s lead in Monday’s Slate:

“Jim Johnson, the man Barack Obama has picked to lead his vice-presidential vetting team, has gotten preferential treatment for personal loans from Countrywide Financial, a company Sen. Obama and others have blamed for helping to create the subprime mortgage mess.”

The claim of preferential treatment is based on a June 7, 2008 Wall Street Journal article which says something altogether different:

“A comparison of the Fannie Mae officers’ terms with interest rates prevailing when they got their loans raises the possibility Countrywide gave them preferential terms. But it’s impossible to tell for sure from public documents. An array of other factors also can account for lower-than-average rates, including a borrower’s income, total assets and credit score; how big the loan is compared with the home’s value; and how many “points” a borrower may have paid upfront in order to get a lower rate.”

Translation for those who lack any financial sophistication: They don’t know jack. The numbers themselves bear this out. Johnson obtained three mortgages from Countrywide, each with an initial five-year fixed rate. Here’s how the contractual rates compared with the market averages at time, as determined by the Journal:

October 23, 1998: Amount: $393,000; Initial Rate: 6.375%; Market Average: 6.2%. Rate was .175% above market average.

November 8, 2001: Amount: $1,300,000; Initial Rate: 5.250%; Market Average: 6.0%. Rate was .75% below market average.

June 20, 2003: Amount: $972,000; Initial Rate: 3.875%; Market Average: 4.3%. Rate was . 4125% below market average.

So, according to the Journal’s analysis, the Johnson received a mortgage that was no more than 75 basis points below the market average for the initial five-year period. Could that difference be explained by points paid up front, the home’s appraised value versus the loan value, refinancing penalties or any number of other variables? Absolutely.

James Johnson was the CEO of Fannie Mae, the biggest buyer of Countrywide’s mortgages, until December 1998. Consequently, the only mortgage Johnson obtained when there was a potential conflict of interest was a $393,000 mortgage that was 17.5 basis points “above” the market average.

The Journal article is highly misleading in that it places Johnson’s tenure at Fannie Mae in a false context:

“Mr. Johnson led Fannie Mae from 1991 to 1998. He and Countrywide’s Mr. [Angelo] Mozilo worked together to streamline the underwriting process. Mr. Mozilo told Dow Jones in 1995 that he was ‘working very closely … with Jim Johnson of Fannie Mae to come up with a rational method of making the process more efficient by the use of credit scoring.’ Their efforts helped to lead to a boom in mortgage lending that brought huge profits to both companies but is now ending badly.”

The recklessness in mortgage lending never really took off until 2003, when mortgage lenders like Countrywide abdicated traditional underwriting standards for documentation, income and asset values. Fannie Mae’s exposure to the subprime market has always been a tiny percentage of its portfolio. It is false and misleading to tie the subprime crisis to Fannie Mae’s lending policies of the 1990s.

Then the follow-up: On June 9 and June 10, the Journal’s Washington Wire echoed the same disparaging insinuations, with “Obama Won’t ‘Vet the Vetters’.”

With the flimsy foundation laid by the Journal’s news section, its notorious editorial page went into its familiar smear mode against Johnson and the Obama campaign:

“Mr. Johnson is now vetting Vice Presidential candidates for Mr. Obama. But he is also a textbook case for poor disclosure as regulators sifted through the wreckage of Fannie’s $10 billion accounting scandal. Despite an exhaustive federal inquiry, Mr. Johnson managed to avoid disclosing one very special perk: below-market interest-rate mortgages from Countrywide Financial, arranged by Countrywide CEO Angelo Mozilo.”

Again, there was only one mortgage extended while Johnson was at Fannie Mae; it does not appear on its face to have been at below-market rates; and there was no evidence presented to suggest that he avoided disclosure of that single mortgage. Another fatal flaw in that passage is that the Fannie Mae accounting scandal was caused almost entirely by actions that took place beginning in 1999, after Johnson left Fannie Mae.*

The smear campaign had its desired effect. Johnson just announced that he was resigning from the Obama team.

So to recap, here’s how the right wing media campaign works:

Step 1: Plant a story based on speculation rather than hard evidence.
Step 2: Rely on sloppy journalists (e.g. John Dickerson) to present the speculation as fact.
Step 3: Use the “factual” premise to argue that Democrats are just as ethically compromised as Republicans.

A year ago, it would never have occurred to me that the initial news story in the Journal was intended as a setup for a larger partisan narrative. But that was then.
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*An important qualifier here: The Fannie Mae accounting scandal involved the manipulation of hedge accounting to smooth out reported earnings. The first time this had a significant impact on reported earnings was in the fourth quarter of 1998, when Johnson was still at Fannie Mae. (He left in December 1998.) In late 1998 collapse of the Russian ruble caused the yield on 10-year Treasuries to fall by over 100 basis points, thereby triggering a wave of mortgage refinancings. Fannie Mae’s statistical models estimated that the eventual expense associated with that change would be $400 million. A decision was made to recognize $200 million of the expense in 1998 and $200 million in 1999. Reported income for the year was $3.4 billion. However, disclosure of such an extraordinary item should have been footnoted in the financial statement for full transparency. Those accounting decisions are made following the end of the fiscal year, i.e. in calendar 1999. The bottom line is that Johnson is not 100% exempt from any taint associated with Fannie Mae, but a review of the report by the Office of Federal Housing Enterprise Oversight shows the almost all of the dubious accounting decisions were traceable to actions taken in 1999 onward, by Johnson’s successors. The other bottom line, as the right wing knows all too well, is that it is far more difficult to explain away a smear than it is to launch a smear.