It's fetishism.
I find it unbelievably selfish and self absorbed to get married and father so many kids when you know you cannot father them. Other than that, long live photoshop and who cares?
Since I am married to a man who married his high school sweetheart and had two children with her, this is something I know a little about.
From the outside, "coming out" seems like a simple matter of telling the truth. But most people aren't sure what the "truth" is. Everybody has feelings that don't align with traditional models of gender and sexual orientation. What those feelings mean isn't easy to say.
In my husband's case, he certainly loved his wife and intended, at the moment of his marriage vows, to remain with her forever. Living as an openly gay man did not seem a viable option in 1963. There were no role models. It took 12 years, two children, and a lot of therapy before he understood that he really was gay and could no longer live a lie. (No, he was not sleeping with men during those years.)
And none of us--not his ex-wife, not his children or grandchildren, and least of all I--wish he had done things differently. Yes, there was some pain for everyone in the transition, but we all survived and are the stronger and closer for it.
The problem is that from the inside, "coming out" often seems like exchanging one set of lies for another set of lies, i.e., society's stereotypes of gay people. Few of us fit those stereotypes completely and yet to come out invites everyone to assume a gay male likes Judy Garland, parades, and anonymous sexual encounters. (Not that there's anything wrong with any of those, but those are just three of hundreds of stereotypes that, as a whole, apply to nobody.)
So Jenner may well have believed he was merely a cross-dresser when he first told that to a wife. Who knows? Even he may not recall. To my knowledge, there is no commonly available test that distinguishes between cross-dressing and transsexuality.
It may well have been selfish of him to continue having children when he wasn't parenting the first two, but it is wrong to say "he knew he could not father" his initial children. How would he have known such a thing?