Examining Fannie Mae

By Annys Shin
Washington Post Staff Writer
Wednesday, May 24, 2006

When James A. Johnson walked out of his office as chief executive at Fannie Mae for the last time, in December 1998, the longtime Democratic Party operative and investment banker could look back at his nearly decade-long tenure at the helm knowing the company had lived up to his promises of double-digit earnings growth. The value of its assets had also tripled, and its share price had risen sevenfold.

"Without good numbers, nothing else can get done," he told The Post in 1998.

Good numbers kept Wall Street happy. They paid the light bills for more than 50 partnership offices that represented Fannie Mae around the country. And they made top executives multimillionaires. Johnson received $21 million in his last year as chief executive and a consulting contract worth $600,000 a year.

But when good numbers -- and the bonuses that came with them -- weren't possible anymore, the executives who came after Johnson allegedly rearranged the math and, even after accounting problems were found, used the company's political clout to fend off closer regulation. That was the conclusion of Fannie Mae's chief regulator, the Office of Federal Housing Enterprise Oversight, in a 340-page report that determined the company's $10.6 billion accounting scandal was rooted in a corporate culture that dates back 20 years.

Johnson, now a managing partner with Perseus, a private equity firm and merchant bank, has not been accused of involvement in the accounting irregularities. During the 1990s, he shaped the company's management and culture, mixing a Wall Street-like obsession with meeting earnings targets and the aggressive tactics of a political campaign.

In an interview yesterday, Johnson would not discuss what happened after his tenure and said Fannie Mae's political success was a result of its success in funding home mortgages.

"The regard with which we were held was what defined our political success," he said. "If we were not held in that high regard, it wouldn't have mattered what else we did. . . . I didn't know a company that had a better reputation than Fannie Mae."

Johnson's vision for the company was rooted in its unusual structure as a shareholder-owned, publicly traded company with a government charter to promote homeownership.

To fulfill its mission, it buys home loans from banks and other lenders, replenishing the supply of mortgage money, and pooling the loans into securities for sale to investors.

With its charter comes certain advantages, such as a line of credit with the Treasury Department and exemption from federal, state and local income tax. As a result, the company is perceived as having the backing of the federal government, allowing it to borrow money at close to government rates and to pass those savings on to lenders and eventually to customers.

These advantages attracted a succession of critics, some of whom were ideologues who objected to the idea of directing so much capital to housing and some of whom were competitors who felt the company had an unfair edge.

Johnson, having explored and rejected privatization of Fannie Mae while working as a consultant for the company in the late 1980s, believed in the company's critical role in the housing system.

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'An Uncanny Coincidence'
Investigators found that Fannie Mae's reported earnings per share closely tracked the targets set for executives to receive their maximum bonus payouts.
'An Uncanny Coincidence'
SOURCE: OFHEO Report of the Special Examination of Fannie Mae | The Washington Post - May 24, 2006
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