Examining Fannie Mae

By the time Johnson took the reins in 1991, protecting its charter had become management's "preeminent concern," said former president and chief operating officer Roger Birk, who served on the board in the early 1990s.

The company had only recently become profitable again, having survived a brush with bankruptcy, and already had a small but highly effective lobbying operation. But Johnson thought it could do more and set out to transform how the organization "spoke about itself, how it defended itself against" critics, recalled David Jeffers, a former Fannie Mae spokesman who worked closely with Johnson.

Though Johnson had spent much of the 10 years before becoming head of Fannie Mae as a businessman, he was well equipped to manage the company's "political risk."

The son of a Minnesota state House speaker, he volunteered for his first political campaign before he could vote. He was a top aide to Walter Mondale and chaired the politician's 1984 White House bid. As chief executive of Fannie Mae, Johnson often traveled with briefing books and hired former advance staffers for President Ronald Reagan and Housing and Urban Development Secretary Jack Kemp to scope out events for him.

To fill the company's executive ranks, Johnson recruited high-powered public officials, such as former deputy attorney general Jamie Gorelick, and preferably ones who had ties to the company's overseers, such as Duane Duncan, former chief of staff to Rep. Richard H. Baker (R-La.).

Unlike the company's critics, Johnson saw no contradiction between its public mission and its need to make money for its shareholders. To him, its financial and political fortunes were inseparable.

"The only way we could do what we were chartered to do was to be as profitable and well managed as we can possibly be in order to earn the trust of Wall Street. Without the trust of Wall Street, we would not have the shareholders to enable us to have the biggest impact" on housing needs, Jeffers said.

To keep up with Wall Street expectations, however, the company began holding onto more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s, when interest rates strayed into the double digits. Its smaller rival, Freddie Mac, copied the strategy. Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion.

Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at one of the two companies could bring down the financial markets with it -- an argument that Johnson and his successor, Franklin D. Raines, fought at every opportunity. They assured investors and policymakers that no such thing could happen because the company was so well managed.

Only after OFHEO uncovered accounting problems did it become clear that Fannie Mae hadn't adequately invested in internal controls. The report said political power helped stave off closer scrutiny.

Fannie Mae's lobbyists "did a superb job," said Wright H. Andrews Jr., a partner at Butera & Andrews, a lobbying firm. "Politicians of both parties were afraid to give proper oversight."

That lobbying power was magnified by the company's network of partnership offices. In 1993, after traveling around the country, Johnson decided Fannie Mae needed a presence on the ground, closer to the markets in which the company did business and the public officials who served them.

"For a relatively small investment, Fannie Mae will be recognized as a force for good in each of those cities or states. And by doing so, will have . . . more networks of support," then-general counsel Robert B. Zoellick said in a 1996 speech, referring to the 25 partnership offices then open. Fannie Mae would eventually open more than 50.

"I wanted to have everybody and anybody who cared about housing working in partnership with us," Johnson said.

Company lobbyists tapped the contacts created by the partnership offices to generate letters or phone calls to lawmakers. And they relied on that network to pick up advance warnings of threats to the company's charter or bottom line.

When Fannie Mae got wind in late December 1998 about an idea among some Clinton administration staff members to require the company to pay to register its securities, Fannie Mae officials tried taking their case directly to then-White House Chief of Staff John Podesta. When they couldn't get him on the phone, Fannie Mae officials got 100 mayors and other local officials to call Podesta's private line at the White House on the same afternoon. By New Year's Eve, the idea was snuffed out.

"They were very aggressive about throwing the switch," Podesta said in a recent interview.