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Examining Fannie Mae
How a Former Chief Helped Shape The Company's Political Culture

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.

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.

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