On Economy, Unlikely Allies Forge Winning Strategy

Frank's first collaboration with Paulson came soon after the 2006 election, just as problems in the subprime mortgage market were becoming apparent. Paulson was paying courtesy calls on the new Democratic leaders. As he sat in Frank's office, Frank recalled, "we talked about things and it became clear that we had a common interest in a good GSE bill."

Until then, Frank and the Bush administration had been far apart on a proposal to reform the regulator that oversees mortgage financiers Fannie Mae and Freddie Mac, often referred to as GSEs, or government-sponsored entities. Frank wanted to restrict the government agency's control over the firms' mortgage portfolios and capital requirements, which provide a financial cushion. Treasury wanted a more powerful regulator and had previously opposed Frank's ideas.

"There was some skepticism among ideological conservatives in the administration" about the role of the GSEs, Frank said. But "Paulson, coming from the markets, understood how important they are."

After weeks of meetings, they reached a compromise and the bill passed the House in May 2007.

Frank and Paulson also worked together on legislation to modernize the Federal Housing Administration, a division of the Department of Housing and Urban Development that is the nation's largest issuer of mortgage insurance. That bill passed the House in June.

For months, the bills stalled in the Senate. But last month, public anxiety over the darkening economic picture spurred a fresh round of negotiations. The Senate approved a version of the FHA bill; talks are continuing over GSE regulation. Both measures are aimed at unfreezing the mortgage markets by providing financial support to lenders and by offering federal mortgage insurance to a wider range of borrowers.

Meanwhile, Frank has emerged as a reliable supporter of some of Paulson's most controversial initiatives, including a plan to dramatically reshape the regulation of financial institutions. And Frank defended the decision, in which Paulson played a key role, to rescue the troubled investment giant Bear Stearns.

Along with other congressional leaders, Frank has served as a sounding board for Paulson as the subprime mortgage market fell into crisis and the broader economy began to sag. On Jan. 2, Paulson called Frank in Maine, where he was vacationing, to report that the economy was doing worse than he had previously thought.

"I talked to members and told them the economy was going down and got their views," Paulson said. "And Barney was definitely one of the early people."

Two days later, President Bush announced that he was considering a plan to stimulate the economy through government spending. Paulson helped negotiate congressional passage and within six weeks Bush was signing the bill.

Now Frank hopes Paulson can help forge a compromise on his housing plan, which would make federal mortgage insurance available to even the riskiest borrowers in the belief that lenders will forgive a portion of their debt and help them keep their homes.

HUD has already adopted a more cautious version of the proposal. Two weeks ago, when HUD issued a letter declaring that the administration "strongly opposes" further action along the lines of Frank's plan, Frank said he got a reassuring call from Treasury. That same day, Paulson told Reuters: "We are behind the objectives. We like some parts of it better than others and we have not issued a veto threat."

Frank said he has since discussed the matter with Paulson. The bill that the House will consider this week contains several changes aimed at addressing administration concerns.

"You can start from different ideological perspectives," Frank said. "But there is some point you realize that there is enough in common so that you have a relationship that can be mutually beneficial -- and, more importantly, helpful to what I think the country should be doing."