By Jonathan Weisman
Washington Post Staff Writer
Thursday, July 17, 2008
When Fannie Mae and Freddie Mac's stock prices plunged and rumors of their insolvency swirled, the presidential campaigns of Sens. John McCain and Barack Obama released terse statements about the mortgage giants, then went nearly silent.
Their responses made sense in political and economic terms. The risks of intervening in the firms' rescue are high, the rewards are scant, and the tentacles of the government-sponsored enterprises reach into both campaigns.
"You see a consensus developing that the current system is unsustainable," said David C. John, a senior research fellow at the conservative Heritage Foundation. "But actually saying what has to happen next is a little bit scary if you're in a campaign, especially if some of your most prominent supporters have such deep ties to these entities."
Rick Davis, McCain's campaign manager, was president of the Homeownership Alliance, which advocates the expansion of homeownership through low-interest mortgages funded by Fannie and Freddie. Arthur B. Culvahouse Jr., who is heading McCain's vice presidential vetting panel, was a lobbyist for Fannie Mae. Mark Buse, a longtime McCain aide, lobbied for Freddie Mac before returning to McCain's Senate staff.
And the list of Republican Fannie and Freddie lobbyists includes some of its most notable rogues -- including Tony Rudy, Edwin Buckham, Kevin Ring and David H. Safavian, all of whom were linked to the Jack Abramoff lobbying scandal -- as well as some of its leading power brokers, from Reagan White House chief of staff Kenneth M. Duberstein to uberlobbyists Vin Weber and Tom Korologos. Alberto R. Cardenas, one of McCain's top fundraisers, has lobbied for Fannie Mae, as have former Montana governor Marc Racicot and tax-cut advocate Grover Norquist.
Obama also has ties to the firms. James A. Johnson, the former head of his vice presidential vetting panel, was a chief executive of Fannie Mae, as was Franklin D. Raines, who said this week that he has been consulting with the campaign on housing issues. Maria Echaveste, a top Clinton White House official whose husband, Christopher Edley Jr., is a close Obama friend and adviser, has lobbied for Freddie Mac, and former commerce secretary William M. Daley, a top Obama backer, was an in-house lobbyist.
Other Democratic luminaries who have advocated for the mortgage giants include strategist Steven Elmendorf, Rep. Doris Matsui (Calif.), former Al Gore aide Ronald A. Klain, former Clinton aide Steve Ricchetti and former congressman Harold E. Ford Jr. (Tenn.), now the head of the Democratic Leadership Council. Jamie Gorelick, a deputy attorney general in the Clinton administration, was also vice chairman of Fannie Mae.
That payroll has cost Fannie and Freddie nearly $200 million in lobbying and campaign contributions over the past decade, according to lobbying reports and Federal Election Commission disclosures. It has also won them plenty of protection from calls for greater regulation, less federal protection, and even nationalization.
With the current housing meltdown, that protection may be ending, Washington economists say, but any real changes will almost certainly happen after the election.
"I am hopeful that the extent of carnage will shake up the status quo," said Douglas W. Elmendorf, an economist at the Brookings Institution who has worked at the Federal Reserve Board and Treasury Department and is not related to Steven Elmendorf. "And if the taxpayers end up putting in a significant amount of money, which I think they will, members of Congress will realize whatever their past views were, the future cannot be a replay of the past."
Fannie Mae and Freddie Mac grew huge and powerful by buying up home mortgages and consolidating them into fixed return bonds and other financial instruments with the implicit backing of the Treasury. But with so many of those mortgages going into default, investors fear that both companies lack the capital to cover the losses, and the lobbyists have helped Fannie and Freddie fend off calls to bolster their reserves.
On Sunday, Treasury Secretary Henry M. Paulson Jr. made that implicit federal backing more explicit, allowing the companies to borrow directly from the Federal Reserve and pledging that the government stands ready to pump money into the giants in exchange for equity if necessary.
Douglas Elmendorf argued that federal loans will minimize the personal risks to Fannie and Freddie managers and shareholders, while leaving taxpayers with all the risk. Instead, the government should be taking stakes in the companies in exchange for that cash. That way, a recovery would have some benefit to the government.
The McCain campaign has been reticent about backing anything that smacks of partial nationalization. Last week, the senator from Arizona issued what amounted to full-throated support of the Bush administration's efforts to keep the companies afloat.
"Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail," he said. "They are vital to Americans' ability to own their own homes. And we will do what's necessary to make sure that they continue that function."
Obama has been slightly more skeptical, at least in tone. His initial statement put the issue of homeownership first. The senator from Illinois "has long believed we should take all necessary steps to ensure affordable homeownership for millions of American families, and that includes an essential role for Fannie Mae and Freddie Mac," spokesman Bill Burton said last week.
Then on Tuesday, Obama sounded a note of skepticism: "I think it is important, with respect to Freddie Mac and Fannie Mae, that we ensure there's continued liquidity in the housing market, but that we're not devoting huge sums of money to bailing out shareholders or CEOs. I mean, I think that there's got to be some recognition that you can't have those institutions with all upside but no downside," he said on PBS's "NewsHour With Jim Lehrer."
That is still a far cry from prescriptions coming from the campaigns' left and right flanks, from firing the firms' managers before offering any loans, to nationalizing them to breaking them up. But analysts in Washington say those next steps will have to wait.
"It's going to take a lot of effort, and it's going to require some real sustained activities," John said. "It won't be easy, but it can be done."