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How Washington Failed to Rein In Fannie, Freddie
In 2003, Richard Baker, left, obtained executive pay information on Fannie and Freddie but was pressured not disclose it. In 1999, Treasury Secretary Lawrence Summers publicly signaled that Fannie, Freddie could be a hazard.
(By Susan Walsh -- Associated Press)
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The Treasury Department folded in the face of public pressure.
There was an emerging consensus among politicians and even critics of the two companies that Fannie Mae might be right. The companies increasingly were seen as the engine of the housing boom. They were increasingly impervious to calls for even modest reforms.
As early as 1996, the Congressional Budget Office had reported that the two companies were using government support to goose profits, rather than reducing mortgage rates as much as possible.
But the report concluded that severing government ties with Fannie Mae and Freddie Mac would harm the housing market. In unusually colorful language, the budget office wrote, "Once one agrees to share a canoe with a bear, it is hard to get him out without obtaining his agreement or getting wet."
'Big, Fat Gap'
Fannie Mae and Freddie Mac enjoyed the nearest thing to a license to print money. The companies borrowed money at below-market interest rates based on the perception that the government guaranteed repayment, and then they used the money to buy mortgages that paid market interest rates. Federal Reserve Chairman Alan Greenspan called the difference between the interest rates a "big, fat gap." The budget office study found that it was worth $3.9 billion in 1995. By 2004, the office would estimate it was worth $20 billion.
As a result, the great risk to the profitability of Fannie Mae and Freddie Mac was not the movement of interest rates or defaults by borrowers, the concerns of a normal financial institution. Fannie Mae's risk was political, the concern that the government would end its special status.
So the companies increasingly used their windfall for a massive campaign to protect that status.
"We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie Mae chief executive Franklin Raines said in a 1999 meeting with investors.
Fannie Mae, and to a lesser extent Freddie Mac, became enmeshed in the fabric of political Washington. They were places former government officials went to get wealthy -- and to wait for new federal appointments. At Fannie Mae, chief executives had clauses written into their contracts spelling out the severance benefits they would receive if they left for a government post.
The companies also donated generously to the campaigns of favored politicians. The companies' political action committees and employees have donated $4.8 million to members of Congress since 1989, according to the Center for Responsive Politics.
But Fannie Mae wasn't just buying influence. It was selling government officials on an idea by making its brand synonymous with homeownership. The company spent tens of millions of dollars each year on advertising.
Even Greenspan, who shared the concerns of Treasury officials about the unrestrained growth of Fannie Mae and Freddie Mac, refrained for years from using his bully pulpit to urge action. He too wanted a hot housing market.
