Washington Outlook
Edited by Richard S. Dunham
Wanted: More Disclosure from Fannie and Freddie
Supporters of Fannie Mae (FNM
) and Freddie Mac (FRE
) rejoiced two years ago when the mortgage finance firms disarmed critics on Capitol Hill and inside the Clinton White House by agreeing to a series of largely cosmetic changes in the way they do business. But no one is partying now.
Enron's implosion has put Fannie and Freddie in the political crosshairs once more. And this time the threat may be more serious. A clutch of critics--from conservative ideologues against big government to liberal advocates of more affordable housing--have seized on the scandal to charge that, like Enron, the two companies keep investors in the dark and don't disclose enough information about their operations, including risky trading in derivatives.
Behind the charges: concern that future financial missteps by Fannie and Freddie could send tremors through the financial markets and the economy, leaving the government on the hook for a multibillion-dollar bailout. Thanks to implicit federal subsidies, the two have grown so large through their issuance of mortgage-backed securities that they account for nearly half of the home-finance market.
Now, worried lawmakers are preparing to take on the real estate giants. A bill introduced by Representatives Christopher Shays (R-Conn.) and Edward J. Markey (D-Mass.) would tighten the regulatory reins by requiring Fannie and Freddie to register with the Securities & Exchange Commission all the securities they issue, just as every other publicly traded companies does. "In this day and age of Enron, we want to make sure that investors have information," says Shays, whose district is home to Fannie and Freddie competitor GE Capital. Longtime critic Representative Richard H. Baker (R-La.) promises hearings before his Financial Services subcommittee this summer.
The Shays-Markey bill has gained unexpected momentum. In a speech on Apr. 22, Fed Chairman Alan Greenspan--whom Shays says privately backs the thrust of his bill--warned that banks selling derivative contracts to Fannie and Freddie may be taking too many risks because of the perception that the agencies have the full faith and credit backing of the feds. Even the Office of Federal Housing Enterprise Oversight, criticized for being lax as watchdog of Fannie and Freddie, is getting into the act. It has set up a working group on derivatives trading at the two agencies and, with the SEC, is reviewing disclosure practices. A report is due at the end of the summer.
Fannie's politically astute CEO, former Clinton budget director Franklin D. Raines, and Freddie CEO Leland C. Brendsel are fighting back. They contend that the housing market would be disrupted if they had to register securities with the SEC. The companies add that they voluntarily reveal far more about their operations than other private-sector firms.
To back that up, Freddie hired former SEC General Counsel Edward F. Greene to evaluate its financial reports, and he gave them a thumbs-up. Still, both Fannie and Freddie in the past month have given investors more information about derivatives trading and dealings in their shares by their executives.
Critics acknowledge they face an uphill battle. Both companies are being helped by groups ranging from the National Association of Realtors to the National Urban League. And Treasury Secretary Paul H. O'Neill, who has close ties to Raines, has signaled he thinks Fannie and Freddie can improve financial disclosure on their own.
Up to now, Fannie and Freddie have remained in control of events. But as other business giants, from IBM to General Electric, have learned, the Enron scandal might be the force that alters the path of even the most powerful corporations.
By Rich Miller
CAPITAL WRAPUP
Bright City Lights
Two former big-city mayors are helping Democrats make electoral inroads in the suburbs. Both Ron Kirk of Dallas, who's seeking a Senate seat, and Philadelphia's Ed Rendell, running for Pennsylvania governor, are fiscal moderates with strong business ties. Polls show Kirk leading GOP nominee John Cornyn in the normally Republican Dallas metro area. And thousands of suburban Philly Republicans have switched party affiliation to back Rendell in the May 21 Democratic primary.
CAPITAL WRAPUP
Man vs. Monster
Monster.com Chairman Andrew Mc-Kelvey has made enemies by funding Americans for Gun Safety. With AGS targeting GOP Senate incumbents in Colorado and Oregon, NRA CEO Wayne LaPierre is shooting back. McKelvey, says LaPierre, "sounds a lot like Osama bin Laden and the al Qaeda: a billionaire with an extremist political agenda, subverting honest diplomacy, using personal wealth to train and deploy activists." LaPierre's words speak for themselves, says McKelvey.
CAPITAL WRAPUP
Broadband Babies
The Baby Bells are pressing ahead with their effort to have the Hill help stoke broadband services. Faced with stiff opposition from Senate Commerce Committee Chairman Ernest F. Hollings (D-S.C.), they found friends in Senators John Breaux (D-La.) and Don Nickles (R-Okla.), who on Apr. 30 introduced a bill to provide regulatory relief to the Bells in the broadband market. Expect a costly lobbying blitz as the Bells try to roll the wily Commerce boss.
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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