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OCTOBER 27, 2003
Edited by Richard S. Dunham Fannie And Freddie Dodge A Bullet--For Now They were supposed to be on the ropes. Buffeted by accounting scandal and concerns over their high-risk investment strategies, Fannie Mae and Freddie Mac looked like soft targets for stiffer federal regulation. But the Bush Administration and conservative Hill Republicans, who want to restrain the housing-finance giants, are finding that these longtime champs of Washington lobbying still pack a punch. Fannie, Freddie, and their housing-industry allies have stalled legislation to put them under strict Treasury Dept. oversight. But the match is far from over. With the prospect of more bad financial numbers at Freddie and profit pressures on Fannie, calls for closer supervision will only intensify. So while Fannie and Freddie have won Round One, Treasury Secretary John W. Snow could still emerge victorious. Republican Regulators The fight is a curious case of role reversal. Conservative Republicans, led by the White House, argue that the behemoths that finance 45% of America's mortgages need strict regulation. Liberal Democrats and reliably Republican homebuilders and real estate interests don't want any new rules that would restrain housing, the strongest sector of the economy. Both agree that Treasury should oversee financial practices at the government- sponsored enterprises (GSES). But the housing industry argues that the Housing & Urban Development Dept. should retain power to clear any new loan and insurance program from Fannie and Freddie. "Treasury has shown a bias against housing finance -- it's almost a conflict of interest to give them new-product approval," argues Jerry Howard, CEO of the National Association of Home Builders. The GSEs and their allies manned the barricades, teaming up with Democrats to kill plans to move a bill from the House Financial Services Committee on Oct. 8. Now, the reform that was expected to sweep through Congress isn't likely to get back on track until next year. By then, Fannie and Freddie might regret the delay. Why? The GSEs face a potential public-relations nightmare in coming months from the final reckoning of Freddie's accounting errors (likely to top $5 billion); a critical report from Congress' watchdog, the General Accounting Office; and a criminal probe of Freddie's accounting. "All this news is going to come down a lot harder if Fannie and Freddie are still fighting against a credible regulator," warns independent banking analyst Karen S. Petrou, managing partner at Washington-based Federal Financial Analytics. Despite the House setback, Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) hopes to start writing a similar bill by Oct. 23. But without a big bipartisan vote, he's unlikely to push it through the Senate's yearend calendar. By the time Congress returns next year, Treasury could be playing a much stronger hand. Secretary Snow argues that Treasury can't take responsibility for the GSEs' soundness if it can't exercise control over their lines of business. And the drumbeat of bad news could convince even the most Fannie-friendly lawmakers that it's time to get tough. By Mike McNamee, with Paula Dwyer When A Tax Cut Is A Profit Hit House Ways & Means Committee Chairman Bill Thomas (R-Calif.) is preparing a big new tax cut for business, including a reduction in the corporate rate of three percentage points, from 35% to 32%. Great news for Corporate America, right? Not exactly. Because of deficit concerns, the cut may not be fully effective until 2009. Yet many companies would have to take an immediate accounting hit of hundreds of millions of dollars. Why? Accounting rules require companies to lower today's earnings to reflect future liabilities, such as pension and retiree health expenses. Because those costs are tax deductible, corporations now trim them by the 35% tax rate. But if that future rate is cut to 32%, they'll have to restate expenses to reflect the promised cut in deferred taxes. Thus, a company with $1 billion in projected pretax pension costs takes a charge of $650 million today but would have to trim earnings by $680 million. "It is a double zinger," says one accountant. "They'll have to take the tax hit now but probably won't ever see the [full] rate cut." Among the biggest losers: manufacturers such as Ford Motor. Winners: Companies without lots of retirees or deferred taxes on their books. The good news: If the cut is later rescinded, companies will get to restate earnings upward. By Howard Gleckman 
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