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Did Fannie And Freddie Outsmart Themselves?


One of Washington's cardinal rules is: Know when to hold 'em and know when to fold 'em. Banking and Capitol Hill sources say Fannie Mae (FNM) and Freddie Mac (FRE), which beat back legislation in 2004 that would have put them under tighter controls, have indicated that they're ready to fold and accept last last year's Senate bill.

But it's too late. In the wake of Fannie's $9 billion accounting scandal and revelations of fat bonuses, Republicans will mount an even more ambitious assault on the two mortgage giants. "We are going to have all the wheels and spinners previously enumerated, plus a few new ones," promises Richard Baker (R-La.), chairman of the House capital markets subcommittee. Last year, Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) pushed to establish a new independent regulator with the power to set capital standards, approve new products, and put government-sponsored enterprises (GSES) such as Fannie and Freddie into receivership in the case of severe financial difficulties. Now, he says, that's "a floor, not a ceiling. We're coming back in a different environment."

Too Far Afield

Just how different is clear in an overhaul bill sponsored by Senator Chuck Hagel (R-Neb.). Hagel would curb severance payments to executives and restrict Fannie's and Freddie's activities largely to buying and securitizing mortgages that banks originate. "These two behemoths have gone beyond their mission" of promoting homeownership, he says.

Even stiffer restrictions may be in store. Shelby is scrutinizing the fees the GSEs charge lenders when they guarantee loans. Giving a new regulator authority to review or limit these "G fees" could cut a lucrative source of revenue. White House officials, meanwhile, are mulling whether to limit GSE issuance of debt by limiting the amount of mortgages they can buy and hold. That would reduce their risk -- but put a lid on their shareholder-pleasing growth.

Fannie, whose lobbying was legendary under ousted CEO Franklin D. Raines, is keeping its head down. But don't expect the GSEs to quietly accept new strictures. Freddie is bouncing back from its 2003 accounting troubles and has added lobbying muscle, including Timothy J. McBride, formerly DaimlerChrysler's (DCX) top lobbyist and a staffer for President George H.W. Bush. "Fannie and Freddie are wounded but not out of the game," says Diane Casey-Landry, president of America's Community Bankers, a trade group.

Fannie and Freddie can also count on Democratic allies to argue that limits will hamper the pair's ability to promote homeownership. "The regulator shouldn't be able to say 'no' to a new product unless it would interfere with safety and soundness," says Representative Barney Frank (D-Mass.).

Republicans, however, could get a fresh boost from ongoing investigations. The SEC and Justice Dept. are still looking over Fannie's accounting, while the Housing & Urban Development Dept. is examining the Fannie Mae Foundation, which supports charities that create affordable housing. And the housing giants' current regulator is probing whether Fannie and Freddie colluded in setting mortgage fees. If more shoes drop, legislation to create a new regulator will move quickly -- and Fannie and Freddie will look back at last year with even deeper regret.

President George W. Bush owes straying Democrats a big debt of gratitude for his 2004 re-election victory. According to a BusinessWeek analysis of new data on the party identification of American voters, released on Feb. 15 by the University of Pennsylvania's National Annenberg Election Survey, the Republican incumbent carried 13 states where self-declared Democrats outnumber avowed Republicans, including the key battlegrounds of Ohio and Florida. Senator John Kerry (D-Mass.) won only two states where more voters are loyal to the GOP -- Maine and Oregon. The worst cases of Democratic underperformance were in Kentucky, Oklahoma, and West Virginia. Colorado, a top Democratic target in 2004 and beyond, was the only red state where Kerry demonstrated more crossover appeal than Bush.

Business lobbyists fret that no replacement for U.S. Trade Representative Robert B. Zoellick has yet been named despite a full roster of trade negotiations, many of which are already behind schedule. Zoellick is headed for the No. 2 job at the State Dept. Two possibilities for the trade position formerly worked together at the USTR under President George H.W. Bush: White House Budget Director Josh Bolten and former USTR Chief of Staff and White House aide Gary Edson. Bolten has been trade counsel to the Senate Finance Committee and general counsel for the USTR. But the President may not be willing to let Bolten leave the budget office.


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