All the Devils Are Here [106]
Six weeks later, they were all fired.
12
The Fannie Follies
George W. Bush believed in homeownership, too. In June 2002, nine months after 9/11, the president traveled to Atlanta, where, in an African-American church on the city’s south side, he unveiled his homeownership agenda. Entitled “Blueprint for the American Dream,” it promoted homeownership among minorities. The administration’s goal, Bush said, was to raise the number of minority homeowners by 5.5 million by 2010. “Part of being a secure America is to encourage homeownership,” he said, thus making homeownership seem somehow a part of the battle against terrorism.
Sitting in the audience that day was a man named Franklin Delano Raines, the chief executive of Fannie Mae. It was a triumphant moment for Raines, and not only because he was a minority himself—the first African-American CEO of a Fortune 500 company. Along with Leland Brendsel, the chief executive of Freddie Mac, Raines had gone to Atlanta that day at the behest of the White House, which wanted him to be part of the administration’s orchestration of the events of that day. (The two men flew back on Air Force One.) For all the controversies that had dogged the GSEs, the new administration seemed to be signaling that it could live with Fannie and Freddie just the way they were. A few months later, at a White House conference on minority homeownership, the president went out of his way to praise Raines’s stewardship of Fannie Mae.
And yet, if Raines thought he could rest easily, he was dead wrong. Within a year, the Bush White House would be engaged in a bitter war with Fannie and Freddie. By the end of 2004, the war would cost Raines his job, while Fannie Mae would be forced to restate billions of dollars in earnings in one of the largest accounting scandals in American history.
These events created an envious amount of Sturm und Drang in Washington. But ultimately, very little changed. The administration had started the war because it feared that Fannie and Freddie had become so big they posed a systemic risk to the financial system. The White House wanted to force the GSEs to pare back the risks on its books. Yet the “intifada,” as Raines would later call it, arguably wound up making matters worse, because it helped push the GSEs into buying riskier mortgages at exactly the wrong time. Just as important, this intense focus on the dangers Fannie and Freddie posed to the system allowed Congress and regulators to turn a blind eye to the systemic risks that were building up, inexorably, in the private market. After all, if clipping the wings of the GSEs was your primary objective, then you wouldn’t be inclined to look skeptically at their private competitors, would you?
Frank Raines, as everyone called him, was the quintessential postmodern Horatio Alger; born poor, he attached himself to the meritocracy and rode it for all it was worth. He grew up in Seattle, his father a custodian for the city parks department, his mother a cleaning woman for Boeing, a company whose board Raines would later serve on. After he became Fannie Mae’s CEO, Raines liked to recall that his father didn’t make enough money to get a thirty-year fixed-rate mortgage. The only way he could buy a home was to pay an exorbitant rate of interest to a hard-money lender.
Raines earned a scholarship to Harvard, where he joined both the Young Democrats and the Young Republicans and was named a Rhodes Scholar. After graduating from Harvard Law School, he interned in the Nixon White House and then served in the Carter administration before leaving to become a partner at Lazard Frères, where he spent the next eleven years. Deciding that he had had enough of the nonstop travel that was the life of an investment banker, he quit without knowing what he was going to do