All the Devils Are Here [107]
Five years later, he jumped back into government, becoming the head of the Office of Management and Budget at the beginning of Bill Clinton’s second term. When Raines asked the president how long the job would last, Clinton replied, “Until you balance the budget.” Within two years, the Clinton administration had indeed produced a balanced budget, the first in a generation, for which Raines reaped enormous credit. When he returned to Fannie Mae in 1998—with a promise from Johnson that he could soon take it over—his political stock could not have been higher. Charismatic, smart, and tough, he had “extraordinary presence,” recalls Andrew Lowenthal, a lobbyist whose clients once included Freddie Mac. “You see him, you meet him, you want to believe him.” There were people in Democratic circles who speculated that he might someday become the first black president of the United States.
By all appearances, the Fannie Mae that Raines inherited was a well-oiled machine. It utterly dominated the traditional mortgage market, guaranteeing almost three-quarters of a trillion dollars worth of securitized mortgages, many of them thirty-year fixed-rate loans. It was so powerful that it essentially dictated the terms under which prime borrowers could get such loans. Its other, far more profitable business—buying up mortgages and mortgage-backed securities to keep on its own books—was growing by leaps and bounds. It held, by then, more than half a trillion dollars worth of mortgage assets on its books. Fannie was just beginning to tiptoe into riskier mortgages, but it was doing so cautiously; it didn’t care for credit risk. To the extent that subprime mortgages could help the company meet its affordable housing goals, Fannie had better ways to reach those goals—ways that wouldn’t dent its profits.
By the end of the 1990s, Fannie and Freddie’s combined assets exceeded the GDP of any nation except the United States, Japan, and Germany, according to a research report by Sanford Bernstein. There was even talk—encouraged by the GSEs—that Fannie and Freddie’s thirty-year note was going to replace thirty-year U.S. Treasury debt as the United States’ benchmark bond.
Then there was the GSEs’ regulator, the Office of Federal Housing Enterprise Oversight. It was a nonfactor—woefully understaffed, dependent on Fannie and Freddie for information, and regularly trounced by Fannie’s congressional allies on the rare occasions it tried to assert itself. Fannie’s capital requirements were minimal. Its leverage was sky high—over 60 to 1. Its earnings were growing steadily, while its stock rose tenfold during the decade. Fannie’s executives, their compensation tied to the company’s earnings goals, got very rich. It still had critics, of course, but it had proven time and again that it could swat them away like an irritating fly.
Which perhaps explains why, not long after becoming CEO in 1998, Raines met with some of the company’s investors and laid out an extraordinary target. He felt confident, he said, that the company could double its earnings per share over the next five years, from $3.23 to $6.46. That number became a kind of mantra within Fannie Mae; even its chief internal auditor—who is supposed to be immune to earnings concerns—once told his troops, “By now, every one of you must have 6.46 branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breathe, and dream 6.46. . . . After all, thanks to Frank, we all have a lot of money riding on it.”
In retrospect, it is hard to see this target as anything but hubris. For all their power, the GSEs’ business model was seriously constrained. Being a government-sponsored enterprise had a few minuses as well as pluses. One of the