All the Devils Are Here [109]
A few months later, it was Take Your Daughters to Work Day. Summers brought his two daughters, as one former Treasury executive recalls. Another employee said to them, in an obvious reference to the GSEs, “What would you tell your daddy to do if there are people who are doing a lot of harm, and Daddy could take them on, but they might do Daddy some harm, and nothing he does may do any good?”
“Oh, is Daddy like Rosa Parks?” asked one of Summers’s daughters.
Finally, on March 22, 2000, assistant Treasury secretary Gary Gensler testified in favor of Baker’s bill on behalf of the administration. Among other things, he said that the U.S. Treasury should consider cutting off the GSEs’ $2.5 billion lines of credit with the federal government.
All hell broke loose. At the hearing, Gensler was berated by Fannie’s many defenders. Yields on GSE debt rose dramatically, meaning that investors suddenly viewed Fannie and Freddie as riskier bets. This, in turn, reduced the spread Fannie could earn on its portfolio, which threatened Fannie’s earnings. Fannie reacted even more intemperately than usual, calling Gensler “irresponsible,” “unprofessional,” and (of course) antihousing.
Congress quickly rose to Fannie’s defense. Within a week, Rick Lazio, the Republican chairman of a key housing subcommittee, announced that he would oppose any legislation that would, as he put it, increase costs to home buyers. Senate Minority Leader Tom Daschle, a Democrat from South Dakota, went on C-SPAN to say that Fannie had done a “phenomenal job” over the years, and “if it ain’t broke, don’t fix it.”
That wasn’t quite the end of the story. Behind the scenes, for a period of about a year, the Treasury Department also held a series of unpublicized meetings with Fannie’s top executives. The meetings were conducted at Fannie Mae’s instigation. In an effort to appease its critics, Fannie Mae had put together a series of “voluntary” initiatives that it hoped to get Treasury to sign off on, which included such measures as disclosing more information about its interest rate risk. It was classic Fannie Mae: keep your friends close and your enemies closer. But the chemistry between Summers and Raines was “horrible,” in the words of one former executive. “The two of them were so alike,” this person explains. “They were both arrogant, stubborn sons of bitches, and they both viewed themselves as the smartest guy in the room.” Summers simply didn’t believe the Fannie team when they explained why it was necessary for Fannie to own that huge portfolio of mortgages. And he absolutely scoffed when Fannie insisted that it received no subsidy and posed no risk to taxpayers. “They made the mistake of insulting his intelligence,” says a former Treasury official.
The initiatives turned into a small comedy of errors. Freddie Mac, having gotten wind of Fannie’s plans, did an end-around, working out a deal to announce the initiatives with Richard Baker. The weekend before the announcement, however, Fannie Mae discovered that Freddie was going to one-up it. So it joined in and took part in the announcement. But the point of the exercise had always been to get Treasury to sign off on the initiatives, which would have signaled to the marketplace that Treasury was finally aligned with Fannie’s business model. That never happened. And without the Treasury on board, the initiatives did little to quell the criticism.
It was pure political calculus that initially caused the Bush administration to decide to leave Fannie and Freddie alone. It’s not that the White House didn’t understand the issue, or that there weren’t a smattering of critics inside the administration. But Fannie also had its internal defenders: