All the Devils Are Here [13]
And yet, ironically, to get a bill passed that took care of the double-taxation problem, Ranieri needed Maxwell’s support. Maxwell wanted the legislation passed, too; the double-taxation problem was simply too threatening to the potentially lucrative new market. Realizing they needed each other, Ranieri and Maxwell put aside their differences and worked together to push the thing through Congress. To this day, though, there is disagreement over who did the heavy lifting. (“We had the brainpower and did most of the work on the Hill,” Ranieri recalls; Maloni says that Fannie “did the lion’s share of the work” pushing the bill through Congress.) In 1986, after a number of fits and starts, Congress finally passed the second bill as part of the Tax Reform Act of 1986. It was known as the REMIC law, referring to the real estate mortgage investment conduit, which became the shorthand phrase for deals in which mortgage-backed securities were carved into tranches. In essence, the law created a straightforward process for issuing multiclass securities and avoiding double taxation. Needless to say, it did not specifically prevent Fannie or Freddie from doing REMIC deals; had anyone insisted on that, Maxwell would surely have fought it instead of backing the bill.
Sure enough, the new market exploded. In December 1986, Fannie did its first REMIC offering. It sold $500 million of securities in a deal that was led by Ranieri’s mortgage desk at Salomon Brothers. That year, according to the New York Times, the mortgage-backed securities market totaled more than $200 billion. Underwriting fees were estimated at more than $1 billion. And mortgage specialists were convinced REMICs would dominate the secondary market. “It became the way mortgages were funded in the United States,” Nevins explains.
Almost as quickly, warfare broke out between Fannie Mae and Wall Street. “We worked hand and glove with the New York guys, and then they turned and tried to screw us,” grumbles Maloni. Fannie Mae fought back with a display of bare-knuckled politics and public threats that if it didn’t get its way, the cost of homeownership would certainly rise—an attitude that would characterize its approach to its critics for much of the next two decades.
The battle was joined in the spring of 1987, when five investment banks—Salomon Brothers, First Boston, Merrill Lynch, Goldman Sachs, and Shear-son Lehman—banded together “in an effort to persuade the government to bar [Fannie] from the newest and one of the most lucrative mortgage underwriting markets,” as the New York Times put it. The way Maxwell and Ranieri had dealt with the issue of whether Fannie should be allowed to issue REMIC securities prior to the passage of the law was by kicking the can: Fannie and Freddie were granted the ability to issue REMIC securities—but only temporarily. HUD was charged with the task of granting (or denying) Fannie Mae permanent approval, while the Federal Home Loan Bank Board had to make the same decision for Freddie Mac. The investment banks filed a hundred-page brief with HUD secretary Samuel Pierce, arguing that if HUD gave Fannie REMIC authority, they would “use their ability to borrow at lower costs to undercut the private sector,” as Tom Vartanian, the lawyer hired by the investment banks to press their cause, told the New York Times.
It was a bitter fight.