All the Devils Are Here [28]
The main reason was Fannie Mae’s new CEO, a smooth-as-silk longtime Democratic operative named Jim Johnson. A tall, forty-seven-year-old Minnesotan and a graduate of Princeton, Johnson was, as they say, a player. He had spent his twenties working on the campaigns of Eugene McCarthy and George McGovern, and then served as Vice President Walter Mondale’s executive assistant during the Carter administration. In 1984, he had managed Mondale’s failed presidential bid; a year later, he co-founded Public Strategies, a policy-oriented public relations firm, with Richard Holbrooke, the well-known diplomat. He counted among his friends senators, members of Congress, top administration officials, and even the president, Bill Clinton, whom he had first met at a reunion of former McCarthy campaign staffers. When he wasn’t running Fannie Mae, he was serving as chairman of the Brookings Institution, Washington’s leading liberal think tank, and heading up the capital’s premier arts venue, the Kennedy Center for the Performing Arts. The Washington Post once called him “the chairman of the universe.”
As Fannie Mae’s CEO, though, Johnson also played a brand of take-no-prisoners political hardball that even Maxwell—no slouch himself in that department—would likely have shied away from. Maxwell had handpicked Johnson for the job, and it was easy to see why. Like Maxwell, Johnson oozed charm. He was exceedingly smart; Maxwell recalls being dazzled by his brilliance the first time they met, at a dinner party in the 1980s. Also like Maxwell, he was a tough cookie who wasn’t afraid to play rough to get his way.
The major difference between the two men was that Johnson’s bare knuckles were much more visible than Maxwell’s. Maxwell ran a smaller, less threatening company, and he had always had a sense of where the limits were, of what lines were best not crossed. Johnson didn’t calibrate things that way. When it came to political fights, he believed in all-out warfare, no matter how important—or unimportant—the issue. “In daily life, he’d say things like, ‘We’re going to cut them off at the knees,’” recalls a former Fannie executive. Once, a government official in the middle of a negotiation with Johnson asked him jokingly what the possibility was that Fannie Mae might lose. There was no humor in Johnson’s reply: “There is no probability that we lose.”
Years later, Fannie’s last real CEO, Daniel Mudd, would say about the Johnson years, “The old political reality was that we always won, we took no prisoners, and we faced little organized political opposition.” One longtime critic, former Republican congressman Jim Leach, says that Johnson built “the greatest, most sophisticated lobbying operation in the modern history of finance.”
Which was true. At first, the purpose of Fannie’s lobbying machine was to bend the new legislation to its wishes as it wended its way through Congress. The bill had come about because there were people in the first Bush administration who worried that Fannie and Freddie were taking on risk that the taxpayers would likely have to absorb if the housing market ever tanked and they had to make good on their guarantees. At a minimum, these administration critics believed, Fannie and Freddie needed better, tougher regulation. As a general rule, banks had to put aside enough capital to cover around 8 percent of the assets in their portfolios. But Fannie Mae and Freddie Mac put aside only a sliver of capital, allowing them to employ more debt than their competitors could—and produce greater profits. The Treasury Department wanted Fannie and Freddie to be forced to put up more capital.
In 1990, even before Johnson took over as CEO, Fannie Mae engaged Paul Volcker, the legendary former Federal Reserve chairman, to defend Fannie Mae’s low capital levels. This was a classic Fannie tactic—finding a highly respected expert to defend its position—that Johnson would also employ. In this case,