All the Devils Are Here [31]
Fannie and Freddie spent a staggering amount of money lobbying: $170 million in the decade ending in 2006, just a little less than the American Medical Association. But even the dollar tally understates Fannie’s reach. Money alone couldn’t have gotten a politician’s barber to call him when Fannie Mae wanted something from Congress, as the Washington Post once reported. When one of Fannie Mae’s few congressional critics, Jim Leach of Iowa, who succeeded Gonzalez as House banking committee chairman, proposed taxing Fannie and Freddie’s debt issuances, rumors began circulating that he was going to be stripped of his chairmanship. That was Fannie’s doing as well. “What do you think a Fannie pack is?” asks one critic. “Whenever there was a hearing, anyone involved would get a Fannie pack, which would consist of every single loan originated in their district that Fannie Mae had purchased in the last four or five years.” Says former Louisiana congressman Richard Baker: “They ran a battle plan that would make Patton proud. It was twenty-four/seven and never anything left to chance.”
And those who persisted in criticizing Fannie Mae? They learned to regret it. When some of Fannie’s large competitors, worried about its growing dominance, launched an organization called FM Watch to keep tabs on the GSEs, Fannie openly threatened them. GE Capital CEO Denis Nayden told the Wall Street Journal that GE was on the “receiving end of multiple communications from Fannie Mae indicating that GE would suffer financial consequences if GE remained a member of FM Watch.” Said Hank Greenberg, the chief executive of AIG: “They use their muscle to threaten competitors, and that’s an outrage.” Soon, FM Watch stopped disclosing the names of its members.
When the Congressional Budget Office published a report in May 1996 estimating that about 40 percent of Fannie and Freddie’s profits were due to their implied government support, Fannie Mae denounced the report, calling it the work of “economic pencil brains who wouldn’t recognize something that works for ordinary home buyers if it bit them in their erasers.”
When the General Accounting Office wrote in a letter to house majority leader Richard Armey that the GSEs received a government subsidy amounting to $2.2 billion in 1995, the letter’s author, James Bothwell, says that he received a call from Franklin Raines, who was then the vice chairman of Fannie Mae. According to Bothwell, Raines demanded that he take out the line about the subsidy—and if he didn’t, Raines would make a call that might cost Bothwell his job. Bothwell refused. In the end, he didn’t lose his job. (Raines denies the incident.)
And when, in 1996, the Treasury Department was preparing to issue a tough report on the GSEs, Fannie somehow managed to get it watered down—and turned into a largely positive report—before it ever saw the light of day. The early draft, for instance, said that if the GSEs were privatized, “Fannie Mae and Freddie Mac would be exposed to the full discipline of private capital market investors, rather than the weakened and distorted discipline resulting from GSE status.” That sentence was gone from the final report. The draft also contained a paragraph that cited several reasons why ending government sponsorship “should also improve the safety and soundness of the housing finance market.” That was gone from the final report, too. The fifth chapter of the draft disappeared entirely. It had been entitled “Policy Options for Altering the Relationship Between the Federal Government and the GSEs.”
No one who’s talking can prove what happened, but those who know about the rewrite have long speculated that Johnson put in a call to his friend Bill Clinton or to Treasury Secretary Robert Rubin, another friend. Johnson has denied calling either man. The mystery was never solved.
The ferocity of Fannie Mae’s response to criticism was strange, in a way. After all, Fannie Mae