Nice work if you can get it: how Fannie Mae became Washington's biggest power player.

With more than two years yet to go in Bill Clinton's second term -- assuming Reps. Burton and Barr fail in their impeachment crusade -- the pundits are already speculating about what our 42nd president will do post-White House. Facing unemployment at the tender age of 54, Clinton is too young to be put out to pasture a la Ronald Reagan or LBJ, and a little too fond of the spotlight to retreat to the ivory tower of academia, as some have suggested. Diplomat, government adviser, and spokesman for a pet cause are a few of the higher-profile possibilities being tossed about, and a handful of Bill-watchers (this magazine among them) have predicted that Clinton, addicted to the glad-handing life of a politician, will make a ran for the Senate. But in light of the excitement Bill's fund-raising techniques tend to generate among Republicans, hopping right back onto the money-grubbing campaign trail might be pushing his luck. Besides, after eight years of subpoenas, hairstyle jokes, and all-around public pillorying, dear Hillary deserves a break from the political viper pit. All told, President Clinton's shrewdest career move come 2001 might be simply to move his office across town and settle in at Washington's most prestigious rest home for ex-politicos and bureaucrats, more commonly known as Fannie Mae.

Chartered by Congress in 1938 as the Federal National Mortgage Association, Fannie Mae is a quasi-governmental entity whose central mission is to encourage home ownership by ensuring that the residential mortgage market remains well-funded. To this end, Fannie buys up mortgages from primary lenders such as banks and thrifts -- thereby enabling those lenders to finance even more mortgages -- then bundles the debts and resells them. (Thus, not only can investors buy shares in Fannie Mae, they can also purchase a piece of the mortgages the company has bought) Originally a public agency, Fannie was transformed in 1968 into a "government-sponsored enterprise." As a GSE, the company is subject to congressional oversight and certain limitations on its activities, but it nonetheless is a privately operated, publicly traded, for-profit corporation charged with making money for its shareholders.

Over the last two decades or so, Fannie has developed an unofficial secondary function as a refueling station for bureaucrats and political operatives fleeing the trenches of public service. Fannies management, like the corporation itself, comprises a rich blend Of government and business. Just this April, profiles in The Washington Post and Slate magazine highlighted the political pedigree of outgoing Chairman and CEO James A. Johnson, whose pre-Fannie credentials include work for the Democratic party on five presidential campaigns and a stint as executive assistant to Vice President Walter Mondale. When Johnson announced his resignation from Fannie, none other than White House budget director Franklin Raines promptly announced that he was leaving the administration to succeed Johnson as chairman and CEO. Raines expressed regret over having spent only a year and a half as chief of the Office of Management and Budget, but explained that the invitation to head Fannie's financial empire was "a once-in-a-lifetime opportunity."

Indeed, a less-than-glamorous career move on its surface, scoring an executive post at Fannie Mae is recognized around establishment Washington as the equivalent of winning the lottery. Much of the draw has to do with the corporation's dual public-private nature. Although Fannie takes great pains to portray itself as just another market player -- "We are not an agency," a staffer in the communications office politely but firmly reminded me -- the corporation's GSE status conveys a number of financial benefits that give the company a formidable edge in the marketplace. Fannie is exempt from state and local corporate income taxes, has a $2.25 billion conditional line of credit with the Treasury, is excused from paying to register the mortgage-backed securities it sells with the SEC, and, thanks to the implicit government guarantee of its debts, is able to borrow money at well below market-rate. This last benefit was worth an estimated $4 billion to Fannie in 1995 alone, according to a '96 analysis by the Congressional Budget Office.

Fannie's financial advantages make it almost impossible for private firms to compete in the field of "conforming" mortgages (those that meet Fannie's credit standards and are valued at less than the federally set ceiling of $227,150). As a result, the only serious competition Fannie faces is from a similar, and much smaller, GSE known as Freddie Mac. Fannie is revered on Wall Street as a money-making machine: In 1997 -- its 11th consecutive year of record earnings -- the corporation turned a profit of $3.1 billion. The company controls one-fifth of the nation's residential mortgage market and boasts that, in terms of assets, it is the largest corporation in the country.

Far from being seen as mercenary capitalists, however, Fannie executives are beloved of philanthropy groups and the public alike, thanks to the company's (government-mandated) commitment to low-income housing, as well as the community and charity works it funds through the Fannie Mae Foundation. During his eight-year reign as chairman, Johnson was invited to head both the Kennedy Center and the Brookings Institution, earning him such monikers as "the face of the Washington national establishment" and "the chairman of the universe" (Now, compare these descriptions to the public labels Clinton currently enjoys as president, such as "The Big Creep" and, as Rep. Dan Burton affectionately dubbed him, "a scumbag.")

In addition to the prestige of working at the mortgage powerhouse, President Clinton would also appreciate the luxury accommodations afforded Fannie Mae executives -- no small consideration for a guy accustomed to the Oval Office. The grounds and facade of the company's grand headquarters in northwest D.C. are more befitting an English estate than an office complex. Just across Wisconsin Ave. from Sidwell Friends School, Chelsea Clinton's upscale alma mater, the main building (Fannie occupies three) is modeled on the governor's mansion at Williamsburg, Virginia -- only greatly expanded, the Fannie folks informed me. A stone fountain gurgles in the center of the circular driveway, gardeners tend the flowering trees and shrubs in the twin courtyards, and, on rainy days, a gracious young guard in a crisp tan uniform meets visitors at their cars or cabs with a giant green-and-white "Fannie Mae" umbrella and escorts them into the lobby. The interior is equally swank: expansive executive offices with plush carpets and mini-fridges, an executive dining room replete with bow-tied waiters, and, for company meetings, a cavernous "grand hall" decorated with chandeliers and sand-colored sofas and ottomans. Security is paramount: Electric card-readers guard the entrance to various sections of the complex, such as the consumer information center and the trading floor. (Fannie runs a full-fledged trading bullpen like on Wall Street, only "much less stressful," one of the traders assured me.) As one government visitor put it, "It's beautiful. It's quiet. Everybody is smiling. It's like being in a big, fancy law firm"

Then, of course, there's the money. In the area of compensation, Fannie's top managers enjoy the best of both the public and private sectors. The company's bottom line is significantly boosted by the government subsidies it enjoys, but, unlike public agencies, the company is not bound by government salary caps -- meaning big profits translate into big paychecks. James Johnson was recently dubbed the $7 Million Man in honor of the estimated $72 million he earned at Fannie in 1996. Other execs receive similarly sweet deals. Last year, Fannie President Lawrence Small earned $703,656 in base pay; a $1,002,710 bonus; "other annual compensation" valued at $35,344; as well as long term stock options and awards valued at a couple of million. The company's third highest-paid employee, Vice Chairwoman Jamie Gorelick, didn't join Fannie until mid-year but still managed to pull in $877,573, excluding long-term earnings. To put all this in perspective, consider that, in annual compensation alone, Fannie Mae's No. 2 guy, Lawrence Small, makes more than the entire Supreme Court. And soon-to-be Chairman Raines' annual income will run considerably more than those of the president of the United States, the vice president, and all of the Cabinet secretaries combined. (Quite a step up from his OMB salary of $150,000.)

With this kind of money involved, Fannie would seem to have obvious appeal to an out-of-work politico with a daughter in college and several million dollars in legal bills. Perhaps even more important, Clinton would feel right at home with the coterie Of political and government expatriates now among the ranks of Fannie's senior management: In addition to Gorelick, who was Clinton's deputy attorney general, Executive VP Ann Logan was once staff director of the Senate judiciary Committee; Senior VP John Buckley served as press secretary to Rep. Jack Kemp and as communications director for Bob Dole's presidential campaign; Senior VP William Maloni is the former senior congressional liaison for the Federal Reserve board of governors; Senior VP Thomas Nides was chief of staff to Trade Representative Mickey Kantor and, before that, executive assistant to House Speaker Thomas Foley; and, of course, Franklin Raines just finished up at OMB.

Arguably, any of these people could have gone into equally lucrative careers at lobbying firms, consulting firms, or some other private practice, a point the company stresses in its shareholder proxy statement: "... Fannie Mae's Board of Directors has adopted a compensation policy designed to help the corporation compete with other large sophisticated financial services companies for the talent Fannie Mae needs" But Fannie Mae is not just another financial services company. Fannie's enormous profits, and thus its ability to reward its executives so richly, come compliments of the federal government. (An estimated 40 to 50 percent of Fannie's net income is the result of retained subsidies) According the the CBO's numbers, of the $4 billion in savings the company enjoys because of its ability to borrow money so cheaply, $2.5 billion is passed along to homeowners in the form of lower mortgage rates; the other $1.5 billion goes into the pockets of shareholders and executives.

Should President Clinton not want to commit to a full-time job at the corporation, he could always shoot for a seat on the board. There, one's business pedigree is even less important than political connections, particularly among the five presidentially appointed directors. Members currently serving at Clinton's behest include both the chief of staff and a deputy campaign manager for the president's 1992 campaign, a former White House aide, a hotshot DNC fund-raiser and erstwhile Lincoln bedroom guest, and a prominent GOP real estate developer from Los Angeles who crossed party lines in '92 to endorse Clinton. And although the financial windfall board members enjoy pales next to that of senior management, it's still a nice way for a president to say "thank you" to a political ally: Each director receives an annual retainer of $23,000, plus $1,000 for each board or committee meeting attended, and an additional $500 for each meeting he or she chairs. (Directors who participate by phone receive $600 for their troubles -- $900 if they chair the meeting) Each board member also gets tens of thousands of dollars worth of stock in Fannie Mae.

Preserving the Perks

Assuming Clinton would be interested in joining the Fannie family, the next obvious question is: Is he qualified for a job in the world of high finance? Eminently. As Fannie's management line-up suggests, though financial credentials are a plus, executives with political connections are equally valuable to the corporation. A primary responsibility of the company's top people is to lobby their political pals and former colleagues on behalf of Fannie's government perks. Shortly after Jamie Gorelick's move to Fannie was announced last year, The American Banker remarked that the soon-to-be vice chair was "well-versed in the ways of Washington" and that "Ms. Gorelick plans to mix diplomacy with resolve to fight for Fannie Mae on Capitol Hill." Likewise, while James Johnson was considered a perfectly competent financier and manager, he was a recognized master at, as The American Banker recently put it, "promot[ing] Fannie Mae in the public realm"

Of course, almost all corporations have an interest in getting their issues addressed in Washington. Fannie's GSE status, however, puts the company in a uniquely vulnerable position that would make Clinton's storied charm, schmoozing skills, and political savvy of particular value. Every few years -- most recently in 1996 -- some spoilsport on the Hill decides that, considering how profitable Fannie Mae has become, there's really no reason the corporation should continue to receive a multibillion-dollar subsidy. The company was originally created to support a market that the private sector was neglecting and, in return, was awarded certain privileges. Sixty years later, however, the mortgage market is thriving. Private providers handling the loans too big or too risky for Fannie are becoming evermore efficient, and the growing sense is that Fannie, as one industry representative put it, "is beginning to place a stranglehold on the market" Or as market analyst Tom LaMalfa asserts, "These guys are the robber barons of the 20th century."

A few concerned lawmakers have also noted that, even though Fannie must explicitly state that its debts are not guaranteed by the federal government, investors and lenders alike treat the GSE label as just such a guarantee -- perhaps not an unreasonable assumption considering that Uncle Sam bailed out the government-sponsored Farm Credit System in 1987, and provided financial aid to Fannie when it faced insolvency in the early '80s. Moreover, as the undisputed ruler of the nations $4 trillion home mortgage market, Fannie already falls into the "too big to fail" category of American business, that elite group of players so dominant in their particular industries that the government cannot allow them to collapse for fear of the resulting market disruption. (Think Chrysler circa 1980) Fannie boasts that it is the second largest borrower in the nation, just behind the US. Treasury, and its regulatory guidelines permit the company to maintain a lower capital-to-debt ratio than banks and thrifts. In the event that the corporation suffered a financial meltdown, taxpayers would likely be presented with a billion-dollar bailout bill reminiscent of the good ol' S&L days. Fannie Mae is in the enviable position, House Banking Committee Chairman James Leach has noted, of enjoying "the privatization of profit, coupled with the socialization of cost and risks."

Were Clinton to sign on at Fannie Mae, then, a significant part of his duties would be to keep Congress and the administration convinced that -- far from conveying an unfair market advantage or posing any kind of risk to taxpayers -- keeping Fannie on the GSE gravy train is in the best interests of everyone. (This, despite the CBO's findings that a third of Fannie's government subsidies go to fatten company profits.) Fortunately, tips on how to keep Fannie in the good graces of Congress and the community abound. James Johnson's many methods included hosting political fundraisers for key lawmakers, opening branch offices in key congressional districts, and presiding over the Fannie Mae Foundations philanthropic efforts -- all with great fanfare, naturally. The foundation doles out about $25 million annually in "Community Outreach grants" and sponsors such high-profile charity events as the annual Help the Homeless Walkathon (led last year by Gen. Colin Powell) and the "Home Team" partnership in which foundation volunteers and pro basketball stars join forces to build houses for needy families.

Of course, Fannie also knows the value of direct cash transfers to legislators. During the 1995-96 election cycle, Johnson personally gave to the tune of $30,000, according to the Center for Responsive Politics, while the corporation itself made $158,000 in soft money donations. Granted, it probably would take Clinton a few months to get used to handing out money rather than soliciting it, but at least he's familiar with the basic drill.

Wielding a carrot-stick combination has proved particularly successful for the corporation in making its voice heard. For instance, in 1993, '94, and '95, D.C. officials publicly broached the subject of requiring Fannie Mae to pay corporate income taxes like other companies -- supplying D.C. an extra $300 million or so a year by their count (see sidebar). At least once, legislation was introduced, and a handful of council members signed on to the crusade. Faced with such threats to its bottom line, however, Fannie promptly ratcheted up the foundation's philanthropic efforts, contacting community groups and pledging to invest more in local housing efforts and youth programs. At the same time, company executives began publicly musing about how tragic it would be were tax pressures to "force" the corporation out of the District.

In addition to helping keep Fannie Mae's GSE perks, Clinton would most likely be recruited to lobby for new ways to maximize profits. The corporation obviously has no interest in allowing competitors into its market, and so was understandably miffed when HUD Secretary Andrew Cuomo recently began pushing to raise the value of mortgages that can be insured by the government-run Federal Housing Administration. Concerned that this would cut into its business, Fannie has lobbied against such a move -- thus far effectively. But Cuomo remains determined, and an administration proposal is now before a congressional committee. Should Cuomo retain his post in 2001, Clinton might be the perfect person to lobby his former appointee against such efforts.

The president might also prove successful in helping Fannie broaden its range of business activities. Having dominated all portions of the market in which it may compete, Fannie Mae must find ways to expand its operations or soon face a slowdown in growth. Already, private-sector players are nervous about the corporations plans to extend its reach into subprime lending (mortgages that don't meet ideal credit standards) and rumblings that Fannie intends to enter the home-equity business. As one industry watcher noted, "These are markets that developed just fine without government subsidies, and the participants don't want to see a government-sponsored enterprise come in and take over." just last year Fannie attempted to expand into the life insurance field, offering policies free to home buyers and making money through fees paid by insurance companies. Concerns were raised about how Fannie's entrance into the market would affect private competitors, and about the ability of Fannie's primary regulator, the tiny Office of Federal Housing Enterprise Oversight, to monitor the mammoth corporation as it spread into new areas. Fannie pitched the move as more of a public service than a business decision, only to be publicly embarrassed when an internal memo was leaked to the press portraying the effort as a way for Fannie to expand its profits exponentially -- decidedly bad PR for a company that likes to invoke its social "mission" as a way to justify its subsidies. Fannie says the memo was simply a first draft and that later estimates showed the plan to be less profitable. Nonetheless, the plan was killed during the 1997 budget battle in Congress -- one of Fannie's rare defeats on the Hill.

Scared Silent

Considering the political nature of Fannie's business, the genius of its hiring strategy is clear. While most companies have to worry about choosing executives to manage business risks, the biggest threat Fannie faces is that an act of Congress will take away its GSE status and, thus, its license to make money. As such, tempting former political and government folks into the fold with visions of posh offices, political and market clout, and seven-figure incomes is smart business. Indeed, Fannie Mae has learned how to manipulate Washington's famed revolving door better than most purely private corporate giants. (Franklin Raines and John Buckley are on their second tour of duty, having worked at Fannie, gone into political jobs, then returned to the company.) The cyclical nature of the system is magnificent: Fannie uses its government-subsidized profits to snag former political and government folks, then sends them out to make sure the corporation retains the government-sponsored perks that provide for those subsidies/salaries.

But here's the best part: No one seems to mind. No matter how richly the company profits from its subsidies, no matter how hard it lobbies to keep out competitors, no matter what plans it makes to muscle in on other segments of the industry, Fannie retains an approval rating even Clinton would envy. It appears that, through its philanthropy, its community involvement, and its low-income housing commitments, Fannie Mae remains one of the most popular organizations in D.C. Even staunch anti-government GOPers are strangely silent when it comes to the corporation -- thanks in no small part to Fannie's bipartisan approach to both its hiring and its financial largesse. (The Washington Post reported that in 1996, after House Republican Richard Baker started agitating for hearings on Fannie Mae's GSE status, Johnson hosted a campaign fund-raiser at his home for Baker. When the hearings at last began, they focused on Congress' oversight of Fannie rather than on the privatization issue. Johnson assured the Post that the timing was coincidental) "Fannie buys these guys off," says Tom LaMalfa. "There's no one important on the Hill who hasn't gotten a big check from Fannie."

In reality, it is fear as much as love that keeps potential Fannie critics silent. The company is famous for its vindictiveness toward those who cross it, with perhaps the most oft-told story being Fannies decision to stop doing business with investment powerhouse Salomon Brothers for a period after folks at Salomon spoke out against Fannie's operations. No one in the mortgage business wanted to be quoted for this article, and many didn't want to speak even off-the-record. "You'll have to find someone who has nothing to lose," an executive at one mortgage company demurred.

Policy makers are equally hesitant to displease Fannie. In addition to outside lobbyists, the company keeps a cadre of its own people up on Capitol Hill monitoring both sides of the aisle. (During the first six months of 1997, Fannie reported $2,460,000 in lobbying expenses, earning it the No. 36 spot on the Center for Responsive Politics' list of top spenders) If somebody does something the company feels is undercutting it, Fannie mobilizes mortgage bankers, real estate agents, securities dealers, and homeowners all across America to put pressure on the offending party, say staffers (all of whom, incidentally, asked not to be quoted). "Fannie has the Congress cowed," says Charles Lewis, the head of the Center for Public Integrity. "They are arguably the most powerful special interest that lawmakers encounter." In 1995, when House Banking Chairman Leach proposed having Fannie Mae pay "user fees" for the maintenance of its subsidies, the veteran congressman got steamrolled. Fannie mobilized its lobbying forces and threatened to pass along all costs to homeowners in the form of higher rates. Leach was forced to withdraw his proposal, explaining, "Fannie Mae and Freddie Mac -- its duopolistic partner -- have ties to Congress which are much stronger than those of 13,000 financial institutions in the 50 states."

Fannie keeps a close eye on the media as well. Press attention tends to make the company unhappy -- unless, of course, reporters are covering one of the foundations PR events. No scrap of information is released by Fannie, or its foundation, without the requester first undergoing a thorough grilling. And when the Monthly tried to arrange interviews with company executives, we were informed that Fannie has "a low tolerance for these sorts of articles" and that this reporter would not be allowed to speak with top management, particularly "in light of the murderers row listed on your masthead." (In recent years, two former Monthly editors have written pieces criticizing Fannie.)

The end result of all this is that Fannie essentially operates without any meaningful checks on its behavior. The company is not a "bad guy" per se. Over the years, Fannie has helped raise the level of home ownership dramatically, and more recently has been working to improve its record in providing a market for low- and moderate-income housing. But the corporation has grown so big, so rich, and so powerful that it is largely beyond the control of both government regulators and free-market forces. No industry players can influence it through competition. Certainly no one on the Hill dares speak out. "What's so interesting is not only that they have preserved their cushy arrangement," says Charles Lewis, "but that there is no discourse on the subject -- not just in the halls of Congress, but even intellectually. It's a whole area that's been relatively ignored."

This, of course, suits Fannie just fine. And Bill Clinton would clearly be a top-notch recruit to help the corporation keep things that way.

RELATED ARTICLE:

Sadly, our nation's capital has come to embody the old adage: It's a nice place to visit, but I wouldn't want to live there. Crime is rampant, the streets are a mess, the schools are falling down, the water is barely fit for consumption, and most residents consider themselves lucky if their garbage gets picked up at all. So what needs could the District start addressing with an extra $300 million(*) a year in tax revenue? Among other things:

Resurface severely potholed local roadways:             $62 million
Modernize the plumbing in schools:                      $14 million
Replace boilers in schools:                             $14 million
Upgrade electrical wiring in schools:                   $28 million
Remove asbestos from school facilities:                  $4 million
Rehabilitate decrepit police stations:                  $10 million
Repair fire department and emergency medical
service facilities:                                     $10 million
Replace/repair defective firefighting protective
equipment:                                             $1.5 million
Replace/update computer-assisted emergency
dispatch system:                                         $4 million
Rebuild/restore Fire-EMS training facility:              $7 million
Get 17 more ambulances on the streets/increase
staffing efficiency:                                    $11 million
Hire 150 additional teachers (salary costs):             $6 million
Hire 100 additional police officers (salary costs):      $4 million
Upgrade computers to deal with the year-2000
problem:                                              $44.5 million
Payment toward the $3.32 billion in long-term debt
the District carries:                                   $80 million
                                                       $300 million

When past proposals to have Fannie pay local income taxes have been introduced, the company has made noises about moving out of the District. This kind of psuedo-blackmail, however, could be dealt with in kind: Fannie would be unlikely to head for the suburbs were Congress to suggest that such a move prompt serious review of Fannie's GSE status and the more the $4 billion in savings it brings the company each year. Come to think of it, maybe having Fannie pay $1 billion in "user fees" in exchange for those subsidies would be an even better idea.

(*) By other estimates, even were Fannie subject to local taxation, only the portion of profits directly attributable to its operation in D.C. would be taxed here, with the remainder taxed in the other cities where Fannie does business. This would give the District closer to $40-$60 million, depending on who you ask. Still, $40-$60 million is nothing to sneeze at, and surely the other cities in which Fannie operates could find equally worthy uses for a little additional revenue.

Source: Office of the D.C. Chief Financial Officer, the AFT, The WAshington Times, and management reports commissioned by the D.C. financial control board.