6 How Fannie and Freddie Influence the Political Process

Ralph Nader

Fannie Mae and Freddie Mac are fast learners. Born of the federal bureaucracy, these enterprises have swiftly and skillfully managed to pick up the roughshod tactics of the private corporate world and at the same time cling tightly to one of the federal government's deepest and most lucrative welfare troughs. The combination has produced two government-sponsored enterprises that are not only too big to be allowed to fail but per­ haps too influential and too politically connected to be regulated or shaped effectively in the public interest. Any suggestion that their power be limited or that subsidies be reduced triggers an immediate no-holds-barred counterattack from Fannie and Freddie. As John Buckley, Fannie Mae's vice president for communications, bluntly told the Wall Street Journal, "We're not casual about man­ aging our political risk." What makes it difficult to deal in any rational manner with Fannie and Freddie's power is the fact that these GSEs are wrapped around a product-housing-that is right up there in the American psyche with apple pie and motherhood. Unquestionably the GSEs' secondary market operations have significantly contributed to housing by providing stability and in­ creasing access to the housing finance markets. To suggest other­ wise would be inaccurate. Nor do the entities miss a beat in promoting and at times exaggerating their contributions, particu­ larly in the critical area of affordable housing. Fannie and Freddie are extremely skilled at playing the heart strings to the fullest about America's love affair with homeowner­ ship. Rarely does a Fannie Mae newspaper advertisement appear

110 RALPH NADER 111 or a television spot air without emphasis on the corporations' role in "helping families achieve the American Dream." Fannie and Freddie are not the first to make good public rela­ tions use of the American dream of homeownership. The Federal Home Loan Bank System, created in the New Deal-and the sav­ ings and loan industry that it served-used the same phrase to de­ scribe its role in housing the nation. For years the link between housing and the savings and loans muted serious questions about the industry. Even as the industry was collapsing in the 1980s, many members ofCongress-alongwith the media-continued to cling to the image of the American Dream and raised no serious questions about where and why the savings and loans had wandered from their original role. When they did look behind the dream, it was too late for oversight, too late to ask the hard questions that clever public relations, weak regulation, and a passive, if not corrupt, Congress and Reagan administration had hidden too long. Letting any industry-exalted missions notwithstanding-elimb on a self-constructed pedestal and remain exempt from serious in­ dependent inquiry is foreign to a market economy and a democratic system of government. Such exemptions from normal checks and balances can also be quite expensive for the taxpayers. But Fannie and Freddie do not depend solely on the goodwill generated by a housing finance role to shield their corporations from scrutiny. Far from it. These GSEs, particularly Fannie Mae, have built an almost impenetrable moat that essentially seals off their opera­ tions from serious ongoing examination by Congress, the media, or even many advocacy groups engaged in promoting affordable hous­ ing. The mentality of "see no evil, hear no evil, and speak no evil" that pervades official Washington's approach to the GSEs is the prod­ uct of an influence machine that is oiled by revolving doors, the care and feeding of key politicians across the nation, a quick-strike take­ no-prisoners public relations operation, and targeted contributions to advocacy organizations-activities financed by slush funds cre­ ated by generous forms of corporate welfare. Such corporate welfare includes exemptions from D.C. and some state and local income taxes worth $300 million annually while their foundations donate only a fraction of that amount lo­ cally. All this is aided and abetted by national media that infre­ quently use their vast investigative resources to look beyond the handouts and the smiling faces of young couples and children that 112 INFLUENCING THE POLITICAL PROCESS

invariably adorn the slick brochures selling the GSEs' housing role to the American public. As a result, most citizens have only a vague idea of what lies behind the term government-sponsored enterprises. And certainly Freddie and Fannie do nothing to enlighten homebuyers about the corporate welfare that fuels their operations. But the financial mar­ kets are well aware of the benefits that flow to the GSEs from their congressional charters and ongoing links to the federal government. These links provide good reasons for the markets' perception that the U.S. Treasury and taxpayers would be the fall guys in the event of a default. Here are some of the links to the federal government that lead to this market perception: • Fannie and Freddie each have a contingency line of credit of $2.25 billion that can be drawn from the Treasury. • Their securities are government securities for the purpose of the Securities and Exchange Act of 1934. • The securities are exempt from registration under the Securi­ ties Act of 1933. • The securities serve as eligible collateral for Federal Reserve Banks' discount loans. • The secretary of the Treasury approves the issuance of their securities. • The Federal Reserve is the fiscal agent for those issuances. • Their obligations are eligible for unlimited investments by na­ tional banks and state bank members of the Federal Reserve as well as by federally insured thrifts. The Congressional Budget Office estimates that the credit en­ hancement stemming from the government links is at least $6.5 bil­ lion annually. Only part of that subsidy is passed on to the homebuyers-about $4.4 billion-with the remainder of the subsidy pocketed by private shareholders and the corporations' executives and lobbyists. CBO estimates that about 40 percent of Fannie and Freddie's earnings in 1995 could be traced to the benefits of their government-sponsored status. Obviously a significant part of the subsidy derived from GSE status is being used, not to assist homebuyers, but to increase corpo­ rate power and control over all facets of the mortgage business. As Tom Stanton, a Washington attorney and long-time observer ofGSEs, says, "Thanks to their special federal charters, Fannie and Freddie form a duopoly in the mortgage market ... and they decide for RALPH NADER 113 themselves how much of the government subsidy they will give to shareholders and how much they will pass on in service to public purposes." One of the prime rationales offered for the continuing subsidy is the need to have Fannie and Freddie provide support for affordable housing, one of the nation's critical needs. But questions are increasing about how well Fannie and Freddie are performing this part of their mission. As the Urban Institute said in a 1999 study, "The GSEs appear to be lagging the market in servicing low and moderate income and minority borrowers." William Apgar, assis­ tant secretary of housing and urban development in the Clinton administration, put this issue succinctly: "There are two clear and indisputable facts. ... One, the number of Americans in need of affordable housing stands at an all-time high. Two, Fannie and Freddie are making record profits." In defending their special status, Fannie and Freddie have drawn heavily from the political ranks to bolster their lobbying and top executive jobs. In recent years the roster has looked like a virtual who's who of Washington's power elite. Nowhere is this more ap­ parent than in the top job at Fannie Mae. The present occupant of the CEO's chair at Fannie is Franklin Raines, who has moved smoothly through the revolving doors between high-level govern­ ment jobs and Fannie Mae. From 1991 to 1996 Raines was vice­ chairman of Fannie Mae. Then he decided to move over to a key job in the Clinton administration as the director of the Office of Man­ agement and Budget. Now he has pushed the revolving doors again and has moved back to Fannie's Wisconsin Avenue offices, this time as the chief executive officer. Raines succeeded James Johnson, an old hand in Democratic politics in Minnesota as well as nationally. He was the executive as­ sistant to Vice President Walter Mondale and was the campaign manager for Mondale's failed bid for the presidency in 1984. In the event that Raines or Johnson lacks the name of a key Democratic operative on their Rolodex, they can always turn to Jamie Gorelick, who joined Fannie in 1997 as vice-chairman after a stint as the deputy attorney general in the Clinton administration's Justice Department. Staffing at the top levels of Fannie could leave the impression that the corporation is a hangout for Democrats. Not true. The tough bipartisan power game puts a high priority on finding former po­ litical officeholders and Congressional staff of both parties to fill executive jobs as well as staff, lobbying, and board positions. Charles Lewis, the executive director of the Center for Public Integrity, says 114 INFLUENCING THE POLITICAL PROCESS that Freddie and Fannie's hiring of high-level government officials blurs the line between public service and private enterprise. The hirings are an example, Lewis says, "of how incestuous these quasi­ governmental entities are with the people who ostensibly regulate or have oversight over them." Fannie Mae's board of directors has always included notable Washington insiders from both political parties who know the po­ litical power game well. The current board includes Kenneth Duberstein, the chief of staff for President Ronald Reagan and a long­ time lobbyist for Fannie; Ann McLaughlin, the labor secretary in the Reagan administration; and Jack Quinn, the chief of staff to Vice President Al Gore and later the counsel to President Bill Clinton. In recent years Fannie's staff has included Robert Zoellick, an executive vice president, who had been the deputy chief of staff in the George Bush White House and later a deputy assistant secretary of Treasury under James Baker; John Buckley, the senior vice presi­ dent for Fannie Mae's communications, who had been a top aide in Senator Robert Dole's presidential campaign; Ellen Seidman, the senior vice president of Fannie, who later became an economic policy advisor to President Clinton and then headed the Office of Thrift Supervision; Mary Cannon, a Fannie vice president, who moved to the GSE after serving as an assistant secretary of the Department of Housing and Urban Development under Secretary Jack Kemp; Thomas Donilon, the Fannie general counsel, who was the chief of staff to Secretary of State Warren Christopher; William Maloni, a senior vice president, who had been a top aide to a senior Demo­ cratic member of the House Banking Committee and the head of congressional liaison for the Federal Reserve Board; Gerald McMurray, a senior vice president and formerly the staff director of the House Banking Committee's Housing Subcommittee; and Arnie Christensen, vice president for regulatory affairs, who was a top aide to Speaker of the House Newt Gingrich. Such in-house political expertise is extremely valuable, but both Fannie and Freddie also maintain cadres of full-time lobby­ ists who watch every move on Capitol Hill and in the executive branch that might have even a minuscule effect on the fortunes of the GSEs. The Center for Responsive Politics tabulated lobbying expenses of $5,550,000 for Fannie Mae in 1998. Freddie, according to the center, incurred lobbying expenditures of $2,160,000 that year. Fannie hired more than forty outside lobbyists to augment its staff of nine full-time lobbyists. Freddie had six in-house full-time RALPH NADER 115 lobbyists-including Ira Paull from the staff of the Senate Banking Committee-plus a dozen outside lobbyists drawn from law and consulting firms. The biggest chunk of Freddie's lobbying fund­ $320,OOO-went to Clark & Weinstock, a firm that includes former Republican congressman Yin Weber from Minnesota. Freddie also had on its lobbying tab the former Comptroller of the Currency and assistant secretary of the Treasury, Jim Smith, from the Nixon ad­ ministration, and former Democratic congressman Richard Lehman of California, an alumnus of the House Banking Committee. Among the political luminaries on Fannie's lobbying team were former senators John C. Culver of Iowa and Steve Symms of Idaho along with former congressmen Tom Downey and Rod Chandler. The list included Nicholas Calio, President George H. W. Bush's con­ gressionalliaison; Michael Boland, former aide to Senator Trent Lott; and Ken Duberstein, President Bush's chief of staffwho now doubles as a member of Fannie's board. The 1998 lobbying numbers may pale alongside lobbying to­ tals for 1999. The formation of FM Watch, the financial industry group trying to curb the GSEs, has brought a flurry of new lobby­ ist hires by Fannie Mae. Among them are Williams and Jensen, as well as Griffin, Johnson Dover and Stewart, two big Washington lobbying firms. Freddie Mac has recently added former Speaker of the House Newt Gingrich and Kimberly Kranys Cobb, former coun­ sel to the Republican Conference and aide to Senator Connie Mack, as consultants.

Playing the Tough Lobbying Game

As another indicator of how tough Fannie plays the lobbying game, the Wall Street Journal reported that Fannie Mae has been pressuring lobbying firms and trade groups to steer clear of FM Watch. Accord­ ing to the Journal, Fannie's communications director, John Buckley, conceded that the GSE had approached lobbying firms with this message: "We said to a number of our friends: You don't want to be on the side of the bad guys." Pressure tactics are nothing new in Fannie's lobbying manual. In 1999 Legal Times reporter Sam Loewenberg quoted three unnamed former and current public officials as saying that Fannie has gone so far as to try to get uncooperative Hill staffers and regulators fired. "They will try to hurt an individual-a member of Congress, a staff member-to make them regret their actions," one official said. 116 INFLUENCING THE POLITICAL PROCESS

Fannie and Freddie back up their lobbying with significant cam­ paign donations, particularly in the form of soft money to both ma­ jor political parties. While the top executives at Fannie Mae have extensive links to the Democratic Party and to the Clinton adminis­ tration, the soft money donations show a decided leaning to the Republican campaign apparatus. Compilations by the Center for Responsive Politics show $501,350 in soft money donations by Fannie Mae in the 1997-1998 election cycle: $312,250 (62 percent) to the Re­ publicans and $189,100 (38 percent) to the Democrats. Freddie Mac contributed $875,000 to the two parties in the form of soft money: $650,500 (74 percent) to the Republicans and $225,000 (26 percent) to the Democrats. In addition to those contributions, top executives and employ­ ees of Fannie and Freddie are individual donors to various mem­ bers of Congress. For example, seven different contributions from employees ofFannie and Freddie ranging from $250 to the individual maximum of $1,000 appear on the 1997-1998 campaign reports of Representative John LaFalce, the ranking Democrat on the House Banking Committee, and a dozen different employees of the two corporations made similar contributions to Representative Rick Lazio, the Republican chairman of the Banking Committee's Hous­ ing Subcommittee. The Fannie Mae and Freddie Mac foundations-which award grants and loans for a variety of purposes-are clearly part of the public relations framework of the two corporations. The founda­ tions are tightly linked to the corporations with the chief executive officers-Leland Brendsel of Freddie Mac and Frank Raines of Fannie Mae-serving as chairmen of their respective foundations. The Freddie Mac Foundation intended to distribute $17 million in grants in 1999, part of the $50 million since the foundation was formed in 1991. Much of the foundation's outlay targeted programs serving children and youth. The Fannie Mae Foundation in 1998 listed $33 million in grants to 1,100 national and local organizations that it says are "working to transform communities." Many grants over the past several years have gone to advocacy and research groups involved in housing and related areas-groups such as the Center for Community Change, Enterprise Foundation, ACORN, Greenlining, and National Low Income Housing Coalition. But the list contains a wide variety including conservative organizations with close corporate ties such as the Heritage Foundation, Alexis de Tocqueville Institution, and Manhattan Institute. RALPH NADER 117

The degree to which these foundation grants are part of a cor­ porate strategy to enhance Fannie's image or to gain political sup­ port or to mute criticism is difficult to pin down. But in some cases an organization receiving a grant has been asked or signaled to lobby for Fannie's interests. We need to know more about the quid pro quo expected from the grantees. In one such incident in 1999 the Office of Management and Bud­ get proposed that Fannie Mae pay fees for the registration of their securities-a cost borne by other publicly traded corporations. A Fannie Mae executive contacted a major recipient of Fannie Foun­ dation money and insisted that the organization lobby the Clinton administration to drop the fee and even provided a script to guide the lobbying effort. In that same lobbying effort, according to the Wall Street Journal, Fannie Mae "enlisted more than two dozen con­ gressmen and big-city mayors" to protest the fee. In the end the ad­ ministration caved in to Fannie's pressure. A Fannie executive bragged that it had taken the corporation only fifty hours to scuttle the proposal.

Fannie Mae Road Shows

Fannie Mae invests heavily in road shows with elaborate press con­ ferences to announce its local housing efforts. Front and center in these shows are the local congressman, the mayor, and other assorted dignitaries. Not only does Fannie gets its name out front, but local politicians are overjoyed with their front-page pictures and televi­ sion coverage. The shows are an ongoing effort that brings feel-good messages about Fannie to cities across the nation. A typical ceremony in Indianapolis in March 1998 paraded Mayor Steve Goldsmith before cameras to announce "a $2.1 billion homeownership investment" in Indianapolis by Fannie Mae. The mayor stood behind a Fannie Mae lectern; overhead was a huge ban­ ner reading "HOUSE INDIANA-I-800 FANNIE." As part of the ceremony Fannie announced that it would open an Indiana Partner­ ship Office in Indianapolis within sixty days-"an important dem­ onstration of the strength of Fannie Mae's commitment to the city," the mayor said. The Congressional Budget Office in its 1996 report on GSEs said the principal function of the partnership offices was to "enhance Fannie Mae's political base." CBO quoted one of Fannie's execu­ tives saying that "for a relatively small investment, Fannie Mae will 118 INFLUENCING THE POLITICAL PROCESS be recognized as a force for good in each of the cities or states ... by so doing Fannie will have 25 networks of support." Fannie is busily expanding this network. The twenty-five offices reported by CBO in 1996 have increased to thirty-eight, with three in the planning stage.

Conclusion

Fannie Mae's political muscle, its tough handling of its adversaries, and its aggressive public relations campaigns might be dismissed as just another example of excess by a private corporation. But nei­ ther Fannie Mae nor Freddie Mac is an ordinary corporation. The overwhelming political power of these GSEs raises serious questions about the willingness or the ability of the federal government to regulate them. The same is true of affordable housing goals, a criti­ cally important mission assigned the GSEs. Can these goals be set high enough and enforced with the vigor required to catch up with the needs of low- and moderate-income families for housing? Are the complaints from private companies valid that the GSEs are using their powers to reach beyond their charter to create unfair competition in the mortgage markets? Could Fannie and Freddie's functions be conducted without the present level of subsidies? Could Fannie and Freddie be required to pass on more of the subsidy to homebuyers rather than diverting it for lucrative executive salaries, lobbying, and political activities? In 1997James Johnson, then Fannie Mae's chairman, received $5,441,232 in salary, bonuses, stock options, and other compensation. Lawrence Small, the president and CEO, received compensation of $2,948,751; Jamie Gorelick was the recipient of $1,850,993 in 1997 after joining Fannie as its vice-chairman in May 1997. Can Congress summon the courage to address these issues, to revisit the GSE charters, and to reform the present GSE system? Or have Fannie and Freddie built a political-public relations wall so strong that Congress will not even dare try to breach it? Some organizations opposing the expansion ofFannie and Freddie argue for tighter restrictions in the GSEs' charters so that they cannot extend their activities beyond the residential mortgage market. Such tightening would enable the two to continue to perform their secondary market func­ tion but would prevent them from competing with banks and other compa­ nies that do not enjoy the same financial and other advantages. The implementation ofsuch a policy would entail the drafting ofsome restrictive charter provisions and laws as well as the administration ofthose changes through regulations and administrative actions. As John Weicher points out, the history of these efforts is not encouraging. Unlike most or­ ganizations chartered to carry out a government mission, Fannie and Freddie's independent obligations to their shareholders require them to maximize profits and to limit the effect of restrictions on their operations. This situation makes them extremely difficult to control through the usual mechanism oflaw and regulation. Weicher details governmental efforts to gain control over the policies pursued by Fannie and Freddie.

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