Jewish World Review Jan. 11, 2005 / 1 Shevat 5765
Fannie Mae's story is not one of corporate greed, or executive compensation, or the challenges of accounting regulation standards. It's a story of moral hazard
Sometimes a business story seems cinematic, like a film-to-be on the hunt for just the right director. A potential film out there has Oliver Stone's name written all over it. The story opens with a Fortune 500 company that seems to be the most wholesome institution around. "Our business is the American dream" is its motto. Yet this very same company terrifies congressmen and makes Treasury officials tremble. There is a great role involved: the chief executive. But the part has to go to a tough guy. For this chief executive walks away from his company after $9 billion mysteriously disappears from the books.
This film, of course, is named "Fannie Mae" after the company that recently did see its chief executive (Franklin Raines) depart after the announcement of a multibillion-dollar accounting oversight. "Fannie," the movie, would be substantively different than, say, Stone's shout-out of the 1980s, "Wall Street." That is because while Fannie is a company, it is not a typical company. And while Raines was a chief executive, he was not a typical executive. Fannie's story is not a story of corporate greed, or executive compensation, or the challenges of accounting regulation standards. It is a story of moral hazard.
Franklin Roosevelt made Fannie's existence possible when he proposed allocating federal cash to help finance home buyers through the Great Depression. New Dealers named their institution the Federal National Mortgage Association, the pleonasm underscoring Washington's involvement. In recent decades, however, both Congress and Fannie have found it convenient to cast Fannie as a private company. In 1970 it listed itself on the New York Stock Exchange; in 1984 it issued its first debenture on the foreign markets. Fannie even suggested it should be known as Fannie Mae, forget that old "federal national" business. What is more, Fannie's charter insists that Fannie's bond contracts all carry reminders to the purchaser that Fannie's debts are not the responsibility of the U.S. government.
Still Fannie remains, officially, a "government-sponsored" enterprise, and a special office within the Department of Housing and Urban Development oversees it like a nanny. Fannie enjoys tax advantages. Such privileges are advantage enough to allow Fannie and Freddie Mac, another government-sponsored enterprise, to work as a duopoly, controlling the secondary market in mortgages. The public-private ambiguities have helped Fannie grow into a "Stone-scale" giant, the world's largest non-bank financial services company. Fannie's work is so extensive that it is quantified with a word the Financial Times' style guide discourages using: trillions. Buyers acknowledge these facts when they pay a premium for Fannie paper. So, of course, does the disingenuous Fannie, which pours millions of dollars into the cause of convincing citizens that challenging Fannie is challenging America. As if that were not sufficient insurance, Fannie goes a step further, selling itself as the engine of social mobility for minorities.
Fannie's arguments are disputable. As Peter Wallison of the American Enterprise Institute recently noted, it is possible to have a healthy secondary mortgage market without privileged players. The U.S. has one: the jumbo loan market, which trades pools of loans that do not conform to Fannie's requirements. As for affordable housing, there is a law, the Community Reinvestment Act, that takes care of that. Besides that, if anyone deserves credit for home affordability in the U.S. it is not Fannie officials but Paul Volcker and Alan Greenspan, the men who tamed inflation at the Federal Reserve.
Still, Fannie and its friends in the property and securities industries pressure lawmakers so much via donations and other attentions that they give Fannie extraordinary license. This license in turn explains Raines' ultrahigh salary. It also explains the billion-dollar blooper, as well as a similar one earlier at Freddie Mac. Even those tasked with overseeing Fannie have not dared do so rigorously. Its unclear status means Fannie will also prove unstable in the future. A collapse of Fannie is one of the financial world's scarier ideas, scarier even than the 1980s savings and loan crisis. Even those investors who earn basis points from Fannie's current inconsistencies therefore should demand an early resolution to this story, either through Fannie's nationalization, so that its bonds become like Treasury bonds, or better, through true privatization.
The Treasury announced completion of the privatization of Fannie's niece, Sallie Mae, the nation's largest student loan provider. The change nonetheless demonstrates it is possible to transform a government-sponsored enterprise into just another Delaware corporation.
It is important to understand, however, that Fannie does damage even when it does well. Most parts of the U.S. economy are relatively level playing fields. Everyday business in these fields is so transparent that it makes the Oliver Stones look paranoid. Fannie's America does, however, feature as much brute political force as the standard anti-corporate flick.
This in turn damages the entire economic culture. It is time to end Fannie's creepy relationship with government. Few projects could do more to sustain the American dream.
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