With Washington mulling corporate-governance reforms in the wake of the Enron scandal, Franklin Raines, CEO of federal mortgage giant Fannie Mae (FNM ), has had a rough year. Banks have long been envious of Fannie's special status as a government-sponsored entity, with special privileges like a $2.25 billion conditional line of credit with the U.S. Treasury and exemption from state and local taxes.
Under mounting pressure, Raines agreed last summer to give up one exemption from federal law -- for the first time, it registered the company's common stock with the Securities & Exchange Commission. But with Republicans taking control of Congress in January, the Administration set to release a study on Fannie's transparency, and Wall Street still pummeling its stock, Raines could face more pressure than ever.
Not that Raines, 53, isn't up to the challenge. As President Clinton's White House budget director, he oversaw the first balancing of the federal budget in a generation. Even his critics concede that Raines, Fannie's chief executive since 1999, is a savvy manager with an eye for the big picture. In a recent interview with BusinessWeek Washington correspondent Laura Cohn, Raines talked about the challenges ahead. Following are edited excerpts from their conversation:
Q: U.S. homeownership has soared in recent years, and some say it has hit its peak. Since your company is in the business of buying mortgages, doesn't that mean your growth outlook is limited?
A:We spend a lot of time looking at that question, because fundamentally, we, like any other business, can only be as good or slightly better than our market. If you're in a bad market, it's very tough to do well. Essentially, I think this is going to be the biggest decade for housing ever. It's going to be driven by demographics. We're going to have 13 million to 15 million new households in the U.S. by 2010 (see BW Online, 11/27/02, "The Melting Pot Keeps Housing Hot"). And we're going to see the Baby Boomers hit their peak homeownership years by 2010. The prospects for housing are terrific.
Q: Is there a point of saturation, though?
A:Not as long as the population keeps growing. That's the big difference between the U.S. and Japan or Europe. Their populations are not growing. They don't have any serious immigration. Their populations are aging. Our average age is going down. So as long as the population grows, there is no reason to believe that housing won't grow.
Q: What was behind your decision this summer to register Fannie's common stock with the SEC, after being exempt from having to do this?
A:The issue was raised about our disclosures. We brought in lawyers and accountants who said [we] already disclose everything the SEC requires. So I said this to various policy folks and the only thing I got back was, "What about in the future? Will you or one of your successors say, 'We no longer want to disclose this information'?"
So we sat around thinking about this. And then some smart lawyer said there's a way for [us] to voluntarily agree to be registered with the SEC. So I went over and talked to Chairman [Harvey] Pitt and said, "We're considering this, but we don't want to do it if this is not something the SEC is interested in. We want to make sure we're reading the law the same way you're reading the law." So we put together a little group, to see what it would look like if we registered. And when we got that done, we got the Treasury Dept. to look at it and the White House.
Q: Will investors get more information as a result?
A:What it really means for us is a lot of reformatting [on Fannie Mae's part]. We already have in place all the accounting and the disclosures that an SEC company would have. Plus, we also do this monthly reporting, which SEC companies don't do. For the first time, we have to think of these things from the standpoint of the SEC's rules. But amazingly, there aren't many major disclosure things that will be different.
Q: You made the presentation to SEC Chairman Pitt yourself? Isn't it unusual for a CEO to do that?
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