Protecting Fannie's Franchise

CEO Raines will need all his political savvy to ward off reforms being pushed by a jealous banking industry

Amid Capitol Hill's post-Enron fascination with corporate governance earlier this year, Representative Christopher Shays (R-Conn.) figured that forcing mortgage giant Fannie Mae (FNM ) to start registering with the Securities & Exchange Commission would be a no-brainer. The first hint that he might have underestimated Fannie and its politically savvy CEO, Franklin D. Raines, came from Representative Richard Baker (R-La.), a longtime nemesis of Raines. Baker, who chairs the House capital-markets, insurance, and government-sponsored enterprises subcommittee, warned Shays, new to his panel, that he might have bitten off more than he could chew. Shays recalls: "I looked at him, thinking to myself: Give me a break. We just got through passing campaign-finance reform. Everything else will be a cakewalk. But Richard gave me this knowing smile like, `Rookie, you don't even know what you're getting yourself into."'

Sure enough, the folks at Fannie eerily got word of Shays's plan and immediately called his office to set up a meeting with Raines. Shays says they never connected, and he went ahead and introduced the legislation. Immediately, each House member received a letter saying that more than two dozen groups--from the National Association of Realtors to the National Council of La Raza, an advocate for Hispanic Americans--opposed the bill on the grounds that it would harm consumers. It went nowhere. "I felt like I kicked a hornet's nest," says Shays.

Chalk up another win for one of Washington's most polished players. Raines has become a master at the art of wielding an iron fist inside a velvet glove. With charm, impeccable connections, and understated arm-twisting, he repeatedly staves off attacks by industry rivals determined to blunt what they believe is an unfair advantage stemming from Fannie's quasi-public status. "Frank Raines runs the most sophisticated political operation in the universe," says a White House insider. Raines, 53, takes this as a compliment. "We pay a lot of attention to political risk because our competitors want to change the landscape," he says.

Probably no other big-company CEO worries so much about wooing official Washington, and for good reason: Fannie's charter can be changed at the whim of Congress. Fannie was created in 1938 by President Franklin D. Roosevelt to revive the housing market by buying mortgages from struggling lenders, enabling them to lend more. Congress converted it into a government-sponsored private enterprise in 1968. Today Fannie is the second-largest U.S. corporation, based on assets of $838 billion, behind Citigroup (C ). It owns 11% of the nation's mortgages.

Fannie doesn't actually lend money, however. It buys mortgages with money raised through debt offerings--borrowing at lower rates than others because of a presumed federal guarantee of its debt. This allows it to profit on the difference between the rate on the mortgages it buys and the rate on the debt it issues. A larger but less profitable part of its business involves packaging mortgages into mortgage-backed securities and selling them to investors.

It's the benefits Fannie derives from that unusual public-private setup that puts Raines in the spotlight. Powerful commercial banks such as Wells Fargo (WFC ), J.P. Morgan Chase (JPM ), and GE Capital (GE )--the latter is based in Shays's district--fear that Fannie is straying from its mandate of stimulating the housing market. They are sure to make another run at getting Congress to revoke Fannie's $2.25 billion conditional line of credit with the Treasury. They also want Fannie to disclose to the SEC details about its mortgage-backed securities, which it issues by the truckload each year. And they want Fannie to start paying state and local taxes, from which it is now exempt.

The Congressional Budget Office says those privileges amounted to $6.1 billion in 2000. Fannie disagrees with the CBO's methodology, calling the figure closer to $3 billion to $3.6 billion. Either way, it's a key reason Fannie has delivered double-digit profit growth for the past 16 years. This year, Fannie should generate operating net income of $6.3 billion, says Sanford C. Bernstein & Co. analyst Kevin J. St. Pierre. He expects that to rise 11% next year. Raines himself made $6.9 million last year in salary, bonus, and other compensation, says Fannie, not including 277,335 new stock options he received.

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By Laura Cohn in Washington

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