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A Crack in the Facade at Fannie Mae?

Despite being one of the most powerful financial services lobbies in Washington, D.C., the recent disclosure of accounting irregularities at Fannie Mae — on the heels of equally damaging disclosures about its rival Freddie Mac — may have finally provided Congressional foes the ammunition needed to rein in the mortgage giants, Members and lobbyists suggested last week.

“It’s not a question anymore of can it ever happen. It’s now a question of what will [the legislation] look like,” said Rep. Richard Baker (R-La.), chairman of House Financial Services subcommittee on capitol markets, insurance and government-sponsored enterprises.

Previously, Baker had been virtually alone in advocating the shifting of the Office of Federal Housing Enterprise Oversight — the regulator of Fannie Mae and Freddie Mac — from the Department of Housing and Urban Development into the Treasury Department, where financial regulation often is more strict.

Now, though, OFHEO has released a report showing that Fannie Mae improperly used accounting gimmicks and ensured multi-million dollar bonuses for its top executives. Separately, the Justice Department reportedly opened a probe into accounting fraud at Fannie Mae, Baker said.

These developments have led some Members who previously had expressed steadfast opposition to changes in the regulation of Fannie Mae and Freddie Mac to rethink their positions.

Rep. Barney Frank (D-Mass.), the ranking member on House Financial Services, had defended Freddie Mac earlier this year when three top executives at the company resigned amid a controversy over accounting errors.

While Frank still doesn’t think Freddie Mac or Fannie Mae are at “crisis” stage, he added, “I think the regulator could be improved.”

With the 108th Congress coming to a close, Baker said he would move legislation in the 109th. “By next February, I expect some formal action in my committee,” he said.

House Financial Services Chairman Mike Oxley (R-Ohio) has pledged to bring the legislation before the full committee, Baker said.

In the Senate, John Sununu (R-N.H.) said he believed “there’s an excellent chance that the [Senate] Banking [Housing and Urban Affairs] Committee takes up a bill next year. All the accounting problems at Fannie underscore the need for a stronger regulator.”

Sununu noted that the Senate Banking panel passed a bill in April to put oversight under the Treasury Department, but the legislation stumbled when House Financial Services cancelled a markup.

This time around, however, Fannie Mae can’t avoid legislation, Sununu said — even though executives there voluntarily agreed to implement some safety and soundness rules, including increasing the level of capital it keeps on hand. “If it’s a cynical effort simply to head off legislation yet again, they are going to be very disappointed,” said Sununu.

As Fannie Mae faces a potential reckoning on Capitol Hill, the company’s bipartisan legion of lobbyists — which ranks among the largest deployed by any company — are being tightlipped.

Few of Fannie Mae’s hired guns returned phone calls last week, and none would speak on the record about the company’s situation or how they plan to attack the crisis on Capitol Hill. Fannie Mae spokesman Brian Faith declined to discuss the quandary the company is in or how it will address lawmakers’ concerns.

As Fannie Mae loyalists circle their wagons, some observers, and especially the company’s critics, suggested that the regulator’s report and its fallout could provide the first cracks in what until now had been an imposing facade.

Bert Ely, an Alexandria-based banking consultant who co-authored a book critical of Fannie Mae, predicted that even the company’s lobbying luminaries won’t be able to save the company from the recent rash of bad news.

“I would say now is the time for them to eat humble pie,” Ely said. “They’re a very arrogant bunch over there and they may believe they can mistakenly power through this with all their might and lobbying clout. I don’t think they can … but a lot’s going to depend on what their friends start telling them, those on the Democratic side of the aisle, as to where they stand.”

Lobbyist Wright Andrews, who once worked for the anti-Fannie Mae group FM Watch, also said the company may not be able to insulate itself as easily as in the past.

“I think for years, many people have felt that Fannie and Freddie, especially Fannie, were so politically powerful that no one could challenge them on almost any issue,” said Andrews, who has represented a variety of banking and financial services clients. “One of the interesting things to watch coming out of the current situation is going to be whether policy makers are going to be more willing to look at broader questions as to the degree to which Fannie and Freddie are really fulfilling their mission.”

To be sure, Fannie Mae’s resources — and its goodwill — are not to be diminished. Last year, the company spent close to $5 million on its in-house lobbying activities, which includes Duane Duncan, the former chief of staff to Rep. Baker.

The company paid more than 55 hired guns at more than a dozen lobbying firms a total of almost $930,000 during the first six months of 2004. The company’s outside lobbyists are among Washington’s most well-connected, covering both sides of the aisle and both sides of the Capitol.

The Alexander Strategy Group, a lobbying firm filled with former aides to House Majority Leader Tom DeLay (R-Texas), earned $120,000 from Fannie Mae during the first half of 2004. The Federalist Group, another Republican firm, also works for Fannie Mae issues, including former Acting Assistant Secretary for the Treasury Patrick Cave. The firm earned $200,000 through June.

Others working for Fannie Mae include former Rep. Harold Ford (D-Tenn.), former Clinton White House Director of Legislative Affairs Patrick Griffin and Brian Conklin, a former special assistant to President Bush.

Freddie Mac also has a sizable arsenal of lobbyists, spending $6.7 million in-house during the first six months of this year and another $3.3 million on outside help. Cave, for instance, earned $340,000 from Freddie Mac while the GOP-leaning Alexander Strategy Group received $180,000. Freddie also retained Clark & Weinstock, the home of ex-Rep. Vic Fazio (D-Calif.) and lobbyist and celebrity hostess Juleanna Glover Weiss and Van Scoyoc & Associates. Both firms received $220,000 between January and June of this year.

In Congress, some past opponents of stricter regulation, such as Sens. Paul Sarbanes (D-Md.) and Charles Schumer (D-N.Y.), appeared skeptical of renewed legislative efforts as a reaction to Fannie Mae’s most recent troubles.

“Certainly, there are changes brewing, but I’m not sure if it’s still going to happen,” said Schumer.

Sarbanes, the ranking member on the Senate Banking, Housing and Urban Affairs Committee, however, took a stronger stance in response to a question about whether stronger regulation was needed.

“OFHEO seems to be regulating them right now,” Sarbanes said.

There are signs that both the Bush administration and Congress are starting to play hardball with Fannie Mae and Freddie Mac.

Just last week, the House Financial Services panel voted unanimously to give Chairman Oxley subpoena power over Fannie Mae CEO Franklin Raines and its chief financial officer Timothy Howard. The two, according to Baker, had been reluctant to agree to appear at a scheduled Oct. 6 hearing. Following the committee vote, Raines and Howard agreed to appear at Baker’s hearing. However, Fannie Mae spokesman Faith denied that the agreement to testify had anything to do with the threat of subpoenas.

And on Sept. 14, Brian Roseboro, Treasury undersecretary for domestic finance, told a group of bankers that Treasury Secretary John Snow continue to believe they should have the authority to regulate Fannie Mae and Freddie Mac.

“These entities are among the world’s largest financial institutions, and they are significant participants in U.S. and global financial markets, which implies they should have a world-class regulator,” Roseboro said.

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