Fannie Mae, Freddie Mac wielded big clout in Washington

Mortgage giants Fannie Mae and Freddie Mac didn't just dominate the nation's $12 trillion home loan market, they were also masters of influence in Washington.

As government-sponsored enterprises, Fannie and Freddie owned or guaranteed some $5 trillion in residential mortgages – a cushion for creating two of the most extensive lobbying operations in Washington.

At its peak – last week, just before the Treasury Department announced a government takeover – the operations ranged from campaign contributions and outright lobbying to a grass-roots charitable giving operation that covered nearly every congressional district.

"They were the most powerful companies in the country, and literally controlled the Congress," Peter Wallison, a senior fellow at the American Enterprise Institute. "Congress would not do anything they did not want Congress to do – and that came through some very sophisticated political activities and public relations that made it very difficult to challenge them."

Since 1990, Freddie Mac has contributed more than $9.7 million to federal campaigns. Fannie Mae's political action committee chalked up more than $2.9 million since 2004, according to the Center for Responsive Politics. Together, they spent some $7.4 million in lobbying in the first six months of 2008 alone.

That's just the beginning. What's most remarkable about the influence operation is its sheer vastness.

Over the last decade, Fannie and Freddie together hired nearly every lobby shop in Washington – so many, in fact, that opponents complained that they had trouble finding someone to represent their interests.

In addition, Fannie and Freddie supported a vast network of charities, often specifically linked to members of Congress.

Some of the biggest movers and shakers in Washington graced their mastheads. James Johnson, chairman and CEO of Fannie Mae from 1991 to 1998, is a Democratic insider who chaired Walter Mondale's presidential campaign. His successor, Franklin Raines, was former director of the US Office of Management and Budget during the Clinton administration.

"When you have leaders who are so well connected and so much of the power structure of Washington, it's not surprising that people would think that these institutions were being well looked after by responsible people," says Ross Baker, a political scientist at Rutgers University in New Brunswick, N.J.

"It underscores one of the real weaknesses of boards of directors controlled by famous people. They're there for their ornamental value, and they have very little use as a check on executive leadership," he adds.

Fannie Mae, or the Federal National Mortgage Association, was founded in 1938. In 1968, President Johnson converted Fannie Mae from a government agency to a so-called government-sponsored enterprise. But it still enjoyed substantial government privileges. Freddie Mac, or the Federal Home Loan Mortgage Corporation, was established in 1970 on the same basis – privately owned but backed by an implicit government guarantee.

Over time, Fannie and Freddie fought vigorously to maintain those privileges, which included exemption from state and local taxes as well as corporate income taxes. They operated in all 50 states but were based in Washington and especially well politically connected.

"Everybody knew people with Fannie and Freddie," says former Rep. Jim Leach (R) of Iowa, a longtime critic. "More than any financial institution in America, they were dependent upon Congress."

"If Congress ever changed their charter, it could mean billions more or less in profit, depending on how the law is changed. Therefore, Fannie and Freddie had a stable of lobbyists hired in Washington larger than any stable of lobbyists of any enterprise in Washington, times three or four," he added in a telephone interview. Mr. Leach is now a visiting professor at the Woodrow Wilson School at Princeton University.

In 1992, Leach tried to move a bill through Congress that would have increased the capital reserves the two companies would have had to hold. "I was trying to suggest that there were certain advantages [the two companies had] that were not in the public interest," he says, including an exemption from state and local taxes.

The effort failed. "I was knocked out of the sky. I was clobbered," he says.

After he filed a series of amendments to tighten the regulation of Fannie and Freddie, Leach says he got a call from a former congressional colleague, who had just been hired on as lobbyist to fight the move. He said: "Jim, I want to tell you I oppose what you are doing, but thank you very much, because Fannie and Freddie had to go out and hire more Republican lobbyists."

In announcing the government takeover on Sunday, James Lockhart, director of the Federal Housing Finance Agency said, that "All political activities – including all lobbying – will be halted immediately."

But the status of the vast charitable operations of the two companies has yet to be determined. Since 1979, the Fannie Mae Foundation has invested more than $1 billion in programs and grants nationwide.

The charitable giving helped cement ties with individual lawmakers and turned charities into a small army of defenders, says Mr. Wallison. "If you give money to community groups and others in a particular district, when there's a threat against you in Congress or in the administration, you can call on all of these institutions – and they did – to call into congressional offices and the offices of the administration and complain."