A Medici With Your Money
James A. Johnson, chairman
of both the Kennedy Center and the Brookings Institution, has become, at age
53, Washington, D.C.'s Medici. But even though he makes some $5 million a year
off the Federal National Mortgage Association (Fannie Mae), of which he is also
chairman, he is not a philanthropist with his own money. The fount of Johnson's
generosity is Fannie Mae's foundation, funded out of its profits, which gives
away millions every year in the District and elsewhere.
Of
course, it is common these days for corporate CEOs to enjoy the perks, status,
gratitude, and frisson of generosity that comes from giving away the
stockholders' money. What makes Fannie Mae special is that it is essentially
the taxpayers' money that Johnson is giving away. Fannie Mae enjoys a massive
government subsidy, and its charitable contributions are part of a vital
corporate strategy to keep it that way.
Indeed, preserving its government subsidy is Fannie Mae's
central mission, which helps to explain why a fellow like Jim Johnson is the
CEO of this $325 billion company. Johnson has only a modest business
background. A Minnesota native, he was a longtime aide to Walter Mondale, the
senator and later vice president. When Mondale lost the vice presidency in
1980, Johnson and Richard Holbrooke, the diplomat, founded Public Strategies, a
Washington consulting firm that gave advice to business clients. Later he
performed similar services for Shearson Lehman. When Mondale ran for president
in 1984, Johnson was the chairman of his campaign. Maxine Isaacs, who later
became his wife, was the campaign's press secretary. Considered likable and
charming, Johnson and Isaacs were, in a small way, the Carville and Matalin of
that period: the hot political couple. Johnson joined Fannie Mae in 1990 and
became its chairman a year later.
Established in 1938 as a government agency, Fannie Mae is a financial behemoth
with assets greater than Citibank and Wells Fargo combined. In 1968, it became
a private, for-profit company. Its stock is publicly traded; its Web site ends
in a ".com." Basically what it does is buy home mortgages from banks and
package them into what are called "mortgage-backed securities," which it sells
to investors. The banks then can use their own money for more mortgages. By
giving home buyers indirect access to the world's capital markets, this device
makes it easier for Americans to buy a home. That is Fannie Mae's social
function. These days, however, that function is served by many private
companies: Mortgage-backed securities are a roaring business.
Fannie Mae, though, has special privileges. Its
securities need not be registered with the Securities and Exchange Commission.
It is exempt from state and local taxes, so it escapes having to pay an
estimated $300 million a year into the parched District treasury. Most
important, Fannie Mae's securities come with an implicit guarantee that they
are backed by the federal government. This allows it to raise money at an
interest rate that is lower than what a normal private corporation has to
pay.
Fannie
Mae has it both ways about the federal guarantee. Its securities are required
to say in so many words that they are not backed by the full faith and
credit of the United States government. But nobody believes it. Why? As a
report last year from the Congressional Budget Office explains, "What the
government appears to withhold with one requirement, it provides with a host of
other legal provisions." The capital markets are persuaded that Fannie Mae's
bonds are backed by the government. Fannie Mae, while denying the guarantee
exists, fights to preserve the arrangement that makes it possible.
The company also notes that, since it has never missed a
payment, the taxpayers have not yet had to shell out a penny. But that is like
saying that fire insurance is worthless if you've never had a fire. Just ask
other private companies if they would like to have a free federal guarantee of
their debts! The government, if it wanted to, could sell its backing to private
borrowers like Fannie Mae. As the CBO points out, the government's guarantee of
Fannie Mae's debt is just like a giveaway of federal land or hydroelectric
power. The fact that no money changes hands doesn't mean it has no cost.
And what
is the cost? The CBO calculates that the federal guarantee saves Fannie Mae
about one-half of 1 percent in interest. That was worth almost $4 billion to
the company in 1995 (plus another $2.6 billion to a similar organization called
Freddie Mac, the Federal Home Mortgage Corp.). The CBO figures that $2.5
billion of that approximately $4 billion federal subsidy was passed along to
lucky homeowners, and $1.4 billion went into the pockets of Fannie Mae
shareholders and executives.
Fannie Mae's executive salaries resemble those
of a real private company of its size, even though its size is largely a
function of the federal guarantee and its business is not as complex as size
alone would suggest. Its officers are in many ways glorified lobbyists. Johnson
makes $5 million a year. Franklin Raines made well over $2 million in his last
year as Fannie Mae's vice president before he joined the Clinton administration
last year as director of the Office of Management and Budget. Other politicos
feeding at the trough include Senior Vice President for Public Affairs John
Buckley, who was on leave last year as Bob Dole's press secretary, and
Executive Vice President for Housing and Law Robert Zoellick, who was an aide
to James Baker.
Not
surprisingly, then, Fannie Mae's public-relations operation is unparalleled in
Washington. Its charitable contributions, through the Fannie Mae Foundation,
are a crucial part. The foundation sprinkles contributions on everything:
homeless shelters as well as hospitals, the Kennedy Center, and powerful think
tanks like the Heritage Foundation (which, to its credit, has issued reports
decrying Fannie Mae's privileged status).
Fannie Mae sports television ads depicting young couples,
plucky immigrants, and others being helped by Fannie Mae. "Showing America a
New Way Home" is the slogan. That is also the name of Johnson's recent book--a
175-page tract that pleads for still more subsidies while cloaking itself in
high-mindedness. The book is a parody of Bartlett's , serving up quotes
from Lincoln, Jefferson, and Roger Rosenblatt with equal pomposity. The cover
shows Johnson, a bland-looking man in full business attire, on the porch of an
all-American home that looks a tad too small to be his. The flag is
conveniently draped in the background. The back jacket is crammed with
bipartisan blurbs--from Jack Kemp to Vernon Jordan, Dianne Feinstein, and Ann
McLaughlin, George Bush's secretary of labor. Acknowledgments are offered to
any number of Washington big shots, including Slate's own Robert Shrum, who is
thanked for his "considerable editing skills." Alas, the text could have done
with more Shrum, who, let's hope, did not pen the line, "Home is about
freedom."
The book's subtitle is
"Expanding Opportunities for Home Ownership." Johnson's idea of opportunity
ranges from the unobjectionable--like giving banks better software for mortgage
applications--to a bunch of new subsidies, many of which, sadly, Clinton and
the Republican Congress may enact. The truth about government subsidies for
real estate--including the granddaddy: the home-mortgage-interest deduction--is
that they do very little to make housing more affordable. Part gets siphoned
off by middlemen like Fannie Mae. Most of the rest melts away into higher
real-estate prices. The main beneficiary of any subsidy for real estate is the
person who owns the property at the time the subsidy is instituted, not the
future buyer.
Fannie Mae, unfortunately,
has become a model. There is Freddie Mac, Fannie Mae's smaller cousin in the
housing market. And there is Sallie Mae (Student Loan Marketing Association),
which creates a similar secondary market in subsidized student loans.
Organizations combining public and private functions appeal to the woolly ideal
of government-business partnership. They seem to represent a third way, a
healthy distrust of government and the market, levelheadedness leavened by a
kind heart. More often, as with Fannie Mae, what you get is the worst excesses
of both.
