To hear Franklin D. Raines, Fannie Mae's chairman and chief executive officer, when he delivered a big yearend speech in December, the previous 12 months had gone exactly as he had planned.

Missing was the charged political rhetoric that had dominated the debate with Rep. Richard Baker, R-La., the chairman of House Banking's capital markets subcommittee, about future regulation of the giant government-sponsored enterprise.

Indeed, Mr. Raines praised Rep. Baker and used the word "voluntary" six times in an 11-page speech to describe the agreement that Fannie and Freddie Mac had reached with him for increased disclosure and other market-oriented reforms in lieu of legislation.

"I want to recognize and compliment Chairman Baker's leadership in this matter," Mr. Raines said during a luncheon speech at the Brookings Institution. "These initiatives will set the standard not only in the United States, but also around the world . and for this, Chairman Baker deserves a great deal of credit."

Such conciliatory language was uncharacteristic of Fannie's rock- 'em, sock-'em battle with the tag team of Rep. Baker and FM Watch, a group of mortgage lenders that sought to rein it in.

Generally, Fannie took a no-holds-barred approach in the yearlong fight. When FM Watch was formed, a Fannie spokesman told one newspaper: "Being up against mortgage insurers and predatory mortgage lenders is like President Clinton being against Milosevic." And last summer, when Fannie's top management embarked on a lobbying campaign, another spokesman referred to Chase Manhattan Corp., Household International Group Inc., and a group of other FM Watch members on a lobbying trip to Washington as "fat-cat bankers" fighting to keep mortgage rates inflated.

Though the verbal war often involved such surrogates, and many combatants were enlisted in the effort, the standard bearers for each side clearly were Mr. Raines and Rep. Baker.

Mr. Raines delivered tough speeches throughout the year, referring to FM Watch at one point as an "attack dog" and repeatedly painting Rep. Baker's legislation as a pipe dream. "I do not believe Congress will ever enact this bill," he said at a credit union conference in Washington in September.

But behind the scenes, hours of negotiations aimed at reaching some kind of compromise took place, though tensions frequently boiled to the surface.

Talks reached a low point in October, after Mr. Raines said at a Prudential Securities conference that his company's political opponents were trying to create headlines to drive its stock down.

Rep. Baker voiced disgust. "I have now come to the conclusion, however, after several fruitless private sessions and in light of reports today of continued inflammatory public oratory by Fannie Mae's chairman, that negotiations have broken down," he said. Accusing the company of stalling in hopes that Democrats would capture the White House or Congress and kill his bill, he threatened to offer a tougher one.

"I am convinced that Fannie Mae in fact does not and never has believed in the need for even the smallest measure of reform. . It seems apparent to me now that Fannie has been trying to run out the clock, to wait and gamble on the outcome of the election."

This political fight was not supposed to have lasted so late into the year.

When Rep. Baker unveiled his bill in late February, many dubbed it dead on arrival. The legislation would have consolidated the agencies that oversee Fannie, Freddie, and the Federal Home Loan Bank System into a new, independently funded agency. It would have terminated Fannie and Freddie's $2.25 billion lines of credit with the Treasury, increased disclosure requirements, toughened capital mandates, imposed bank-like regulation, and given the regulator more say in approving new activities.

Though his bill never advanced to a vote at any level, Rep. Baker kept the spotlight on the GSEs by holding four hearings, followed by a four-hour roundtable in September.

The first hearing, in late March, drew headlines when Treasury Under Secretary Gary Gensler testified in favor of many portions of the bill, including the repeal of the Fannie and Freddie credit lines.

Mr. Gensler reiterated several times that the GSE's securities are not government-guaranteed. Though that had been the Treasury position through several administrations, agency officials had not testified so pointedly about it in several years.

Fannie and Freddie shares began a brief slide. In eight days Fannie fell 10.44%, to $56.25, and Freddie dropped 8.06%, to $43.43. A Fannie spokesman called the testimony "irresponsible."

The next ripple occurred about two months later, when Federal Reserve Chairman Alan Greenspan sent a letter to Rep. Baker saying the benefits the companies enjoyed as GSEs should be reviewed. It is "appropriate for Congress to periodically consider" the "implicit subsidies" based on the conventional wisdom that the government would bail out the GSEs in a crisis, Mr. Greenspan wrote. The subsidies distort the financial markets and ultimately cost consumers, he observed.

The letter was opaquely worded and did not endorse the bill, but many viewed it as supportive of Rep. Baker's cause. That sent Fannie's shares down 5.2%, to $57.125, and Freddie's fell 6.1%, to $43.938. Mr. Greenspan repeated his concerns in a late-August letter and urged more congressional debate.

As the Baker-Raines rhetoric neared its crescendo, calls for compromise arose from other quarters. Goldman Sachs & Co. analyst Howard Shapiro urged Fannie and Freddie officials to hammer one out with Rep. Baker to mitigate their "serious" political risk.

"We believe that investors would be best served if the GSEs were to negotiate on a voluntary basis . the parameters of any change in business structure," Mr. Shapiro wrote. "This would allow them to manage the process, thereby preventing disruption to the markets or to their business. It would also allow them to more actively shape the outcome."

That is exactly what happened a month later, when the two GSEs reached a settlement with Rep. Baker, agreeing to voluntarily enhance their disclosure and capital risk management processes.

The companies agreed to increase equity capital and subordinated debt over three years to 4% of assets, disclose more information to investors, and sharpen risk management. The measures were to include public disclosure of the results of self-administered quarterly stress tests of capital levels; annual reviews, publicly disclosed, by independent rating agencies; regular reports on interest rate risk and credit risk sensitivity; and the issuance of $15 billion of subordinated debt that is externally rated and publicly traded.

Shares of both companies rose that day. Fannie's share price climbed $6.75, or 9.53%, to close at $77.56; Freddie's $4.94, or 9.59%, to $56.44.

Some sources reported that Fannie had been dragged into the deal unwillingly, outflanked by Freddie chairman and chief executive officer Leland C. Brendsel and lobbyist Mitchell Delk. But Tom Donilon, Fannie's executive vice president of law and policy, denied it. In a December interview he said the final deal represented proposals the two companies had worked on jointly for months.

Though Mr. Delk made the call to Rep. Baker that launched the final deal, the two companies "coordinated quite closely," Mr. Donilon said. "It was the right thing to do from an oversight perspective, and it made us a better company as a result," he said. And he acknowledged that some remarks had been out of line.

"If we had to do it over again, all of us would not have been as overheated in our rhetoric," Mr. Donilon said.

In the end, each side got something out of it. Fannie and Freddie's share price had rebounded late in the year to $81.875 and $64.438, respectively, and Rep. Baker used the deal as evidence of his political skills when he interviewed with Republican leaders to become House Banking Committee chairman.

But Mr. Raines foreshadowed Round 2 in his yearend speech.

Rep. Baker has vowed to push ahead with legislation that would created a stronger GSE regulator. Mr. Raines, though he did not refer to that threat specifically, was clearly rebutting it, outlining the argument he will use in 2001.

Fannie is less risky and far better capitalized than more diversified financial companies, Mr. Raines said. "The fact is, Fannie Mae is a very low-risk financial intermediary."

He argued that though the Office of Federal Housing Enterprise Oversight has only 26 examiners, they look at only two companies - a 13-1 ratio that is far better than the ratios of federal examiners to banks. That and its capital position give Fannie a "safety and soundness regime unmatched by any financial institution in the world," Mr. Raines said.

Oddly enough, Rep. Baker was not there to listen.

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