Freddie Mac, long overshadowed by Fannie Mae, outfoxed its larger and more powerful rival last week.

It announced a truce with Rep. Richard H. Baker on Thursday under which both government-sponsored entities agreed to increase capital over three years, disclose more information to investors, and ramp up risk management.

The deal addresses some of the Louisiana Republican’s concerns and is expected to quiet his threats of sweeping legislation next year.

Freddie stepped in after talks between Rep. Baker and Fannie Mae broke down following an incendiary speech in which Fannie chairman Franklin D. Raines essentially declared victory over Rep. Baker’s effort to overhaul oversight of Fannie and Freddie.

According to sources, in the days following Mr. Raines’ speech Freddie Mac officials offered Rep. Baker a look at a plan the two GSEs had been working on to improve their regulation. From that proposal, the final deal emerged — without Fannie’s participation, sources said.

One Washington source said Mitchell Delk, Freddie’s senior vice president for government relations, quietly went up to Rep. Baker and said, “We’ll agree to standards that nobody else would possibly think we could agree to.”

Rep. Baker, who liked what he saw, finalized the deal with Freddie and made plans to announce it at a Capitol Hill press conference Thursday, another Washington source said. Fannie Mae officials “went berserk,” this source said.

According to these sources, at Fannie’s and Freddie’s behest, Treasury Secretary Lawrence Summers held a meeting with officials from both GSEs on Wednesday. It is unclear what happened in that meeting.

Only late Wednesday did Fannie agree to the deal that Freddie had brokered with Rep. Baker. A congressional source close to the negotiations said that Fannie Mae dragged its heels throughout the process.

Fannie was rather reluctant to support the proposal, he said. “I know they had seen the contents” and were not happy, he said. “They had no other choice.”

Fannie Mae officials had no comment, and Freddie Mac officials did not return calls.

Under the terms of the deal, Fannie and Freddie are to disclose more, hold more capital, and issue subordinated debt rated by independent agencies.

“This is very unusual. Fannie’s not used to losing publicly, and it’s all over town that they have,” a mortgage industry source said Friday. “Freddie walking out of that Treasury meeting and still doing what it intended to do was pretty extraordinary.”

One observer said conventional wisdom among those familiar with the deal is that it works much better for Freddie than for Fannie because it will be easier for Freddie to meet some of the aspects of the proposal.

An economist agreed. Increasing the companies’ interest rate risk disclosure, he said, would be “more of a departure for Fannie,” while Freddie already provides such a disclosure on a quarterly basis. Fannie, he said, does so only annually.

“There is more work in designing this measure and explaining it for Fannie than for Freddie: it is more tailored to what Freddie is already doing,” the economist said.That Freddie was able to outmaneuver Fannie surprised observers. Of the two GSEs, Fannie Mae stands head and shoulders above Freddie Mac in terms of political presence.

Fannie Mae is seen as an aggressive player, whereas Freddie tends to take the backseat in public debates. Moreover, Mr. Raines is a prominent Democrat who served as chief of the Office of Management and Budget in the Clinton administration. His counterpart at Freddie Mac, Leland Brendsel, on the other hand, is often described as a meticulous, determined, no-nonsense businessman.

What’s more, throughout this year’s battle over Rep. Baker’s legislation to crack down on the GSEs, Fannie Mae has consistently taken the lead and dragged Freddie along with it.

From Our Archive:

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.