WASHINGTON -A Goldman Sachs & Co. report released Thursday urged Fannie Mae and Freddie Mac to negotiate with the Louisiana Republican lawmaker whose bill would increase federal regulation of the two secondary mortgage market giants.

Rep. Richard Baker, speaking at a meeting sponsored by Aegon Financial Services Group Inc., praised the report and continued to urge Fannie and Freddie to work with him on compromise legislation. He has long voiced concern that the two government-sponsored enterprises have become large enough that their failure would wreak systemic disaster on the U.S. economy.

Goldman Sachs analyst Howard Shapiro recommended the companies give in and pursue a deal. "We believe today's political risk is … serious because it could threaten the operating structure and charter benefits of the GSEs and ultimately their ability to grow," he wrote in the report.

The Goldman Sachs report takes no position on the political issues involved, but points out that an accommodation with Rep. Baker now would be better for Fannie and Freddie if it were negotiated from a position of strength.

"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. 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," Mr. Shapiro wrote.

David Jeffers, Fannie's vice president for corporate relations, said that the Baker bill is "basically dead" because Congress adjourns for the year in a few weeks and lawmakers on both sides of the aisle have sided with Fannie. And he said speculation about 2001 is on weak ground given that this is an election year.

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