Aida Alvarez has one of the toughest jobs in financial regulation.
Her assignment is to set up a government agency that will regulate Fannie Mae and Freddie Mac, the dueling titans of the mortgage market.
Ms. Alvarez, 44, heads the Office of Federal Housing Enterprise Oversight, an agency created by Congress last year to keep close tabs on the secondary market companies. The idea is to make sure they are operated safely and never require a taxpayer bailout like the thrift industry.
Seasoned Washington observers said Ms. Alvarez would have her hands full.
"It's a monumental challenge to establish a meaningful regulatory role in the framework of government staffing and budget structure," said Warren Lasko, executive vice president of the Mortgage Bankers Association of America.
"Fannie and Freddie are seasoned, savvy organizations that would like to influence the regulator as much as they can," said a thrift industry source.
That source and others raised questions, such as: Will Ms. Alvarez's office have the smarts and the stomach to set serious capital standards? Will the agency be savvy enough to smell financial trouble if it exists? And will it have the muscle to get the companies to change course, if necessary?
In recent conversations, Ms. Alvarez made clear that she would strive to have a hardheaded view of Fannie and Freddie, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.
"I do think [independence] is the fundamental question in creating the agency," she said.
Strong Staffing Sought
To help ensure her independence she has a two-pronged plan. First, she intends to build a strong staff. In fact, she has asked Congress for a staff of 60, double last year's estimate of 30. She may hear as early as today whether Congress will advance the extra money for the staff. The two companies ultimately foot the $10 million annual bill for her office.
"It seems to me that if you can put together a first-rate, tough-minded, technically sophisticated team, then you have the capacity to develop the expertise and knowledge you need to be a serious regulator," she said.
The second prong of her strategy is to build political capital with players on Capitol Hill and elsewhere - heavy hitters who can support her in potentially bruising battles with the companies.
Cisneros Is Key Ally
Her strongest political asset may be the man who hired her: Housing and Urban Development secretary Henry Cisneros. Her office, though independent, is a part of that agency.
Their ties date to her days as an account executive for Bear, Stearns & Co., when her territory included Texas and Mr. Cisneros was mayor of San Antonio.
She worked with him to develop a national Hispanic agenda for the 1988 presidential race. It was also Mr. Cisneros who drew her into the Clinton campaign, where she served as co-chair of the women's committee along with former Vermont Gov. Madeleine Kunin, former Congresswoman Shirley Chisholm, D-N.Y., and Rep. Patsy Mink, D-Hawaii.
Annual Exams Mandated
In setting risk-based capital levels for Fannie Mae and Freddie Mac, Congress has given Ms. Alvarez detailed parameters. But Ms. Alvarez's office must determine the actual levels. She also must conduct annual examinations, and report to Congress on her findings.
These duties contrast with Fannie Mae's nominal regulation in the past by the Department of Housing and Urban Development, and Freddie Mac's oversight by the Federal Home Loan Bank Board, which also supervised the thrift industry.
How great is the risk of financial problems at the two companies?
Though confidently profitable now, Fannie Mae and Freddie Mac have not been consistently so. Fannie lost money in the early 1980s after interest rates shot up.
Freddie Mac's multifamily mortgage program was so unprofitable that in 1990 it withdrew from that market altogether. It is now being urged by HUD to make a serious reentry.
Big Lobbying Effort
As Congress crafted a new regulatory framework last year, Fannie and Freddie worked hard to limit the regulator's authority and capacity to intrude on their business.
Those who wanted stronger capital standards and more leeway for the regulator were disappointed at many of the successes Fannie and Freddie scored. Still, the law is thought to have real muscle.
For their part, Fannie Mae and Freddie Mac have said at various times that they will cooperate with the regulator.
"Our record is clear. We favor capital requirements with teeth," said David Jeffers, vice president for corporate relations at Fannie Mae.
Freddie Mac's chief lobbyist, Mitchell Delk, confesses the company is "uncertain" about the brave new world of regulation.
"A lot of discretion is granted to the regulator in the legislation, and while we hope that [the regulations she issues] would mirror congressional intent, we will not know until the regulations are final," he said.
No Threat of |Capture'
But he believes it would be impossible for the two companies "capture" their regulator.
"The director has tremendous political savvy. The statute is drafted to prevent capture, and there will be intense oversight on the part of numerous parties, including the Congress," he said.
In fact, Ms. Alvarez does view congressional oversight as her trump card. She reports directly to Congress, which created her office.
"The respect for this office comes from respect for the Hill." she said.
"Frankly. I think it's probably in the best interests of these two companies that we succeed in doing our jobs," she said.
"There are other options, pointed out, referring to gressionally mandated studies on the privatization of Fannie and Freddie.
"I think this is an opportunity to see if [this scenario] will work," she said.