The real scandal at Fannie Mae.

Commentary about business and finance.
Oct. 7 2004 4:44 PM

The Truth About Fannie

The real scandal at Fannie Mae.

(Continued from Page 1)

To which bond investors and traders, a bunch of guys not known for blind faith, say: Riiiight.

Investors permit interest rates from Fannie Mae to be lower than those they demand from, say, Citigroup, and only a bit higher than those they demand from Uncle Sam. In general, the academic consensus holds that Fannie Mae enjoys a 40-basis-point advantage on borrowing over private-sector borrowers. (If Mortgage Lender X borrows at 6 percent, Fannie Mae borrows at 5.6 percent.)

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In other words, investors plainly think there is some implicit government guarantee of Fannie's debt. Not a total guarantee, but a pretty substantial one. If things went seriously amiss at Fannie Mae, they believe, the government would somehow step in. Meanwhile, there's plenty of evidence to suggest that Fannie Mae enjoys most-favored-company status. The president appoints five of the company's 18 directors. Fannie Mae doesn't have to register its mortgage-backed securities with the Securities and Exchange Commission. It has its own regulator, OFHEO. It doesn't pay state and local taxes and is subject to lower capital requirements than banks. Everybody knows that Fannie Mae is too big and too important to fail, and that the government and Congress have a huge stake in Fannie Mae's success.

Fannie Mae is taking a beating on the Hill and in the marketplace of public opinion. The stock is down, and the stock of CEO Raines is down even more. (One of the undiscussed subtexts here is that Fannie Mae, an equal opportunity political donor, has become something of a holding pen for key Democrats.) But while there may be calls to privatize the company or revoke some of its privileges, the smart money is betting no significant changes are in the offing.

If mortgage-backed securities traders and investors really feared that Fannie's special status was threatened, prices would shift, and the rates on its debt would be rising. But after some unease last week, the spreads between government debt and Fannie Mae's debt have returned to their levels of two weeks ago. Investors are still suspending their disbelief.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.