Wrestling Down Fannie Mae

Mortgage colossus Fannie Mae has long been one of the most aggressive lobbyists on Capitol Hill. It deftly works to keep Congress from looking too closely at the company, but there's nothing like a scandal to force needed scrutiny.

Fannie was ordered by the government in December to restate earnings going back to 2001. That correction could come to $11 billion - yes, billion. And the Justice Department is in the midst of a criminal investigation of Fannie over inflated compensation for top executives, among other things.

Fannie's cousin, Freddie Mac, had its own scandal in 2003, when it misstated earnings by some $5 billion between 2000 and 2002. Freddie had to pay a record $125 million fine. Three of its top executives were fired.

Unfortunately, instead of accepting Bush administration calls for a stronger regulator and a reduction in their whopping $1.5 trillion combined portfolios, the two companies are getting help from others to lobby for maintaining their status as government-sponsored enterprises.

A group of some 8,500 Realtors, for instance, members of the 1.2 million strong National Association of Realtors, saturated Capitol Hill last week, arguing that homeownership would be jeopardized if the two enterprises are shrunk. Balderdash. Both companies have long gone way beyond their mandate to make homeownership more affordable to low-income Americans. Federal Reserve Chair Alan Greenspan says the two giants need stronger regulation and should greatly reduce their combined portfolios.

One unfortunate result of all the lobbying: a reform bill in the House that simply doesn't have enough teeth. For example, it gives a new regulator authority to reduce Fan and Fred's portfolio size, but only if he or she felt it posed a threat to the country's financial safety. The bill also doesn't give a new regulator explicit authority to approve new business ventures for Fannie and Freddie, which both need in order to keep them in check. (Their portfolios grew tenfold between 1990 and 2003.)

For far too long, Fan and Fred have enjoyed special privileges - such as a line of credit with the Treasury Department, that's allowed them to borrow money more cheaply than the banks. They also don't have to pay certain taxes. It's time for both to be privatized and put on a level playing field with banks and other lenders.

Short of that, Congress should approve a regulator with the power to force them to reduce their portfolios.

To put it bluntly, if the financial risk isn't reduced, American taxpayers could be forced to bail the two out.

And no one wants that.