CHAPTER 6

Fannie Mae’s Opponents Change Tactics

IN 1989 DAVID MAXWELL HAD BEEN CHAIRMAN OF FANNIE MAE for almost nine years. He had accomplished all he had set out to do. Fannie Mae had been pulled back from the brink and transformed into a healthy and sophisticated financial institution with a leadership culture focused on its housing mission. Maxwell found himself giving the same speeches to the same groups. He was beginning to get bored. It was time to think about stepping down and putting the company in the hands of a successor.

A New Chairman for New Times

His choice was Jim Johnson. Maxwell had met Johnson at a dinner party in the mid-1980s and been extremely impressed by him. Johnson held a master’s degree in public policy from Princeton. He had worked in the political campaigns of Eugene McCarthy, George McGovern, and Jimmy Carter and during the Carter presidency had been executive assistant to Vice President Walter Mondale. He ran Mondale’s 1984 presidential campaign against Reagan, which did not end well; Mondale carried only his home state of Minnesota and the District of Columbia. Johnson then returned to the advisory firm Public Strategies, which he had founded in 1981 with the diplomat Richard Holbrooke. Shearson Lehman Brothers acquired Public Strategies in 1985, so when Maxwell met him, Johnson was an investment banker with solid political credentials. That combination led Maxwell to select him, and Shearson Lehman, as outside advisors for the Fannie Mae privatization study we were about to embark upon in the spring of 1987.

Maxwell got to know Johnson well during the Shearson study (as did I), and by the time we finished it at the end of 1988, he had settled on him as the company’s next chairman. Looking ahead as far as he could see, Maxwell was convinced that his successor’s biggest threats would be political. We now were financially strong, and our investors expected us to capitalize on that strength to grow our business and profits. And Maxwell believed we needed to grow to satisfy our mission obligations. From the Shearson study, we knew we could not meet the objections of our critics and competitors by changing our corporate structure; we would have to achieve our profitability, risk management, and affordable housing objectives with the company as it currently existed and in the face of concerted political opposition. Jim Johnson, Maxwell believed, was the person best equipped to take on that challenge.

Not everyone agreed. Maxwell’s plan was to bring Johnson in as vice chairman in January 1990, work with him for a year in a CEO transition process, then have the board elect him chairman in January 1991. Word of the impending hire leaked out. Out of the blue, Maxwell received a call from his old Yale classmate Nicholas Brady, who at the time was Treasury secretary under the first President Bush. “Max,” Brady said (nobody else called Maxwell “Max”), “I have it from the highest authority that you’re going to hire Mondale’s campaign manager. You can’t do that.” The “highest authority” was the president, who had heard the rumor from his brother, Washington, D.C., banker Johnny Bush. Maxwell explained to Brady why he thought Johnson was the best person for the job, but Brady was not convinced. Johnson had a good relationship with Bush’s director of OMB, Dick Darman, who told Johnson he would calm the president down. He did, although a flag had been raised. Having a high profile Democrat as chairman would put a brighter spotlight on Fannie Mae.

Johnson joined Fannie Mae as we were winding up our work with Volcker. He accompanied Maxwell, Roger Birk, and me on a trip to New York early in 1990 to discuss a draft of the letter Volcker was writing. After our meeting was over, Jim Wolfensohn invited us to lunch in his dining room. (Volcker could not stay; he had a class to teach at Princeton that afternoon.) During the lunch, Wolfensohn told us in confidence that he had just been offered the chairmanship of the John F. Kennedy Center for the Performing Arts. Although taking the job would be a logistical nightmare—he had a business to run in New York, and the Kennedy Center was in Washington—Wolfensohn said he was leaning toward accepting it, and he talked about what he might want to do at the institution. Nobody ever would have guessed that the man who was sitting to his right as he told us this, Jim Johnson, would end up succeeding Wolfensohn when he left the Kennedy Center in 1996.

Johnson’s legacy at Fannie Mae was affordable housing. Like Maxwell, he believed that Fannie Mae’s charter advantages carried with them a duty to expand the availability of mortgage financing to as many of the country’s citizens as possible, consistent with our risk objectives, and he understood that leadership in affordable housing was essential to maintaining our congressional support. The 1992 legislation gave him a further, and purely financial, reason to intensify our affordable housing focus—not the HUD goals but the capital standard. The new risk-based standard offered us the potential to significantly grow our business, and there would be a limit as to how large and profitable Congress would allow Fannie Mae to become if we did not extend the reach of our affordable housing activities by proportionately much more. Maxwell had transformed the management of Fannie Mae’s interest rate and credit risk on the business side; Johnson would use Fannie Mae to transform the way the mortgage finance system provided affordable housing access to the people we were chartered to serve on the mission side.

The Trillion Dollar Commitment

Consistent with his political background, Johnson’s signature affordable housing initiative began with an opinion survey. To gain a better understanding of the obstacles to owning a home, in 1992 he hired the research firms of Peter Hart and Robert Teeter to conduct the first in what would become an annual series of National Housing Surveys of Americans’ attitudes toward housing and home ownership. From that first survey, we learned that for well over half of renters, buying a home was either a high or a very high priority. We were not surprised that the most important factor holding them back was the absence of an adequate down payment. But other reasons did surprise us. A large number of people cited a lack of information about how the mortgage process worked. Many of them—particularly young people, minorities, and those with lower incomes—said they found applying for a mortgage intimidating and did not consider buying a home because they were afraid of being turned down by their lender. And a substantial percentage of minorities said they did not believe the process was fair. “People like me don’t get mortgages” was a common refrain.

Armed with these survey results, Johnson tasked his executive team with developing programs and products that would reduce or remove as many of the barriers to home ownership as possible. We obviously would need to address the down payment constraint. Home buyer education—consumer guides, home buying fairs, and mortgage hotlines—would be a critical component. We would need more flexible underwriting. We would have to develop new products to meet the needs of underserved borrower types. Lenders had to be able to deliver these products to the target customer groups, which required a more diverse staff of loan officers. And Fannie Mae would have to take the lead in making all of this happen.

On March 15, 1994, Johnson announced “Showing America a New Way Home.” “Between now and the end of the decade,” Johnson pledged, “we will provide $1 trillion to finance 10 million homes for the families and communities that have not been well served by the housing finance system in the past.” Almost immediately, Johnson’s affordable housing program became known as the Trillion Dollar Commitment.

The Trillion Dollar Commitment was made up of 11 specific initiatives, which over time expanded to 16. They included a comprehensive and coordinated national consumer education effort using television, radio, print advertising, and direct mail to provide renters with information about how to buy a home. We said we would open at least 25 regional partnership offices to work with lenders, public officials, housing advocates, and others to expand our outreach at the local level. There was a new product initiative called “innovations for change.” We announced new underwriting flexibilities and experiments. We undertook a series of actions aimed at reducing discrimination in mortgage lending. And we set a very ambitious goal of using technology to lower mortgage origination costs by at least $1,000 through simplifying and streamlining the application process “to reduce the largest barrier to home ownership faced by many families: the cost, complexity, paperwork, and time it takes to get a mortgage.”

The scope of the Commitment was unprecedented. At the time of the announcement, Johnson said that “significantly more than half of all the business we do in the next seven years” would have to fall within one or more of its categories for us to accomplish it. This dwarfed the recently enacted HUD goals, which required that only 30 percent of our business be with families at or below their area median income and in central cities. That was by design. Johnson believed it was imperative for Fannie Mae to be the one defining our affordable housing role, not Congress. He told everyone in the company, “Meeting the HUD goals should be a byproduct of our work, not the point of it.”

The notion that Fannie Mae took excessive amounts of credit risk to meet the goals of the Trillion Dollar Commitment, or our HUD goals, was a fiction invented and propagated by the company’s critics. Johnson was emphatic from the outset that our affordable housing objectives had to be accomplished on a basis consistent with our risk management and profitability goals. All of Fannie Mae’s senior officers embraced that discipline, and I had a key role to play in helping us adhere to it.

In February 1990, one month after Johnson joined Fannie Mae, I was named the company’s chief financial officer. As CFO I had lead responsibility for setting Fannie Mae’s profit targets and for working with officers throughout the company to ensure we made our best efforts to hit them. The portfolio’s interest rate risk remained my direct responsibility, and the group that assessed, determined the capitalization for, and priced all of Fannie Mae’s credit risk—including the risk on our affordable housing loans—reported to me until 1997, when I merged it with our Credit Policy group (and continued to oversee it). The scope of my responsibilities meant that any potential trade-offs between Fannie Mae’s profitability, affordable housing, and risk management objectives at some point came to my attention.

With one brief exception in the late 1990s, which we remedied, throughout my tenure at Fannie Mae, our credit risk assessment function was independent of the areas tasked with developing products for or meeting the goals of our internal affordable housing commitments and annual HUD goals. We used the same analytic tools to evaluate, capitalize, and price our affordable housing loans as for the rest of our business. We did set lower return targets on some of our mission-related products, but we tracked the performance of those products closely and sought to make up their profit shortfalls elsewhere. If our affordable housing initiatives ever posed risk to Fannie Mae, it was to our profits, not to our safety and soundness.

We all understood that accomplishing the goals of the Trillion Dollar Commitment would require an easing of our credit standards, specifically for loans with lower down payments (or higher loan-to-value, or LTV, ratios) and loans to borrowers with less than perfect credit. For the increased risks from these actions not to harm us financially, it was necessary that we make compensating moves to either mitigate those risks or transfer some of them to others, which we did.

Our strategy for managing the risk of higher-LTV lending was a combination of loss mitigation initiatives and increased amounts of private mortgage insurance (MI). In 1993 we had set up a dedicated loss mitigation unit in Dallas, Texas, to manage all of our delinquent loans and to dispose of foreclosed property. This group developed tools and pioneered techniques that lowered the percentage of our delinquent loans that went into default, and it found numerous efficiencies in the foreclosed property disposition process that greatly reduced the severity of loss once defaults occurred. Any defaulted loan we owned or guaranteed that had an LTV over 80 percent also had borrower-paid MI—it was a statutory requirement—which meant that the mortgage insurer, not Fannie Mae, bore the brunt of its credit losses. To give us even more credit protection after the Trillion Dollar Commitment, we required a higher level of MI coverage on all high-LTV loans beginning in 1995. Taken together, our loss mitigation efforts (which reduced total credit losses) and increased amounts of MI coverage (which caused a third party to absorb a larger percentage of the losses that did occur) kept Fannie Mae’s credit losses on higher-LTV loans at very manageable levels.

The key to doing credit-impaired lending safely was determining which other borrower, product, and property characteristics needed to be present for a loan to a lower-credit-score borrower to be creditworthy. By 1994 we had that capability. Fannie Mae’s Credit Policy group and the credit-pricing staff in my area had incorporated credit scores into a consistent set of applications that evaluated the credit characteristics of the borrower, product, property, and market environment simultaneously, for both underwriting and pricing purposes. These new analytical tools gave us confidence that we could selectively extend our affordable housing initiatives into the credit-impaired segment of the market in a manner that met our risk standards.

Fannie Mae completed the Trillion Dollar Commitment in February 2000, and by the end of that year, our credit losses as a percentage of total mortgages owned and guaranteed had fallen from an already low four basis points in 1993 to just a single basis point—one cent for every $100 in mortgages. Some of this improvement was due to the strong housing market, but by no means all of it. The average mortgage credit loss rate at large commercial banks barely budged during this same period and remained much higher than ours, falling only to 14 basis points in 2000 from 15 basis points in 1993. Fannie Mae was financing vastly more affordable housing loans than anyone else and doing so with vastly superior financial results.

Check-Ups from the Government

The two criticisms to which Fannie Mae was most vulnerable in Congress were “too much risk to taxpayers” and “not doing enough for housing.” We believed the Trillion Dollar Commitment definitively addressed the second criticism. As to the first, the Financial Housing Enterprises Safety and Soundness Act offered us a way to make the case for our risk management quality directly to the government.

There is a saying on Capitol Hill about hotly contested legislation: “Winners get bills; losers get studies.” As a consolation to the interests that had pushed for tighter regulation, stricter business restrictions, or higher capital for Fannie Mae and Freddie Mac but didn’t get them, the 1992 legislation included language mandating Treasury, HUD, the GAO, and the CBO each to conduct “a study regarding the desirability and feasibility of repealing the Federal charters of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, eliminating any Federal sponsorship of the enterprises, and allowing the enterprises to continue to operate as fully private entities.” The 1992 Act required us to give these agencies access to our books and records and also requested that the agencies solicit our views on the issues they would be addressing.

We considered the studies to be the equivalent of a medical checkup and were confident we would pass with a clean bill of health. We also welcomed the focus on privatization. We were not far removed from our own study of the subject, and we knew that its “feasibility” would be exceptionally hard for any of the groups to demonstrate. As to the “desirability” of privatization, its advocates first would have to identify the problem to which Fannie Mae and Freddie Mac privatization was the solution. When the studies finally got under way in 1995, the U.S. mortgage finance system was functioning more efficiently, serving a broader range of potential home buyers, and operating with less systemic financial risk than at any time in the past 30 years.

It easily could have been otherwise. As recently as 1975, nearly three-quarters of all U.S. home mortgage credit was supplied by depository institutions—either thrifts or commercial banks. Thrifts had by far the largest share, 57 percent, while banks’ share was 16 percent. During and after the thrift crisis, however, thrifts’ share of home mortgage holdings plunged an astonishing 40 percentage points, down to a mere 17 percent in 1995. Because of Fannie Mae and Freddie Mac—and really only for that reason—the U.S. mortgage finance system was able to replace all of the lost thrift funding with no discernable adverse effect on home buyers. Our ability to tap the international capital markets for massive amounts of fixed-rate funding allowed the mortgage market to undergo a seamless transition from a deposit-based system to a capital markets–based system in a very short period of time.

Virtually all of the financing share lost by thrifts (36 percentage points) was absorbed by capital markets investors who bought Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities. U.S. commercial banks were among the largest purchasers of mortgage-backed securities. Banks held almost no MBS in 1975; in 1995 their residential MBS holdings accounted for almost 10 percent of outstanding home loans, and banks’ total mortgages—MBS plus unsecuritized loans—financed more than 28 percent of the market, close to double their share 20 years earlier.

In contrast, only a tenth of thrifts’ lost financing share went to the GSEs’ portfolios, which rose from 6 percent of mortgages financed in 1975 to 10 percent in 1995. But Fannie Mae’s portfolio always had been a lightning rod for criticism, and it remained so. Banks, which had replaced thrifts as the largest holders of mortgages, also replaced them as the most vocal opponents of our portfolio business. As the government studies got under way, we expected banks to make arguments for changes to our charter that would make it harder for us to grow the portfolio in the future, and we were prepared to counter them.

Our management of interest rate risk had just been put to, and passed, a severe market test. After falling for most of the first three years of the decade, long-term interest rates suddenly reversed course and shot upward, increasing by almost three percentage points between October 1993 and October 1994. Barron’s magazine noted at the time that it was the worst 12-month period for long-term bonds since 1927. With interest rates rising so sharply, the average durations on our fixed-rate mortgages lengthened considerably, and we had to quickly lengthen our debt durations and add shorter-term assets to keep the portfolio within our risk limits. We did both. Having a theory and a strategy for managing a portfolio of fixed-rate mortgages is important, but there is no substitute for actual experience. We got a big dose of that experience in 1994 and came out of it in excellent shape.

Going into the studies, then, we felt we could demonstrate that our portfolio was performing the important function of channeling funds from the capital markets to mortgage borrowers with far less financial risk than any other type of intermediary, including banks or thrifts. In addition we were managing our credit risk demonstrably better than other financial institutions and had just launched an extraordinarily ambitious set of affordable housing initiatives targeted at previously underserved potential home buyers. To both our critics and the government entities studying us, our position was, “The current U.S. housing financing system works exceptionally well; what ideas do you have for making it work better?”

When the four reports came out between May and July of 1996, none said anything critical about our or Freddie Mac’s risk management. That was a highly important validation of our strategies, and with none of the agencies doubting that our secondary market activities lowered mortgage rates, it swung the cost-benefit assessment sharply in our favor. Nor did any of the agencies recommend full privatization. HUD was the only one to make a recommendation at all, and it said, “The Department concludes that there is no compelling reason to fully privatize Fannie Mae and Freddie Mac at this time.” The recommendations section of the GAO report was just five words long: “GAO is making no recommendations.” But the report itself raised a number of cautions about full privatization—including higher costs and the diminished availability of mortgage credit—while noting only a few general potential benefits, such as “increased competition.”

Our biggest concern had been the report by Treasury. Treasury over the years had made no secret of the fact that they favored the elimination of our charter benefits and in 1990 had proposed we be required to obtain a AAA stand-alone credit rating or be forced into full privatization. For the 1996 study, Treasury Secretary Robert Rubin recused himself because of his personal friendship with Jim Johnson, and he delegated responsibility for its preparation to his deputy secretary, Larry Summers. Along with the other agencies, Treasury was required to solicit our views on the issues they were examining. In this case that helped us. Early drafts of Treasury’s report contained language endorsing the concept of privatization without clearly defining it or properly addressing the complex transition issues it entailed. Fannie Mae’s then general counsel, Bob Zoellick, knew Summers, and Zoellick and I went to see him. After hearing our arguments against the privatization language in the draft report, Summers asked his staff to either change or remove it. In the final report, Treasury pushed the privatization issue into the future, saying, “Firm conclusions regarding the desirability of ending or modifying government sponsorship of Fannie Mae and Freddie Mac are premature,” while noting, “Many of the most important issues could benefit from further study.”

The great surprise among the GSE studies was the one done by the Congressional Budget Office. Unlike HUD, the GAO, and Treasury—all of which drew on data and facts from the structure and management strategies of our business and the impact we had on the housing market to assess whether we were providing value for the charter benefits we received—the CBO took a theoretical approach to its study. It explained its methodology this way:

In the CBO’s formulation, Fannie Mae and Freddie Mac’s cost to society was the “subsidy” it said we received from our charter. The CBO put this at $6.5 billion in 1995, based on its estimates of the higher interest rates the market would require on our debt and MBS if we did not have GSE status. (Illustrating the subjectivity of these estimates, the GAO was asked by House Majority Leader Dick Armey to make a similar calculation and came up with $2.2 billion.) Our 1995 gains to beneficiaries the CBO pegged at $4.4 billion, based on the dollar amounts of our and Freddie Mac’s mortgages in portfolio and outstanding MBS that year and the 35 basis points by which it estimated our activities lowered mortgage rates. The CBO then termed the $2.1 billion difference between its $6.5 billion subsidy estimate and its $4.4 billion benefit estimate the “retained subsidy,” which it claimed was kept by Fannie Mae and Freddie Mac’s shareholders and executives.

The CBO used uncharacteristically colorful language to summarize the results of its study, calling us “a spongy conduit—soaking up nearly $1 for every $2 delivered.” And because its estimates showed us to be receiving more of a subsidy that we were passing on, we were, by its standards, “failing the public.” To remedy that failing, it recommended a number of alternative policies, including “imposing a cost-of-capital equalization fee on the debt—not the MBS—of the housing GSEs” and “lowering the maximum-size mortgage that the enterprises are permitted to purchase.” The CBO also suggested that the government could “cap and reduce the size of GSE mortgage portfolios.”

We did not dispute that our charter had value, but we did dispute the CBO’s notion that the theoretical value it put on that charter was an amount we could pass on or retain at our discretion. After attempting unsuccessfully to talk the CBO out of its conceptual framework, we switched to trying to correct what we believed were the evident flaws in its estimates. The two most significant were our credit guaranty subsidy and the effect we had on the mortgage market.

The CBO put a value of 40 basis points on the subsidy to our mortgage-backed securities business. In 1995 Fannie Mae charged an average of 22 basis points for our MBS guarantees, before administrative costs of 6 basis points and a loss allowance of about the same amount. Allocating a theoretical subsidy is never easy—there is nothing real to track or reconcile—but we contended that if the 40 basis point mortgage-backed securities subsidy existed at all, most of it was received either by borrowers, who got the benefit of a lower mortgage rate, or by lenders, who might not have been passing all of the lower GSE mortgage-backed securities yields along in their rate quotes. In any event, it could not have been us. How could we in any sense receive a 40 basis point MBS subsidy if all we charged was 22 basis points, before expenses, in the first place?

The second major problem with the CBO’s analysis was its insistence that the 35 basis point reduction it found Fannie Mae and Freddie Mac’s activities had on conforming mortgage rates applied only to the mortgages we actually owned or guaranteed. That clearly that was incorrect. All home owners with mortgages below our loan limit received the benefit of the 35 basis point cost advantage, not just those whose loans we happened to finance. At the time, we owned or guaranteed fewer than half of conforming loans, so properly attributing the 35 basis point cost savings to all conforming loans doubled the CBO’s benefit estimate.

Correcting these two obvious conceptual or measurement errors would have caused the CBO’s estimate of Fannie Mae and Freddie Mac’s benefit to home buyers to have substantially exceeded its estimate of our subsidy, eliminating any notion of there being a residual subsidy retained by our shareholders or executives. The CBO refused to make either correction, insisting on sticking with the assumptions that produced the $2.1 billion retained subsidy—and the “spongy conduit” designation.

We had been prepared to make the case for our value based on an assessment of our actual risks and benefits—and had done so with the three other agencies studying us—but were at a loss as to how to deal with the CBO’s approach. It seemed to have set up its analysis to produce a predetermined result. It had defined and calculated our retained subsidy in a way that gave us no control over its amount and no ability to reduce it through any sensible actions we could take. (To the contrary, actions that did make business sense—such as structural or marketing innovations to reduce our debt costs—in the CBO’s world actually would have increased our retained subsidy.) The CBO could just as well have said, “Fannie Mae and Freddie Mac are inherently bad ideas, and the government must take steps to reduce their roles in the market.” This was political, not economic, analysis, and we said as much. In congressional testimony in July 1996, Zoellick called the CBO report “at best an advocacy document and at worst a polemic.”

The CBO report heralded a new phase in the battle over Fannie Mae’s charter benefits and position in the market. The traditional construct of “are we providing valuable services to the mortgage market and managing our risks well” would not be the only standard against which we were judged. In the future, we also would be judged against carefully selected metrics and custom-tailored standards to which only we and Freddie Mac would be subjected, and which had been concocted precisely because we could be found wanting with respect to them.

An Endorsement from Standard & Poor’s

One further study occurred around this time. Although it was only indirectly related to the four government studies conducted in 1996, it served as a fitting bookend for them.

In 1997 the chairman of the Capital Markets Subcommittee of the House Banking and Financial Services Committee, Richard Baker, made a request of OFHEO that it obtain from Standard & Poor’s and Moody’s stand-alone credit ratings of Fannie Mae and Freddie Mac. S&P and Moody’s already gave ratings of AAA and aaa, respectively, to our senior debt and MBS, based on a combination of our financial strength and their expectation that because of our status as government-sponsored enterprises, the government would preserve the value of our securities if either of us got into financial difficulty. Baker and OFHEO were looking for something different, however. They wanted Moody’s and S&P to rate us assuming we did not have the benefit of GSE status.

Moody’s declined to participate in what they called a “hypothetical” exercise, saying they could not assign a rating to an entity—in our case, a non-GSE Fannie Mae—that did not exist. S&P interpreted the assignment differently and accepted it. S&P would do what they called a “risk-to-the-government” rating: it would look at Fannie Mae as we actually were and operated and attempt to assign a rating to the probability of the government’s ever having to support us financially. That wasn’t what credit ratings normally represented, but at least the concept made sense. I thought of it as a financial strength rating of Fannie Mae done from the perspective of the government as a stakeholder, as opposed to the traditional rating of a bond done from the perspective of the bondholder. To work with S&P on this exercise, we wouldn’t have to debate their analytical framework or their definition of our theoretical subsidy; we just would have to explain our risks and risk management to them. Those were things we knew how to do.

As we had done with the GAO, HUD, and Treasury, we took the ratings team from S&P through our growth prospects; the tools, techniques, and strategies we used in our interest rate risk and credit risk management; and our last several years of business and financial results, which had been excellent. The head of the S&P team, Mike DeStefano, told us that our inability to diversify our business beyond mortgages meant that the highest rating we could earn from S&P was an A+, but after we made our case for a higher rating to S&P’s rating committee, we were accorded a risk-to-the-government rating of AA-. In explaining this rating in their write-up, S&P cited our consistently strong profitability and our ability to weather changing market conditions and interest rate environments in support of it.

Very few companies had AA-level ratings. At the time, there were only six bank holding companies rated AA- or higher, and some of the best known, such as Bank of America and Wells Fargo, were rated lower. In 1997 OFHEO still was years away from implementing our regulatory risk-based capital standard, and in its absence the AA- risk-to-the-government rating from S&P served as an important external validation of our financial strength and credit quality.

With the Treasury, HUD, GAO, CBO, and S&P exercises, a clear pattern was established. When anyone focused objectively on our business results, affordable housing initiatives, and risk management capabilities, we looked exceptionally good. The way to get us to look bad was either to invent a standard we couldn’t possibly meet or to describe our business as something other than what it was. That was not lost on our adversaries. From this point forward, Fannie Mae would exist in parallel worlds: the financial world of objective reality in which we carried out our business, and the Washington world of funhouse mirrors in which our critics and opponents challenged us politically based on their own distorted depictions of that business. The second of these worlds would prove to be much more treacherous than the first.