July 1995 – The Federal National Mortgage Association was about to report its 30th consecutive quarter of record earnings, and its stock was at a record high, having tripled since 1989. If James Johnson, then chairman and CEO of Fannie Mae, had a care in the world, it was retaining the institution’s “politically bulletproof” status at a time when Republicans in Congress regarded it as just one more sacred cow to be led to slaughter. “Fannie’s biggest risk is political risk,” a regulatory source told II in “Masters of Beltway Capitalism.” The magazine added, “Fannie has gone a long way toward insulating itself from the vagaries of the financial, and even housing, markets.” That held true, until the subprime mortgage market imploded last summer, forcing the U.S. federal government to the brink of staging the biggest bailout it has ever attempted — not just of Fannie but also of its sibling government-sponsored enterprise, Freddie Mac. Now it’s clear that the real risk was financial all along. Apart from how many hundreds of billions of dollars a bailout could cost, the main question is which investors ultimately have the most to lose — holders of Fannie stock, which was down 88 percent over the past 12 months, or holders of Fannie bonds, who bought them assuming an implicit government guarantee.
