PRESIDENT BUSH is laying siege to Fannie Mae, as any responsible, market-oriented president must do.
But even he, the world's most powerful man, knows his limits when it comes to dealing with the sumptuous citadel of Wisconsin Avenue.
Fannie Mae is so entrenched, so mighty, so intimidating that Bush has attempted only damage control, not a cleanup. Containment, not invasion.
Last week, the administration indicated it wants to sharply boost capital requirements and other regulation for Fannie Mae and its smaller brother, Freddie Mac. A terrific move, absent more drastic action.
Fannie and Freddie are "government-sponsored enterprises" created decades ago by Congress to help homeowners by funneling money to the mortgage market. But the main people the GSEs help these days are their executives and their shareholders -- at a huge risk to taxpayers.
"It is no secret that these housing GSEs have an inadequate system of supervision," Assistant Treasury Secretary Wayne Abernathy said in a speech at the American Enterprise Institute on Wednesday. "And it is a poorly kept secret that they have never had an adequate system of supervision."
Between them, Fannie and Freddie control an enormous portion of the economy by buying, reselling and guaranteeing home mortgages.
They are highly leveraged, balancing more than $1 trillion in risk against tiny capital cushions. Freddie was caught cooking its books last year. Both institutions deal opaquely in volatile financial derivatives. And, unlike those of private banks, their obligations are implicitly guaranteed by the government that gave birth to them.
Have you ever fantasized about owning stock in, say, the Pentagon or the Agriculture Department? You'd have your own, private piece of the gravy that flows into Washington from all corners of the nation.
Well, that's what Fannie shareholders get. The agency is densely intertwined with the government, yet its equity capital trades on the New York Stock Exchange.
The president appoints some of its directors. The Treasury Department maintains a line of credit for it. The implicit federal guarantee lets it borrow at far below market rates -- a subsidy of billions each year.
Yet the fabulous gains that result from this state support accrue mainly to shareholders and employees. You, the taxpayer, bear all the risk. They, the Fannie insiders, get the goodies.
Study after study has shown that homeowners -- including the low-income folks Fannie is supposed to help -- reap little benefit from the government subsidies.
The Congressional Budget Office figured that Fannie and Freddie reduce mortgage rates for a typical borrower by only a quarter percentage point. A recent analysis by Federal Reserve economist Wayne Passmore found even less of a saving: seven hundredths of a percentage point.
Fannie's and Freddie's government support "does not appear to have substantially increased homeownership or homebuilding," Passmore wrote. So why bother? Fannie insiders can tell you. Subsidy-fueled profits would have turned $15,000 in Fannie stock bought in 1980 into well over $1 million today, including reinvested dividends.
Passmore figures the implicit government guarantee accounts for between 42 percent and 81 percent of Fannie's and Freddie's stock market value.
Fannie lavishes millions in pay on top executives and provides some of the best worker perks in the country. "It is hard to think of an employee benefit not offered by this company" -- including free knitting lessons! -- Washingtonian magazine wrote in November in its "Great Places to Work" issue.
Understandably, Fannie is very worried that the public will learn the details of its executive packages. The pay of its top five people is known, but a few months ago a Fannie staffer e-mailed Capitol Hill to threaten that "criminal proceedings" might result if Congress disclosed the pay of the company's top 20 bosses, The Wall Street Journal recently reported.
Bush's proposal, contained in last week's budget, would set up a beefed-up unit inside Treasury to oversee Fannie and Freddie -- new bureaucrats to supervise bureaucrats.
A good step under the circumstances, but not as good as closing the Treasury credit window, explicitly cutting all government ties and letting the GSEs fend for themselves like normal companies.