It is not often that five top executives from the nation's largest financial institutions come to Washington to personally lobby such Beltway luminaries as Federal Reserve Chairman Alan Greenspan, Treasury Secretary Lawrence Summers, and Banking Committee Chairman Phil Gramm (R-Texas).

But when William Harrison, president and CEO of the Chase Manhattan Corp., Maurice Greenberg, chairman of American International Group Inc., and three others arrived last Wednesday, it was not to fight an everyday opponent. They are taking on the $ 609 billion mortgage giant, Fannie Mae, and its little brother, the Federal Home Mortgage Corp. (Freddie Mac)- among the most politically potent forces on Capitol Hill. Few other players hold such a powerful grip on the legislative and executive branches as these quasi-public corporations, which have built an impressive roster of in-house power brokers and retained about two dozen lobbying firms to ensure they remain politically untouchable.

But Fannie Mae's invincibility is starting to erode under constant pressure from private bankers, Wall Street, Clinton administration officials, and lawmakers. This year, a legislative proposal to curtail Fannie Mae's government ties is being debated in the House; the company's stock has slid by 13 percent; Federal Reserve Chairman Alan Greenspan and senior Treasury Department officials have expressed concern about Fannie Mae's special government backing; and Housing and Urban Development officials blasted the company's minority lending practices.

The swarm of controversy was almost unthinkable last spring, when private financial institutions concerned about Fannie Mae first gathered their own powerful lineup of Washington lobbyists. But now, those lobbyists believe the effort is beginning to pay off.

"I said when we first started out on this thing that Fannie Mae was a lot like the school bully in grammar school, and that if somebody finally stood up and gave him a bloody nose, then everybody on the schoolground would get a lot more courage," says W. Michael House, the head of Hogan & Hartson's lobbying practice, who is leading the banking coalition called FM Watch. House says the coalition's primary goal is "containment" of Fannie Mae and Freddie Mac from moving into the core lending and financial markets of the private sector.

Rep. Richard Baker (R-La.) has a more specific goal. The chairman of the banking subcommittee that oversees Fannie Mae and Freddie Mac, Baker has proposed a bill that would cut off Fannie Mae's $ 2.25 billion line of government credit and subject the institutions to tougher regulation. Baker has held four hearings on Fannie Mae since the beginning of the year, and is holding another this week. He is planning on marking up his bill soon, and though he admits that the chances for passage this year are slim, he sees even the mark-up as a victory.

"Getting the bill marked up shows that congressmen can legislate with regard to (Fannie Mae and Freddie Mac), and the sun will still come up and they will still have friends in Washington," says Baker.

"The general political climate in past years was significantly different, and any legislative progress was denied in the developmental stage, before it even reached the committee level," Baker says.

The six board members of FM Watch-Wells Fargo and Co., the General Electric Co.'s GE Capital Service, PNC Financial Service Group Inc., Household International Inc., AIG, and Chase Manhattan-have not endorsed Baker's measure. But, he says, "Their participation has enabled me to have folks take a look at this battle."

FM Watch members have held a meeting with Minority Whip Harry Reid (D-Nev.). According to a Reid aide, the executives asked him if he would be willing to sponsor a bill in the Senate that was similar to Baker's. Reid declined, but said he would probably support such a bill if it was introduced in the Banking Committee, according to the aide.

For the institutions' lobbyists, the biggest problem in fending off the attacks is that there is still little in the way of tangible legislative or regulatory threats to oppose. Instead, they are faced with the more abstract problem of negative comments by politicians and the press, which appear to be reverberating on Wall Street.

FM Watch is "trying to keep alive a sense that there might be a legislative outcome that could be damaging to our position in the marketplace," says Fannie Mae Vice Chairman Jamie Gorelick. But, she says, FM Watch will not be able to keep the pressure up for long without generating some meaningful legislative or regulatory proposals. The group has yet to come out with reforms, she says, because its members-large banks, small banks, and mortgage insurers-all have different agendas. Members of Congress will eventually ask FM Watch, "What do you want and how do you expect to get there?" says Gorelick, the former No. 2 at the Justice Department. "By fighting it at a PR level, at some point someone is going to say, 'Where's the beef?' "

When and if proposed reforms roll out, Fannie Mae's legendary influence will certainly be brought to bear. "As soon as a proposal does come out, it's subject to scrutiny," says Gorelick. "If it's objectionable, then we fight it. "

The Fannie-Freddie Machine

Fannie Mae and Freddie Mac fulfill a peculiar place in government housing policy. The two publicly traded companies are able to borrow money at below market rates because investors assume they have the backing of the federal government, even though, technically speaking, they do not.

Nonetheless, the expectation that the feds would back the government- chartered corporations is worth an estimated $ 6 billion in lowered borrowing costs. In exchange for that benefit, Fannie Mae and Freddie Mac are supposed to lower the cost of loans for home buyers by maintaining a secondary mortgage market.

Fannie Mae and Freddie Mac, combined, own or guarantee $ 2 trillion in mortgages and hold more than 70 percent of fixed-rate mortgages issued to middle-class borrowers, according to the enterprises' regulator.

The large financial institutions backing FM Watch fear that Fannie Mae and Freddie Mac will move into other types of mortgage and retail lending-such as mortgage origination and insurance-and, with their low cost of borrowing, take a big chunk of market share from private companies.

The two giants have been very effective in staving off criticism in the past. Fannie Mae, which spends a reported $ 35 million a year on advertising, has retained 11 outside lobbying firms, including The Duberstein Group; O'Brien Calio; Williams & Jensen; and Boland & Madigan. Freddie Mac has 15 firms on retainer.

Influential in-house officials include Gorelick, Chairman Franklin Raines, the former head of the Clinton administration's Office of Management and Budget, and Arne Christiansen, a former chief of staff to ex-House Speaker Newt Gingrich.

Freddie Mac, normally the quieter of the two companies, has recently reached out to a few legislative supporters. In the past few weeks, chief lobbyist Mitch Delk held $ 1,000-a-person dinners in the ultra-chic private " laboratory" of the restaurant Galileo for Banking Committee members Rep. Marge Roukema (R-N.J.) and Ed Royce (R-Calif.).

Both companies give large amounts of soft money to the parties. To date, Fannie Mae has contributed $ 283,000 to the Democrats and $ 376,000 to the Republicans, while Freddie Mac has given $ 275,000 and $ 960,000, respectively, according to FECInfo. But FM Watch also banded together four of K Street's finest: Barbour, Griffith and Rogers; Akin, Gump, Strauss, Hauer and Feld; podesta.com; and Hogan & Hartson.

FM Watch lobbyists say they've approached this long-term campaign in a traditional fashion. Facing a superior opponent when they started in the spring of last year, they spent the first year "softening the environment" with visits to members of Congress and administration officials at HUD, the Treasury, and the White House, with the idea of trying to pass legislation in a year or two.

But the "softening" had what House says is an unintended effect, a kind of " collateral damage" that emboldened lawmakers and administration officials to voice criticisms of the mortgage giants. For the first time in nearly a decade, observers agree, political risk has become a factor for market analysts looking at Fannie Mae.

For example, Salomon Smith Barney analyst Thomas O'Donnell lowered his 12- month target prices on Fannie Mae and Freddie Mac because of political risk, citing to The American Banker "a long line of negative proposals" coming from Washington.

Although increased legislation, regulation, or even privatization are a long way off, even their possibility seems to be affecting the companies' market performance. Fannie Mae's stock price is down to $ 54 from $ 62 at the beginning of the year, and from a high of $ 74 at year-end 1998. Freddie's Mac's stock reached a high of $ 64 in 1999, and is now trading at $ 41.

Fannie Mae officials attribute the market turbulence to such factors as the technology boom, which has drawn money away from traditional investments.

Regardless, the lobbying and public relations efforts of FM Watch appear to have opened the way for criticism, if only by providing safety in numbers.

"The fact is that public officials have thought this stuff for a long time, but people were reluctant to speak out because the Fannie- Freddie machine seemed too invincible," says Richard Carnell, a former Treasury Department assistant secretary in charge of financial institutions, who is now a professor at Fordham University Law School.

From the perspective of the institutions' opponents, keeping up the pressure may be victory enough, even if they don't get legislation. The mortgage giants' ability to borrow cheaply is based on the bond market's perception that the bonds will be backed by the government; but sustained criticism from government officials and a continued threat to cut off the implied guarantee could cause the markets to factor in a political risk price and raise the cost of bonds, says Carnell.

Losing that benefit could push both companies toward privatization. "The presence of an organized private opposition probably gives some comfort to public officials who are considering voicing a concern about Fannie and Freddie," he says. "Once people see that the emperor has no clothes, they are never going to see him the same way again."