Sometimes a business story seems cinematic, like a film-to-be on the hunt for just the right director. There is currently a potential film out there that has Oliver Stone's name written all over it. The story opens with a Fortune 500 company that seems to be the most wholesome institution around - "Our business is the American dream" is its motto. Yet this very same company terrifies congressmen and makes even Treasury officials tremble. There is a great role involved: the chief executive. But the part has to go to a tough guy - Leonardo DiCaprio, Robert De Niro? A sum of $9bn disappears from the company's books. The chief executive leaves, but keeps a handsome pension of more than $1m per annum.

This film, of course, is Fannie Mae - after the company that recently did see its chief executive (Franklin Raines) depart following the announcement of a multibillion-dollar accounting oversight. Fannie, the movie, would be substantively different to, say, Mr Stone's send-up of the 1980s, Wall Street. That is because while Fannie is a company, it is not a typical company. And while Mr Raines was a chief executive, he was not a typical executive. Fannie's story is not a story of corporate greed, or executive compensation, or the challenges of accounting regulation standards. It is a story of moral hazard.

Franklin Roosevelt made Fannie's existence possible when he proposed allocating federal cash to help finance homebuyers through the Great Depression. New Dealers named their institution the Federal National Mortgage Association, the pleonasm underscoring Washington's involvement. In recent decades, however, both Congress and Fannie have found it convenient to cast Fannie as a private company. In 1970 it listed itself on the New York Stock Exchange; in 1984 it issued its first debenture on the foreign markets. Fannie even suggested it should be known as Fannie Mae - forget that old "federal national" business. What is more, Fannie's charter itself insists that Fannie's bond contracts all carry reminders to the purchaser that Fannie's debts are not the responsibility of the US government.

Still Fannie remains, officially, a "government-sponsored" enterprise, and a special office within the Department of Housing and Urban Development oversees it like a nanny. Fannie enjoys tax advantages. Such privileges are advantage enough to allow Fannie and Freddie Mac, its sibling GSE, to work as a duopoly, controlling the secondary market in mortgages. The public-private ambiguities have helped Fannie grow into a Stone-scale giant, the world's largest non-bank financial services company. Fannie's work is so extensive that it is quantified with a word the Financial Times' style guide discourages using: trillions. Buyers acknowledge these facts when they pay a premium for Fannie paper. So, of course, does the disingenuous Fannie, which pours millions of dollars into the cause of convincing citizens that challenging Fannie is challenging America. As if that were not sufficient insurance, Fannie goes a step further, selling itself as the engine of social mobility for minorities.

Fannie's arguments are disputable. As Peter Wallison of the American Enterprise Institute noted in a recent monograph, it is possible to have a healthy secondary mortgage market without privileged players.* The US has one: the jumbo loan market, which trades pools of loans that do not conform to Fannie's requirements. As for affordable housing, there is a law - the Community Reinvestment Act - that takes care of that. Besides that, if anyone deserves credit for home affordability in the US, it is not Fannie officials but Paul Volcker and Alan Greenspan, the men who tamed inflation at the Federal Reserve.

Still, Fannie and its friends in the property and securities industries pressure lawmakers so much - both via donations and other attentions - that they give Fannie extraordinary licence. This licence in turn explains Mr Raines's ultra-high salary. It also explains the billion-dollar blooper, as well as a similar one earlier at Freddie Mac. Even those given the task of overseeing Fannie have not dared do so rigorously. Its unclear status means Fannie will also prove unstable in future. A collapse of Fannie is one of the financial world's scarier ideas - scarier, even, than the 1980s savings and loan crisis. Even those investors who earn basis points from Fannie's current inconsistencies therefore should demand an early resolution to this story - either through Fannie's nationalisation, so that its bonds become like Treasury bonds or, better, through true privatisation. Just last week the Treasury announced completion of the privatisation of Fannie's niece, Sallie Mae - a smaller institution, securitising student loans. The change nonetheless demonstrates it is possible to transform a GSE into just another Delaware company.

It is important to understand, however, that Fannie does damage even when it does well. Most parts of the US economy are relatively level playing fields. Everyday business in these fields is so transparent that it makes Oliver Stone look paranoid. Fannie's America does, however, feature as much brute political force as the standard anti-corporate flick. This in turn damages the entire economic culture. It is time to end Fannie's creepy relationship with government. Few projects could do more to sustain the American dream.

* Privatizing Fannie Mae (American Enterprise Institute)

© Copyright 2005 Financial Times